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  Staff Interpretation Letter 2009-23
Identification Number 741
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 and warrants exercisable for additional shares in exchange for indebtedness (the “Outstanding Debt”) owed by the company to a lender (the “Lender”).  Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance would 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.  In connection with the Proposed Transaction, the lender also would provide collateral support for a loan from a financial institution, which would be funded at the closing of the Proposed Transaction (the “Loan”).
You stated that the company is unable to meet its current obligations, that its short-term liabilities are approximately four times the amount of its cash and cash equivalents, and that the company would have been forced to have sought bankruptcy protection already if not for the forbearance of certain of its vendors.  You also stated that if the company delays the Proposed Transaction for the time necessary to seek shareholder approval, it would likely be forced to seek bankruptcy protection and that the Proposed Transaction is its last available alternative to secure financing before it must seek such protection.
You stated that unfavorable global economic conditions have created liquidity problems for certain of the company’s customers, which has caused them to default on their commitments to the company under long-term contracts.  In addition, the company has been unable to secure additional contracts due to a significant decline in the market price of the company’s primary product.  Finally, you noted that the company was negotiating a transaction whereby it would be acquired, which recently unexpectedly fell through.
The company believes the Proposed Transaction would solve its financial troubles.  The company would be relieved of the obligation, which it would be unable to meet, to repay in cash the Outstanding Debt upon maturity.  The Loan would provide sufficient liquidity to pay down past due accounts payable thereby enabling the company to avoid immediate foreclosure and bankruptcy and deliver on the significant contracts it already has in place.  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.
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 bankruptcy.  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: 741
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