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  Staff Interpretation Letter 2006-19
Identification Number 829
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed transaction (the “Proposed Transaction”) which you described.
According to the information you submitted, in the Proposed Transaction the company would enter into a new agreement (the “Agreement”) with the holders of the Notes (the “Note Holders”) pursuant to which the Note Holders would immediately convert the Notes.  Under the Agreement, the company would reduce the conversion price of the Notes and issue warrants to the Note Holders.  The number of common shares that could be issued upon conversion exceeds 20% of the company’s pre-transaction outstanding shares.  The conversion price would be no less than the closing bid price immediately preceding the entering into of the binding agreement (the “Closing Bid”), plus $0.125 for each share of common stock issuable upon the exercise of the warrants.  In addition, the warrants would be exercisable for no less than the Closing Bid and would not have any anti-dilution price adjustments other than for stock dividends, combinations, and similar events.  The company’s market value exceeds its book value.
You stated that the company has several reasons for entering into the Agreement.  In the last four months, the company has changed its executive management, which was responsible for using the Notes as a financing vehicle.  Further, the company’s board has implemented a new operating plan and funding strategy after assessing its funding needs.  An investment bank hired by the company has advised that the complexity and overhang created by the company’s existing securities, including the Notes, are a significant deterrent in attracting long-term equity investors.  As a result of the Proposed Transaction, the company would eliminate the obligation to pay principal and interest and would no longer be subject to covenants which restrict the company’s ability to: (i) incur liens or debt senior to or on par with the Notes; (ii) pay dividends or redeem common stock; and (iii) engage in certain change of control or other transactions materially affecting the company’s capital structure.  In addition, following the Proposed Transaction, the company would be free to sell assets that are pledged as collateral for the Notes.  The Note Holders, by agreeing to immediately convert and thereby foregoing the rights to future interest payments, will be able to convert at a lower price and will receive warrants.
You stated that the company will not consummate the Proposed Transaction if it would result in any stockholder owning 20% or more of the company’s outstanding shares or voting power.  The Note Holders do not, and will not, have any board representation or any rights to board seats, and no additional arrangement between the company and the Note Holders is contemplated.
Following our review of the information you submitted, we have concluded that shareholder approval of the Proposed Transaction is not required pursuant to the Rules.  For purposes of determining whether the issuance price is at least as much as market value, it is appropriate to use the closing bid price immediately prior to the binding agreement for the Proposed Transaction rather than that immediately prior to the original transactions.  The more recent closing bid is used because of the changes in circumstances since entering into of the original agreements that led to the desire to consummate the Proposed Transaction and because of the significant changes in terms that would be reflected in the Agreement, as described above.  As such, although the issuance could exceed 20% of the pre-transaction outstanding shares, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D) because the issuance price will not be less than the greater of book or market value.  The Proposed Transaction will not result in a change of control because no Note Holder could own as much as much as 20% of the company’s outstanding stock or voting power and there will be no other arrangements between any of the Note Holders and the company.  Accordingly, shareholder approval of the Proposed Transaction is not required under Listing Rule 4350(i)(1)(B).
Publication Date*: 7/31/2012 Mailto Link Identification Number: 829
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