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Frequently Asked Questions
  Staff Interpretation Letter 2008-13
Identification Number 758
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of  Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) to a proposed transaction (the “Proposed Transaction”) involving a reduction in the exercise prices of two series of previously issued warrants (the “Old Warrants”) and the issuance of new warrants (the “New Warrants”).
According to the information you provided, the Old Warrants were issued approximately fifteen months ago in a transaction (the “Prior Transaction”), which was approved by the company’s shareholders.  The Old Warrants contain anti-dilution provisions (the “Anti-dilution Provisions”), which could reduce the exercise prices of the Old Warrants and increase the number of shares of common stock for which they are exercisable.  None of the holders of the Old Warrants is a director or officer of the company.
In the Proposed Transaction, the company would offer to reduce the exercise price of the Old Warrants to less than the current market value of the shares for which they are exercisable.  Warrant holders who accept the offer (the “Participating Holders”) would agree to immediately exercise their Old Warrants at the reduced exercise price, and the company would issue New Warrants to the Participating Holders.  The number of shares that would be issued as a result of the exercise of the Old Warrants by the Participating Holders would be less than 19.9% of the company’s pre-transaction outstanding shares.  The number of common shares underlying the New Warrants would not be greater than the number underlying the Old Warrants that would be exercised in the Proposed Transaction.  The New Warrants would have an exercise price not less than the greater of book or market value, would not be exercisable for six months after issuance, and would not contain anti-dilution provisions other than with respect to stock splits and similar events.  The exercise price of the Old Warrants held by warrant holders who do not accept the offer would be reduced as a result of the Anti-dilution Provisions, which would be triggered by the Proposed Transaction.
You stated that the Proposed Transaction was not contemplated at the time of the Prior Transaction.  At that time, the company believed that any additional capital needs would be funded through research and development grants or investments from new sources.  The proceeds from the Prior Transaction were used primarily to finance the company’s efforts to secure a grant from the federal government.  The grant would have been used to fund the development of one of the company’s products.  Subsequent to the closing of the Prior Transaction, the company learned that it would not receive the grant.  As a result, the company revised its strategy and reassessed its capital needs.  You stated the financing contemplated by the Proposed Transaction came about solely as a result of discussions that the company had regarding its financing needs approximately 10 months after the closing of the Prior Transaction.
Following our review of the information you submitted, we have determined that the Proposed Transaction will not require shareholder approval under the Rule.  Although it involves a modification to the warrants issued in the Prior Transaction, the Proposed Transaction is considered to be a new transaction because of the amount of time that has elapsed, and the significant change in circumstances since the Prior Transaction giving rise to the company’s need to seek additional financing.  As such, because the number of shares of common stock that could be issued as a result of the exercise price reduction would be less than 20% of the shares outstanding prior to the Proposed Transaction, shareholder approval is not required under the Rule.  In addition, the shares underlying the New Warrants would not be aggregated with the shares that would be issued as a result of the exercise price reduction, because the New Warrants would not be exercisable for less than the greater of book or market value and could not be exercised until at least six months after the closing of the Proposed Transaction.  The additional shares that could be issued under the Anti-dilution Provisions of the Prior Transaction would not be aggregated with the Proposed Transaction because the issuance of those shares was approved by shareholders.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 758
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