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 is proposing a repurchase of certain debt (the “Debt Repurchase”) and a sale of common stock and warrants (the “Equity Issuance”).
In the Debt Repurchase, the company will repurchase certain of its outstanding convertible subordinated debentures for a combination of cash, common stock, and warrants (the “Debt Warrants”). The repurchase is expected to involve five holders of the company’s
debt (the “Debt Holders”) and would involve separate negotiations with each. The issuance of common stock, which will be at a discount to market value, will be limited to less than 20% of the company’s pre-transaction outstanding shares. In the event of
a change in control of the company, the Debt Warrants will be exercisable for $0.01 per common share, but only after the company’s shareholders approve such an issuance. Otherwise, the warrants will be exercisable, beginning six months after issuance, at
the market value of the company’s common stock immediately preceding the execution of the binding agreement. Although the Debt Warrants have certain anti-dilution provisions, the company has represented that it will not take any action that would trigger
shareholder approval under NASDAQ rules, unless the company obtains advance shareholder approval of such issuance. In any event, there will be no alternative outcome if shareholders do not approve the exercise of the warrants.
In the Equity Issuance, the company proposes the issuance of common stock at a discount to market value and warrants, which would be immediately exercisable. While a definitive agreement had not been reached, the company represented that it would limit
the potential issuance (including shares issuable upon the exercise of the warrants) to less than 20% of the company’s pre-transaction outstanding common shares.
None of the Debt Holders will participate in the Equity Issuance, and there are no contingencies between the two transactions. The proceeds from the Equity Issuance will be used for general corporate purposes and will not be used to fund the Debt Repurchase.
No officer or director of the company will participate in either transaction. Further, no participant in either transaction will own or have the right to acquire more than 19.9% of the outstanding common stock or voting power of the company as a result of
the transactions.
Issue: Does NASDAQ require shareholder approval for these transactions?
Determination: No. The shares to be issued to the Debt Holders will be aggregated for purposes of determining whether the Debt Repurchase reaches the 20% threshold set forth in Listing Rule 4350(i)(1)(D)(ii). Shares issuable upon the exercise of the
Debt Warrants at $0.01 per share will not contribute to the 20% calculation, because such issuance can only take place after shareholder approval is obtained. Likewise, shares issuable at an exercise price equal to or greater than the market and book value
on the date of the definitive agreement will not contribute to the 20% calculation. Further, the warrants are not exercisable until six months after closing and are exercisable at a price equal to or greater than the market and book value on the date of the
binding agreement.
The Equity Issuance will not require shareholder approval, pursuant to Listing Rule 4350(i)(1)(D)(ii), because the issuance is limited such that it cannot exceed 20% of the company’s pre-transaction outstanding shares (including shares issuable upon the
exercise of the warrants).
In addition, the Debt Repurchase and the Equity Issuance will not be aggregated for purposes of Listing Rule 4350(i)(1)(D)(ii), because the investors and the use of proceeds in each transaction are different, and there are no contingencies between the
two transactions.
Finally, neither of the proposed transactions can result in a change of control because no individual or entity will own, or have the right to acquire, 20% or more of the outstanding common stock or voting power of the company as a result of the transactions.
Therefore, shareholder approval pursuant to Listing Rule 4350(i)(1)( B) is not required.