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  Staff Interpretation Letter 2009-14
Identification Number 732
This is in response to your correspondence wherein you asked that the company be granted an exception to NASDAQ’s shareholder approval requirements for a proposed transaction (the “Proposed Transaction”) pursuant to Listing Rule 5635(f).
According to the information you provided, in the Proposed Transaction the company would convert all of the indebtedness it owes to the Debt Holder into shares of its common stock at a conversion price in excess of the current market price. Following the Proposed Transaction, the Debt Holder together with its affiliates would beneficially own approximately 60% of the company’s then outstanding common shares.  Currently, no shareholder owns as much as 10% of the outstanding shares. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control.
You stated that the company is an operator of upscale restaurants and that during the recent economic downturn consumers have eaten out much less than before, resulting in mounting losses and the depletion of the company’s cash. As a result, while the company has halted its planned development of new locations and has negotiated with its suppliers and landlords the reduction of certain costs, expenses, and lease obligations, the company is experiencing significant negative cash flow and has been unable to meet its obligations with its leasers and other creditors.
You stated that the company has received default notices from some of its creditors and landlords and that such notices are expected to increase dramatically as more time elapses without payment. Defaults on leases likely would cause the company’s vendors to demand cash on delivery for future transactions resulting in the company having to cease operations because it would be unable to acquire a food supply for its restaurants. Without the Proposed Transaction, the company would have enough cash to meet its obligations for only one month. In addition, you stated that any delay in the Proposed Transaction beyond a month, or perhaps slightly more if its creditors would agree, would mean that the company would be forced to file for bankruptcy. The company has retained counsel to prepare a bankruptcy filing, should one become necessary.
The Debt Holder is one of the company’s landlords and is its primary store equipment leaser. The amount the company owes to the Debt Holder under the leases represents substantially all of the company’s secured indebtedness, and the Debt Holder has indicated it may declare the leases in default. Pursuant to the Proposed Transaction, however, the default on the leases with the Debt Holder would be avoided. In addition, the amount of the ongoing lease payments the company would owe to the Debt Holder would be substantially reduced, which you stated is necessary for the company’s ongoing financial viability. You stated that the timetable for obtaining shareholder approval for the Proposed Transaction would require the company to exceed its cash position and that the company needs to take quick action before it is forced into bankruptcy by its creditors. The company has been unable to structure a transaction that would not require shareholder approval, and it has sought strategic alternatives without success.
The company believes that the Proposed Transaction would solve its current cash flow problems and also allow the company to seek additional financing. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with the bid-price requirement.
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements. This determination is based on the company’s representations that it needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the possible cessation of its operations. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 732
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