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  Staff Interpretation Letter 2004-29
Identification Number 926
Rule 4350(i)(2):  Exceptions to the shareholder approval requirements may be made upon application to NASDAQ when: (A) the delay would seriously jeopardize the financial viability of the enterprise; and (B) reliance by the company on this exception is expressly approved by the audit committee or a comparable body of the board of directors.  A company relying on this exception must mail to all shareholders no later than ten days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required and indicating that the audit committee or a comparable body of the board of directors has expressly approved the exception.
Rule 4351:  Voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the Act cannot be disparately reduced or restricted through any corporate action or issuance.  Examples of such corporate action or issuance include, but are not limited to, the adoption of time-phased voting plans, the adoption of capped voting rights plans, the issuance of super-voting stock, or the issuance of stock with voting rights less than the per share voting rights of the existing common stock through an exchange offer.
IM-4351.  Voting Rights Policy:  [NASDAQ’s] Voting Rights Policy is based upon, but more flexible than, former SEC Rule 19c-4.  Accordingly, The NASDAQ Stock Market will permit corporate actions or issuances by NASDAQ issuers that would have been permitted under Rule 19c-4, as well as other actions or issuances that are not inconsistent with this policy. In evaluating such other actions or issuances, NASDAQ will consider, among other things, the economics of such actions or issuances and the voting rights being granted. NASDAQ's interpretations under the policy will be flexible, recognizing that both the capital markets and the circumstances and needs of NASDAQ issuers change over time.
Relevant Facts:  A company proposes to issue convertible preferred stock and a warrant (the “Preferred Stock” and the “Warrant”, respectively) to a group of investors (the “Investors”).  In addition, as a condition to making the investment, the Investors are requiring that the principal amount and the accrued and unpaid interest of the outstanding debentures previously issued by the company to other investors be converted into Preferred Stock at the first closing (together with the Preferred Stock and the Warrant, the “Proposed Transaction”).
The Preferred Stock will vote on an as-converted basis; however, the Investors will not be entitled to vote on the shares to be issued in the second closing.  Additionally, the Investors will be entitled to nominate two directors to the company’s board of directors.  The company’s board is currently comprised of seven directors.  Assuming the Investors’ nominees replace two current directors, the Investors’ representation on the board would equal approximately 29%.
As structured, the Proposed Transaction would require shareholder approval.  The company represented that a delay in the completion of the Proposed Transaction, due to the need to secure shareholder approval, would seriously jeopardize the financial viability of the company.  Accordingly, the company sought relief from NASDAQ’s shareholder approval rules, pursuant to the Financial Viability Exception (the “Exception”) available under Listing Rule 4350(i)(2), stating that its cash and cash equivalents could not sustain the company through the duration of the proxy solicitation process and that without the Exception, it would significantly curtail, or cease entirely, its operations and/or file for bankruptcy protection.  The company noted that its audit committee had approved the reliance on the Exception.
The company is requesting the Exception solely for the issuance of $15 million in Proposed Transaction at the first closing.  Subsequently, the company will seek shareholder approval for the remaining $10 million investment prior to a second closing.
Issue:  Is the company eligible for a Financial Viability Exception, pursuant to Listing Rule 4350(i)(2)?
Determination:  Based on a review of the circumstances described above, NASDAQ determined to grant the company’s request for an exception from the shareholder approval requirements because without the requested exemption the company would have no alternative to meet its capital requirements and may have to seek bankruptcy protection in the event that the transaction was delayed.  The company was required to send a letter to all shareholders and to issue a press release describing the transaction at least ten days prior to closing the transaction and alerting shareholders of the company’s omission to seek the shareholder approval that would otherwise be required.
Issue:  Is the issuance of the Preferred Stock consistent with Listing Rule 4351, NASDAQ’s Voting Rights Rule, and IM-4351, NASDAQ’s Voting Rights Policy?
Determination:  NASDAQ determined that because the Preferred Stock will vote on an as-converted basis and may be converted at a discount to market value, the issuance of the Preferred Stock would be presumed to be prohibited.  See, e.g., IM-4350-1.  However, NASDAQ noted that under the Voting Rights Rule and Policy, it is appropriate to consider whether an issuance is designed to “rescue” a company in financial distress.  In such cases, it may be permissible to issue preferred stock with heightened voting protection that is consistent with the reasonable expectations of investors willing to provide additional equity to the company in these circumstances.  See Section III.C.2 of SEC Release No. 34-35121.  Accordingly, based on the company’s assertion that the voting rights provisions of the Preferred Stock as described are the only basis on which the Investors are willing to proceed with the Proposed Transaction, the company’s representations regarding its financial situation, and the analysis of the voting rights in these circumstances, NASDAQ concluded that the Preferred Stock conversion and voting provisions are consistent with the Voting Rights Rule and Policy.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 926
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