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  Staff Interpretation Letter 2008-7
Identification Number 752
This is in response to your correspondence regarding a proposed issuance of securities by the company (the “Proposed Issuance”) and the sale (the “Proposed Sale”) of common stock by the chairman of the company’s board of directors (the “Chairman”).  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)(i) (the “Rules”).
According to the information you provided, in the Proposed Issuance the company would issue convertible debt to the Investor.  Initially, the conversion price would be greater than both the market and book value of the common stock such that the number of shares that could be issued upon conversion would equal approximately 13% of the pre-transaction outstanding shares.  The conversion price is subject to adjustment, however, which could result in its being at a discount to market or book value.  As such, pursuant to the terms of the Proposed Issuance, the number of shares issuable upon conversion cannot reach or exceed 20% of the pre-transaction outstanding shares without shareholder approval.
The Investor is the company’s largest shareholder and currently owns approximately 40% of the outstanding shares.  The Investor acquired its current ownership position approximately seven months ago in connection with a prior transaction approved by shareholders (the “Prior Transaction”).  The company’s board of directors includes two members (the “Directors’) who are executive officers of a subsidiary of the Investor, but not of the Investor itself.  You stated that neither of the Directors would be the beneficial owner of, nor have a pecuniary interest in, the securities that would be issued in the Proposed Issuance.
In the Proposed Sale, pursuant to an agreement entered into in connection with the Prior Transaction, the Investor will purchase shares of the company’s common stock equal to approximately 10% of the company’s outstanding shares from the Chairman (the “Chairman’s Shares”).  You stated that the terms of the agreement have been amended to reduce the price at which the Investor would purchase the Chairman’s Shares; however, no additional shares of common stock would be issued by the company or sold by the Chairman in the Proposed Sale.
Following our review of the information you provided, we have determined that the Proposed Issuance complies with the Rules.  Shareholder approval is not required under Listing Rule 4350(i)(1)(A) because the Proposed Issuance will not result in equity compensation to any officer, director, employee, or consultant of the company, or to any affiliated entity of any such person.  The Directors would not be the beneficial owner of, or have any pecuniary interest in, the securities that would be issued in the Proposed Issuance.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Proposed Issuance will not result in a change of control given that the Investor will have a control position both before and after the Proposed Issuance.  The Proposed Issuance satisfies the requirements of Listing Rule 4350(i)(1)(D)(i) because the issuance cannot reach 20% of the pre-transaction outstanding shares without shareholder approval.  The Chairman’s Shares do not contribute to the 20% calculation because the sale of those shares would be pursuant to the Prior Transaction, which was approved by shareholders, and the reduction of the price that the Chairman will receive in that transaction does not require additional shareholder approval.  Please note that pursuant to IM-4350-2: (i) shares to be issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of a transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can changed based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 752
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