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  Staff Interpretation Letter 2009-20
Identification Number 738
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to the issuance of shares of common stock in exchange for shares of currently outstanding preferred stock (the “Exchange”). Specifically, you asked about the applicability of Listing Rule 5635(c) if officers and directors (the “Officers and Directors”) of the company participate in the Exchange.
According to the information you provided, the company issued preferred stock in private placements approximately fifteen months ago to multiple investors including the Officers and Directors in a shareholder-approved transaction.  The preferred stock is currently convertible into common stock at the option of the holders. The company is planning the Exchange in response to the adverse economic and market conditions over the past several months that have resulted in the need for financial institutions, such as the company, to raise equity capital to maintain financial strength and meet regulatory requirements. In the Exchange, the company would replace the preferred stock with common stock.
Under the terms of the Exchange, the number of shares of common stock that would be issued for each share of preferred stock is the sum of: (i) the number of shares into which it is currently convertible (the “Conversion Shares”), and (ii) the number of shares equal in value to 75% of the value of future dividends that that would be payable if the preferred stock were to remain outstanding (the “Dividend Shares”). The aggregate number of shares that could be issued in the Exchange, including both the Conversion Shares and the Dividend Shares, would be less than 20% of the pre-transaction outstanding shares of common stock.
Pursuant to Listing Rule 5635(c), shareholder approval would be required if the Exchange could result in common stock being issued to the Officers and Directors at a price less than market value at the time of the Exchange (the “Market Value”). For this purpose, the Market Value would be the last closing consolidated bid price of the common stock prior to the closing of the Exchange. The price at which the common stock would be issued in the Exchange would be determined by dividing: (i) the amount which the company received for each share of preferred stock and at which the company reflects each preferred share on its balance sheet, by (ii) the aggregate number of Conversion Shares and Dividend Shares issued in the Exchange for each preferred share (such quotient being the “Offer Price”). Based on the information you submitted, the issuance to the officers and directors in the Exchange would not require shareholder approval under the Rule if the Offer Price, calculated as described above, is not less than the Market Value. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 738
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