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  Staff Interpretation Letter 2004-38
Identification Number 930
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:  A company is considering a public offering (the “Public Offering”) of its common stock.   Approximately one year earlier, the company’s shareholders had approved a private placement of Series A Convertible Preferred Stock and warrants (the “Financing”).  Shareholder X was one of the participants in the private placement.  Upon the closing of the Financing, Shareholders X and Y beneficially owned approximately 25% and 32%, respectively, of the company’s outstanding shares.  One year later, Shareholder X has become the largest beneficial owner as a result of open market purchases.  At the time of the proposed Public Offering, Shareholders X and Y beneficially own 24.7% and 24.5%, respectively.
Pursuant to the terms of the Financing, all of the investors were afforded the right to participate in future equity offerings by the company up to an amount that would enable them to maintain their pre-transaction beneficial ownership percentage.  If Shareholder X was to exercise its right, this investor could purchase up to 11.6% of the company‘s pre-transaction outstanding shares.  Any shares bought by Shareholder X would be: (i) purchased in the public offering at the same terms available to all other purchasers; and (ii) covered by the same registration statement as all other shares in the Transaction.
Issue:  Is shareholder approval required for the investors’ participation in the Public Offering under NASDAQ’s rules?
Determination:  No.  In accordance with NASDAQ’s shareholder approval requirements, shares issued in a public offering are not subject to shareholder approval.  In addition, Shareholder X’s participation in the Public Offering would be pursuant to the terms of the participation rights from the Financing, a shareholder approved transaction.  As such, NASDAQ determined that Shareholder X’s participation in the proposed Public Offering would not require shareholder approval under Listing Rule 4350(i)(1)(D).  In addition, prior to the Public Offering Shareholder X was the largest beneficial owner of the company’s outstanding stock as a result of open market purchases, which are not considered for purposes of NASDAQ’s shareholder approval requirements.  Accordingly, shareholder approval, pursuant to Listing Rule 4350(i)(1)(B), would not be required since a change of control would not result from the proposed Public Offering.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 930
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