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  Staff Interpretation Letter 2007-19
Identification Number 795
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 Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”).
According to the information you submitted, in the Prior Transaction, which was completed approximately five months ago, the company issued shares of its common stock, at a discount to market value, and warrants to purchase additional shares in a private placement.  The number of shares of common stock was less than 20% of the pre-transaction total shares outstanding.  The warrants, if exercised, would result in an aggregate issuance of more than 20% of the pre-transaction outstanding shares in the Prior Transaction.  The warrants are exercisable for not less than the greater of book or market value and cannot be exercised until six months following closing.  The Prior Transaction did not require shareholder approval under the Rules.
In the Proposed Transaction, the company would sell shares of its common stock (the “Shares”) and warrants (the “Warrants”) to several investors.  The number of Shares would equal more than 20% of the pre-transaction outstanding shares, and the Warrants would be exercisable for additional shares of common stock.  The Shares would be issued at a price per share equal to the closing bid price immediately before the company enters into the binding agreement (the “Purchase Price”) plus $0.125 for each Warrant.  The Warrants would be exercisable for not less than the Purchase Price and would not have any anti-dilution adjustments other than for stock dividends, stock splits, and similar events.  The company’s market value exceeds its book value.
The company expects that one of the five investors (the “Prior Investor”) in the Prior Transaction will be among the approximately ten investors in the Proposed Transaction.  The Prior Investor purchased approximately 41% of the securities issued in the Prior Transaction and may purchase up to approximately 35% of the securities issued in the Proposed Transaction.
The proceeds of the Prior Transaction were used to fund a project safety study relating to products in development and for general corporate purposes.  The proceeds from the Proposed Transaction would be used to fund further stages of that development, to expand manufacturing capacity, and for general corporate purposes.
You stated that there are no contingencies between the Transactions, and that at the time of the Prior Transaction, there was no plan or agreement to initiate the Proposed Transaction.  You stated that, as a result of the Proposed Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis (the “Ownership Limit”), and there would be no other related arrangements between the company and any of the investors.  To assure that the Ownership Limit is not exceeded, the exercise of the Warrants will be limited with respect to one investor whereby the investor will agree not to exercise Warrants if the number of shares issuable upon such exercise would result in the investor holding more than 19.9% of the post-transaction outstanding shares (the “Exercise Limit”).
Although the issuance under the Proposed Transaction would exceed 20% of the pre-transaction outstanding shares, shareholder approval would not be required by Listing Rule 4350(i)(1)(D) because the issuance would not be at a discount.  The Proposed Transaction also would not be aggregated with the Prior Transaction because the Proposed Transaction will not be at a discount to book or market value.  In addition, based on the information you provided, there are no linkages or contingencies between the Transactions, and there was no plan for the Proposed Transaction at the time of the Prior Transaction.  Further, given the ownership positions, the Exercise Limit, and the lack of any other arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).
Publication Date*: 7/31/2012 Mailto Link Identification Number: 795
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