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  Staff Interpretation Letter 2010-19
Identification Number 718
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).
The facts of the matter as they have been submitted to us, and upon which we have based our consideration of this issue, are summarized below.
The company, a bank holding company, conducts banking operations through its principal operating subsidiary (the “Bank”). The Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market. As a result, the company experienced substantial losses from continuing operations for its most recently completed fiscal year and in each quarter of the current year. The losses were due largely to impairment charges on certain of the Bank’s mortgage-backed securities and other non-performing assets as well as provisions for credit losses and loan-principal write-downs.
Due to its weakened financial status, the Bank has experienced a decline in deposits, and it believes that unless it resolves its difficulties in the near-term, additional depositors may move their funds elsewhere, further weakening the financial condition of both the company and the Bank. In addition, the company has been forced to suspend interest payments on its outstanding trust preferred securities, and it is in default of its credit agreement.
The cumulative effect has been to erode the company’s equity account and to materially and adversely affect the Bank’s compliance with applicable banking regulations. Consequently, pursuant to Cease and Desist Orders (the “Orders”), the banking regulators have imposed stringent enforcement actions requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions. Thus far the company has been unable to raise the amount of capital required under the Orders, and as a result, the Bank is not in compliance with certain provisions of the Orders. The company also expects that at the end of the current year, the Bank will fall below the level required to be adequately capitalized, absent the Proposed Transaction. As a result, the Bank would be unable to hold certain deposits (that currently account for over 75% of its total deposits) and would face a liquidity crisis that it believes would lead to the regulator recommending the seizure of the Bank, resulting in the liquidation of the company. The company believes that the Proposed Transaction is the only viable option available to it.
You stated that the Proposed Transaction is the result of an extensive process pursuant to which the company’s investment banking advisers conducted over 30 meetings with potential investors. In the Proposed Transaction, the company would issue shares of common stock and warrants exercisable for additional shares. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or the company being liquidated.  In addition, the company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
The company believes that it does not have the time or the ability to withstand the delay in consummating the Proposed Transaction that would result from seeking shareholder approval and that without the requested exception, its ongoing prospects would be dire, leading the company to file for protection under the federal bankruptcy laws and probably resulting in a total loss to the company’s shareholders.
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined that NASDAQ should grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the company needs to quickly proceed with the Proposed Transaction to avoid the seizure of the Bank and the possible liquidation of the company.  In order to rely upon this exception, the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 718
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