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  Staff Interpretation Letter 2004-12
Identification Number 912
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
Relevant Facts:  In late 2003, a company proposed a private placement (the “Offering”).  Pursuant to the Offering, the company intends to sell common stock and warrants exercisable into common stock to a number of accredited investors.  The common stock and warrants will constitute approximately 50% and 25%, respectively, of the company’s pre-transaction outstanding shares.
The price of the units will equal the market value of the common stock immediately preceding the execution of the definitive agreement, plus an additional cost to allow for the attribution of $0.125 for each full share purchasable under a warrant.  The warrants will be exercisable at the same market value at any time after issuance.  The warrants will contain anti-dilution protection for stock splits and similar events, but will not contain price adjustments.  According to the terms of the transaction, no investor individually, or as part of a group, can beneficially own more than 19.9% of the company’s outstanding common shares or voting power as a result of the issuance.
The company subsequently closed only a portion of the unit offering (the “Initial Issuance”) and now plans to issue the remainder of the securities discussed above (the “Proposed Transaction”) on virtually identical terms to the securities issued in the Initial Issuance.  The market value will be determined immediately prior to the company entering into the binding agreement for the Proposed Transaction plus the attribution of the appropriate value for the warrants.  The Proposed Transaction, if consummated, together with the Initial Issuance, would result in the issuance of common shares and warrants convertible into common shares on a fully-diluted basis, totaling 45% of the company’s total shares outstanding prior to the Initial Issuance.  The company noted that only differences between the two issuances would be that the securities would be sold pursuant to separate agreements, and that the shares to be issued in the Proposed Transaction would have a different price than those issued in the Initial Issuance.
Issue:  Is shareholder approval required for the Proposed Transaction?
Determination:  No.  NASDAQ determined that the Proposed Transaction does not require shareholder approval pursuant to the Rules.  While the Proposed Transaction will be aggregated with the Initial Issuance for purposes of Listing Rule 4350(i)(1)(D), and the aggregate number of shares issuable pursuant to both transactions exceeds 20% of the company’s total shares outstanding, both transactions were priced at no less than the greater of book or market value.  Therefore, shareholder approval under Listing Rule 4350(i)(1)(D)(ii) was not required for either the Initial Issuance or the Proposed Transaction.  In addition, shareholder approval for the Proposed Transaction is not required pursuant to Listing Rule 4350(i)(1)(B) because the transaction will not result in a change of control since no participating investor will own alone, or as a group, hold 20% or more of the company’s common stock or voting power following the Proposed Transaction.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 912
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