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Frequently Asked Questions
  Staff Interpretation Letter 2008-5  
Identification Number 750
This is in response to your correspondence regarding a proposed issuance of securities to the Controlling Stockholder (the “Transaction”).  You asked about the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D)(ii) (the “Rules”).  In addition, you asked whether the Controlling Stockholder may vote the shares it currently owns in a shareholder vote to approve the Transaction.
According to the information you provided, in the Transaction the company would issue notes (the “Notes”) to the Controlling Stockholder.  The Notes would be convertible into common stock only if the company obtains shareholder approval of the issuance of common stock upon conversion.  The conversion price will be at a discount to the market value of the common stock at the time the company and the Controlling Investor enter into a definitive agreement to issue the Notes.  The number of shares that would be issued upon conversion equals approximately 32% of the pre-transaction outstanding shares.
Currently, the Controlling Stockholder owns approximately 73% of the company’s outstanding common stock, which it obtained approximately five years ago in a transaction unrelated to the Transaction.  The Controlling Stockholder has three representatives on the company’s board of directors.  These directors have an indirect pecuniary interest in the holdings of the Controlling Stockholder.
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Transaction will not result in a change of control given that the Controlling Stockholder will have a control position both before and after the Transaction.  Shareholder approval is required under Listing Rule 4350(i)(1)(A) because of the equity compensation that would result from a discounted issuance of common stock to directors.  Shareholder approval is also required under Listing Rule 4350(i)(1)(D) because the issuance of common stock would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  The Transaction complies with Listing Rule 4350(i)(1)(A) and Listing Rule 4350(i)(1)(D), however, because no shares of common stock could be issued until after shareholder approval.  Accordingly, the Notes may be issued prior to the receipt of such approval.  For purposes of complying with the Rules, the Controlling Stockholder is not prohibited from voting the shares it currently owns to approve the Transaction because those shares are not part of the Transaction.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 750
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