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Frequently Asked Questions
  Staff Interpretation Letter 2007-17
Identification Number 793
This is in response to your correspondence regarding whether a proposed transaction (the “Proposed Transaction”) would be aggregated with a prior transaction (the “Prior Transaction”, and together with the Proposed Transaction, the “Transactions”) for purposes of the applicability of NASDAQ’s shareholder approval requirements.  Specifically, your question relates to Marketplace Listing Rule 4350(i)(1)(D).
According to the information you submitted, in the Prior Transaction, which was completed approximately three months ago, the company issued convertible notes to several investors in a private placement.  The notes are convertible into common stock at a discount to the market value of the common stock, but the number of shares issuable upon conversion is limited to 19.9% of the company’s pre-transaction outstanding shares.  The primary purpose of the Prior Transaction was to raise funds to resolve debt covenant issues which arose due to the company’s recent financial performance.  The proceeds were used to pay down debt under the company’s term loan agreement and for general corporate purposes.
In the Proposed Transaction, the company would issue to an institutional investor shares of its common stock up to a fixed aggregate dollar value, at a discount to market value.  The number of shares to be issued will be further capped so as to make sure that it remains below 20% of the total shares outstanding prior to the Proposed Transaction.  The investor in the Proposed Transaction was not an investor in the Prior Transaction and is not an officer, director, employee, or consultant of the company.  You stated that the Transactions are distinct and unrelated and each came to the attention of the company separately.  Neither is contingent on the other.
You stated that at the time of the closing of the Prior Transaction, the company anticipated that it would have sufficient liquidity for the foreseeable future and had not planned any additional capital raising efforts in the short term.  Subsequent changes in circumstances, however, gave rise to the need for the Proposed Transaction.  Specifically, (i) there was a significant increase in the cost of raw materials that the company purchases for use in its manufacturing process; (ii) the company entered into a contract settlement that resulted in its having to make a higher than anticipated payment; and (iii) the company experienced operational difficulties that resulted in lower than expected revenue after the Prior Transaction was completed.  These events caused the company’s working capital requirements to increase significantly beyond the amount that had been anticipated at the time of the Prior Transaction, and the proceeds from the Proposed Transaction would be used to fund those requirements.
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction because there are no linkages or contingencies between the Transactions, there will be no commonality of investors, the proceeds will be used for different purposes, and the need for the Proposed Transaction arose only after the closing of the Prior Transaction.  Accordingly, provided the issuance is less than 20% of the pre-transaction outstanding shares, shareholder approval of the Proposed Transaction would not be required under Listing Rule 4350(i)(1)(D).  Of course, if the investor in the Proposed Transaction acts with the intent to sell or resell company shares to any of the investors in the Prior Transaction, then our conclusion could be different.  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.  For example, if the issuance could result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B).
Publication Date*: 7/31/2012 Mailto Link Identification Number: 793
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