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  Staff Interpretation Letter 2009-27
Identification Number 745
This is in response to your correspondence requesting: (i) an exception under Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), 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 convertible preferred stock in exchange for certain of its outstanding debt securities (the “Notes”). The issuance price of the common stock, and the conversion price of the preferred stock, would be less than the market value of the common stock. The preferred stock would vote on an as-converted basis. The holders of the Notes (the “Noteholders”) do not include any officers or directors of the company.
The company provides freight transportation services. You stated that the overall economic conditions and credit crisis beginning last year have had a significant detrimental impact on the company’s financial condition and continue to negatively impact its customers’ needs to ship goods which, in turn, causes a reduction in the volume of freight the company ships and in the price it receives for its services. In addition, shipping volumes have declined as a result of customers’ switching to other carriers due to their concerns regarding the company’s financial stability. For each of its most recently completed two fiscal quarters, the company’s operating revenues were down approximately 50% compared to the year-earlier periods. The company continues to experience reduced revenue, operating losses, and negative cash flow, and did not make the most recently due interest payment on the Notes. As a result of its financial condition, the company is restricted from accessing a significant portion of its revolving credit facility (the “Credit Facility”).
You stated that the Proposed Transaction is a necessary step for the company to address its near-term liquidity issues and to stabilize its financial condition. Subject to the completion of the Proposed Transaction, the company’s lenders under the Credit Facility have agreed to allow the company to defer the payment of interest and fees otherwise due (the “Deferral”). After the completion of the Proposed Transaction, and subject to compliance with certain borrowing conditions, the lenders will allow the company to again access the blocked portion of the Credit Facility. In addition, the company has obtained significant concessions from its unionized employees who have agreed to wage reductions and to allow the company to defer contributions to pension funds (the “Concessions”). You stated that the Concessions are essential to the company’s remaining a going concern, and the continuation of the Concessions is contingent on the completion of the Proposed Transaction in the near-term. Other measures the company has taken include the consolidation of operations and the sale of excess property and equipment.
Without the requested exceptions, the Proposed Transaction would require shareholder approval 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. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to the market value.
You stated that the delay in securing shareholder approval would seriously jeopardize the company’s financial viability and that unless the Proposed Transaction is completed within approximately three weeks, the company will likely file for bankruptcy. The company does not have cash sufficient to sustain it for the time that it would take to get shareholder approval of the Proposed Transaction. Moreover, the Noteholders were unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
The company believes that if it completes the Proposed Transaction, it will have sufficient liquidity to continue in business as a going concern and to continue operations for at least approximately nine months. The company expects that the benefits of the Proposed Transaction, which include the Deferral, the Concessions, and the availability of the Credit Facility, as well as the elimination of future interest payments associated with the Notes, will further improve the company’s liquidity position and overall financial condition. In addition, the company believes that following 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 plans to complete a reverse stock split, if necessary, at 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 to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. 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: 745
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