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  Staff Interpretation Letter 2006-39  
Identification Number 848
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) to a proposed transaction (the “Proposed Transaction”) which you described.  
According to the information you provided, the company would issue shares of its common stock in exchange for a portion of the outstanding principal amount of indebtedness currently held by the Investor.  The Proposed Transaction would be structured such that either: (i) the shares would be issued at a price (the “Issuance Price”) not less than the closing bid price immediately preceding the entering into of the binding agreement (“Market Value”); or (ii) if the Issuance Price were to be less than the Market Value, the company would limit the issuance of common stock to less than 20% of its pre-transaction outstanding shares unless shareholder approval were obtained.  The company’s market value exceeds its book value. You have represented that the Investor is not an officer, director, employee, or consultant of the company, and that the investor is not an affiliate of any such person or entity.
The company’s officers and directors own in the aggregate approximately 26% of the company’s outstanding shares of common stock.  The Investor is the next largest stockholder with approximately 12% of the outstanding shares.  After the Proposed Transaction, each of these holdings would equal approximately 23% of the then outstanding shares with the officers’ and directors’ combined holdings being slightly larger than the Investor’s.  You stated that the Investor would not: (i) have any right to appoint or otherwise have a designee become a member of the company’s board of directors; (ii) have the right to participate in the management of the company; or (iii) be granted any other right in connection with the Proposed Transaction.  In addition, the company stated that: (i) based upon an inquiry of each current officer and director of the company, no such person intends to sell shares of the company’s stock in the near term; (ii) the Investor is acquiring the shares in the Proposed Transaction as an investment in the company and not with the intent of seeking to obtain control over the company; and (iii) the company does not intend to sell the Investor any shares other than those that would be sold in the Proposed Transaction.  In addition, based upon the negotiations between the Investor and the company regarding the Proposed Transaction, the company believes that the Investor does not intend to acquire shares of the company’s stock other than in the Proposed Transaction.
Following our review of the information you submitted and based on your representations, we have determined that shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Proposed Transaction would not result in a change of control.  Following the Proposed Transaction, the officers’ and directors’ aggregate holdings would exceed the ownership position of the Investor, albeit by only a small amount.  In addition, as described above, there are no additional arrangements between the company and the Investor that would allow the Investor to acquire board representation or otherwise act to control the direction of the company.  Note that this conclusion is based on the specific ownership positions you provided, and that if those ownership positions change soon after the Proposed Transaction is completed (such, for example, as through a sale of shares by an officer or director, a departure of an officer of director, an acquisition by the Investor of additional stock, acquisition by the Investor of additional rights in the company, or other circumstances) our conclusion could be different and therefore shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(B).  In addition, given the conclusion that the Investor will not control the company as a result of the Proposed Transaction, please be advised that any future issuance of shares by the company to the Investor, or the entering into of other arrangements with the Investor, could result in a change of control, which may require shareholder approval under Listing Rule 4350(i)(1)(B).
The Proposed Transaction would comply with Listing Rule 4350(i)(1)(D), subject to the restrictions contained in IM-4350-2, because if the Issuance Price was to be less than Market Value, the issuance would equal less than 20% of the pre-transaction outstanding shares, unless shareholder approval were obtained.  Please note that pursuant to IM-4350-2: (i) shares issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 848
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