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  Staff Interpretation Letter 2007-18
Identification Number 794
This is in response to your correspondence regarding whether a proposed recapitalization (the “Recapitalization”) would require shareholder approval under Marketplace Listing Rule 4350(i)(1)(B) or 4350(i)(1)(D).
According to the information you submitted, the Notes were issued approximately 2.5 years ago.  The Holder owns all of the Notes and over half of the company’s voting stock.  The Notes are mandatorily convertible into common stock four years after issuance or earlier at the option of the Holder.  The initial conversion price is higher than the market value (and the book value) of the common stock immediately preceding the entering into of the binding agreement to issue the Notes.  Subsequent to the issuance of the Notes, shareholder approval was obtained of anti-dilution provisions that could cause the conversion price to be reduced to below that market value.
Approximately one month ago, the company entered into a new debt facility (the “New Debt Facility”) with new lenders (the “New Lenders”).  As a condition to entering into the New Debt Facility, the New Lenders required the Holder: (i) to subordinate its rights as a creditor of the company under the Notes to the New Lenders; and (ii) to fully convert the Notes within four months.  To induce the Holder to subordinate its rights, the company and the Holder entered into an agreement relating to the Recapitalization.  Pursuant to the Recapitalization, the Holder will convert the Notes within four months, and the company will pay the Holder a restructuring fee in a combination of cash and additional shares of common stock (the “Additional Shares”).  The number of shares that the Holder will receive upon conversion will give effect to the amount of payment-in-kind interest that would have been paid had the Notes been held to maturity.  The number of Additional Shares will equal less than 20% of the pre-transaction total shares outstanding.
The securities that will be issued to the Holder upon conversion will include not only shares of common stock but also warrants exercisable for common stock, for a nominal exercise price, to the extent necessary to prevent the Holder from exceeding restrictions on its ownership of the company’s voting power.  You stated that there are certain regulatory restrictions on the Holder’s permitted level of voting power.  The issuance of the warrants does not change the economics of the transaction because the warrants, due to their nominal exercise price, provide the economic equivalence of owning the common stock but without the voting power.  You stated that structuring the transaction in this manner, with the issuance of the warrants, will not cause an increase in the number of shares of common stock ultimately issuable.
The purpose of the New Debt Facility is to bring to the company additional funding to address a cash shortage caused by the acceleration of payments to certain key vendors and to allow for the refinancing of other debt.   No stock will be issued in payment of the New Debt Facility. Equity, not cash from the New Debt Facility, will be used to pay off the Note.  Following the New Debt Facility and the Recapitalization, the Holder will remain the company’s largest shareholder.
Following our review of the information you provided, we have determined that the Recapitalization will not require shareholder approval under the Rules.  With respect to Listing Rule 4350(i)(1)(D), we note that the company’s shareholders have approved the issuance of shares upon conversion of the Notes and that those Notes will be converted pursuant to those approved terms.  While the company will issue the Holder the Additional Shares, as an inducement for the Holder to enter into the Recapitalization agreement, we note that the Recapitalization agreement only recently became necessary and that the number of Additional Shares is less than 20% of the pre-transaction outstanding shares.  Therefore, shareholder approval of the Additional Shares is not required under Listing Rule 4350(i)(1)(D).  Shareholder approval will not be required under Listing Rule 4350(i)(1)(B) because the Holder, as the majority shareholder both before and after the Recapitalization, will remain the largest shareholder.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 794
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