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  Staff Interpretation Letter 2008-12  
Identification Number 757
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a transaction (the “Proposed Transaction”) under consideration by the company.  In addition, you asked that to the extent necessary, the company be granted an exception to the voting rights requirements of Marketplace Listing Rule 4351 with respect to Investor’s right to appoint members of the company’s board of directors (the “Board”).
According to the information you provided, in the Proposed Transaction, the company would issue to the Investor: (i) non-convertible senior secured notes (the “Notes”); and (ii) shares of common stock equal to approximately 62% of the pre-transaction outstanding shares at a discount to market value.  As such, without the requested exception, shareholder approval would be required pursuant to: (i) Marketplace Listing Rule 4350(i)(1)(B) because the issuance would result in a  change of control; and (ii) Marketplace Listing Rule 4350(i)(1)(D)(ii) because the issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the market value.
Pursuant to the Proposed Transaction, the Investor would have the right to appoint members of the Board (the “Board Rights”).  The percentage of the company’s Board that the Investor could appoint would be consistent with its percentage ownership interest in the company.  If the ownership position were to decline, the number of directors the Investor could appoint would decline pro ratably such that the percentage of the Board that it could appoint would remain approximately equal to its percentage ownership interest in the company.  As such, the Board Rights comply with Listing Rule 4351.
You stated that as a result of several events since 2005, the company’s business has deteriorated significantly.  Among those events is a decline in revenue due to a new federal law that impacted the company’s customers such that the customers were less likely to purchase the company’s products.  As a cost-savings measure, the company eliminated approximately 27% of its work force during the first quarter of the current year.  Nonetheless, without the Proposed Transaction, the company likely could not fund its operations longer than approximately one month.  You stated that any delay in closing the Proposed Transaction to seek shareholder approval most likely would cause the company to seek the protections of bankruptcy.
Over the past several months, the company explored other financing alternatives but was unsuccessful in finding a suitable transaction.  The company expects that the Proposed Transaction would provide sufficient capital for it to survive its current difficulties and succeed in executing its business plans.  Further, the company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ over the next several months with the possible exception of the bid-price 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 exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to fund its operations and its likely need to seek bankruptcy protection in the event that the Proposed Transaction is delayed.  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 in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the  audit  committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also 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.  Because the Board Rights comply with the voting rights requirements, an exception to Listing Rule 4351 is not needed.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 757
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