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  Staff Interpretation Letter 2009-24
Identification Number 742
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 transaction (the “Proposed Transaction”). According to the information you provided, in the Proposed Transaction the company would issue shares of its common stock, and warrants exercisable for additional shares, to its primary lender (the “Lender”) as part of a restructuring of the company’s debt held by the Lender (the “Debt”).
You stated that the company has recently experienced significant losses and cash flow deficits and that as a result its current financial position is precarious and its operational viability is uncertain. Over the past year, the unfavorable conditions of the global financial and credit markets have negatively impacted the company’s business leading to repeated defaults by the company on certain covenants of the Debt, thereby triggering higher interest rates on the Debt, which the company is no longer able to cover. Additionally, the company is experiencing difficulties with certain of its vendors who are requiring prepayments or significantly reducing credit terms and limits, thereby inhibiting the company’s ability to keep its supply lines open. To conserve cash, the company has reduced its workforce, limited business travel, reduced the payment of fees to members of its board of directors, suspended most of its marketing programs, and refocused its business on productive customers in lieu of under-performing accounts.  You stated that notwithstanding these efforts, without the Proposed Transaction the company will run out of cash in the next few weeks and would face almost certain insolvency and a likely bankruptcy. The company has already retained bankruptcy counsel.
Over the past eight months, the company has unsuccessfully sought additional financing utilizing the services of two investment banking firms.  The company believes that such efforts failed because potential investors were unwilling to invest in the company given the defaults on the covenants of the Debt. As a result, the company entered into negotiations with the Lender leading to the Proposed Transaction. In the Proposed Transaction, a portion of the Debt would be converted into equity, and the terms on the remaining debt would be amended to be more favorable to the company, thereby reducing its monthly interest obligations. In addition, as a result of the Proposed Transaction, the company would have increased cash available under a credit line agreement with the Lender.
Without the requested exceptions, the Proposed Transaction would require shareholder approval 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. You stated that the Lender was unwilling to enter into a transaction that would satisfy the shareholder approval requirements. Moreover, you stated that the company’s current cash is not sufficient to sustain it through the time that it would take to secure shareholder approval.  As a result, you stated that the company has concluded that the Proposed Transaction is the only alternative available in the timeframe necessary to avoid a shut-down of the business.
The company expects that the Proposed Transaction will enable it to fund operations at least through the third quarter of its next fiscal year, at which time the company expects to have positive cash flows from its business operations. The company believes that it will meet the requirements for continued listing on NASDAQ upon closing of the Proposed Transaction and over the long term. You stated that the company was prepared to effect a reverse stock split to maintain compliance with the bid price requirement, if necessary.
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 to the shareholder approval rule.  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: 742
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