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  Staff Interpretation Letter 2003-6
Identification Number 977
Rule 4350(i)(1)(A):  Each issuer shall require shareholder approval of a plan or arrangement  … when a stock option or purchase plan is to be established or other arrangement made pursuant to which stock may be acquired by officers or directors, except for warrants or rights issued generally to security holders of the company or broadly based plans or arrangements including other employees (e.g. ESOPs).  The establishment of a plan or arrangement under which the amount of securities which may be issued does not exceed the lesser of 1% of the number of shares of common stock, 1% of the voting power outstanding, or 25,000 shares will not generally require shareholder approval.
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 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 proposes to sell shares of its common stock and a warrant exercisable for common stock to the chairman of its board.  The purchase price per common share will be the market value immediately preceding the execution of the definitive agreement, plus $0.125 for each share of common stock subject to the warrant.  The warrant will be exercisable at a 25% premium to the market value.  The warrant does not contain any anti-dilution provisions other than provisions to pro-ratably adjust the number of shares issuable upon exercise in the event of stock dividends, stock splits or similar events effecting holders of the common stock generally.
Giving effect to the exercise of the warrant, the proposed transaction will result in the potential issuance of approximately 10% of the company’s pre-transaction outstanding common shares.  While the chairman already owns shares of the company’s common stock, his ownership would not exceed 20% of the company’s common stock as a result of the transaction.
Issue:  Is shareholder approval required for the issuance of common stock to a director of a listed company?
Determination:  Because the maximum potential issuance will be less than 20% of the pre-transaction total shares or voting power outstanding, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D)(ii).  Further, although the shares will be issued to a member of the company’s board of directors, shareholder approval is not required, pursuant to Listing Rule 4350(i)(1)(A), because the sale is not at a discount to market value.  Lastly, because the chairman’s ownership upon consummation of the transaction will not exceed 20% of the company’s outstanding shares or voting power, a change of control will not occur as a result of the proposed transaction.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B).
Publication Date*: 7/31/2012 Mailto Link Identification Number: 977
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