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  Staff Interpretation Letter 2009-22
Identification Number 740
This is in response to your correspondence wherein you asked that the company be granted an exception from the shareholder approval requirements pursuant to Listing Rule 5635(f) for a proposed transaction (the “Proposed Transaction”).
According to the information you provided, in the Proposed Transaction the company would issue shares of common stock to multiple investors. Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control, and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
You stated that without the Proposed Transaction, the company would run nearly out of cash in approximately two weeks and, as a result, would face almost certain insolvency and a likely bankruptcy filing. You stated that the company’s predicament is attributable to several factors including significant losses and cash flow deficits in recent years and the recent conditions of the global financial and credit markets, which have made it difficult for the company to obtain additional loans. The company’s lead secured lender has suspended an expansion of the company’s line of credit but retained its interest in the company collateral.  As a result, the company does not have sufficient unencumbered collateral to enter into an arrangement with any replacement lender. You further stated that the sharp decline in discretionary consumer spending has also contributed to the company’s financial struggles and has negatively impacted its financial performance. As a result of its difficulties, the company has become significantly behind in its payments to its vendors. Without the Proposed Transaction, the company may be forced to default on the principal and interest due to its primary lender in approximately two weeks, and such a default would trigger a cross-default on the company’s obligations to another lender. To conserve cash, the company has consolidated operations and reduced its workforce.
The company believes the Proposed Transaction would raise capital sufficient to provide for its financial rescue, funding its ongoing operations and enabling it to meet its obligations to its lenders and vendors. 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 that requirement. You stated that the investors in the Proposed Transaction were not willing to enter into a transaction that would comply with the shareholder approval requirements and that the company unsuccessfully attempted to obtain alternative sources of funding.
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 requested exception. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid insolvency. 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, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must  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: 740
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