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  Staff Interpretation Letter 2004-58
Identification Number 942
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% or 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 and its primary lender (the “Bank”) have an existing credit arrangement (the “Agreement’).  The Bank subsequently entered into junior participation agreements (the “Participation”) with certain investors (the “Junior Participants”).  In connection with the Participation, the Bank advanced approximately $10,000,000 to the company, pursuant to the Agreement, and the Junior Participants acquired 100% participation in the Bank’s loan to the company.  Effectively, the Junior Participants loaned the $10,000,000 to the company.  Officers and directors of the company hold approximately $5,000,000 principal amount of the Participation.  The company is proposing to issue common stock, at market value, to satisfy the $10,000,000 Participation, thus converting the original debt to equity (the “Proposed Transaction”).  The issuance would be less than 20% of the company’s pre-transaction outstanding shares.
Issue:  Is shareholder approval required for the Proposed Transaction under NASDAQ’s rules?
Determination:  No.  In this case, NASDAQ determined that shareholder approval under Listing Rule 4350(i)(1)(D) is not required because the issuance will equal less than 20% of the company’s pre-transaction outstanding shares.  Since no investor will, alone or as a member of a group, own or otherwise control 20% or more of the company’s common stock or voting power as a result of the Proposed Transaction, no change of control, as set forth in Listing Rule 4350(i)(1)(B), will occur.   Although officers and directors will receive shares in the Proposed Transaction, the issuance will be at a price that is not less than market value.  Finally, the company represented that its audit committee, as required by Listing Rule 4350(h), had reviewed and approved the Proposed Transaction.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 942
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