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.
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.
Relevant Facts: A company proposes an equity financing (the “Proposed Transaction”) and requests that it be granted an exception to NASDAQ’s shareholder approval requirements pursuant to Listing Rule 4350(i)(2) (the “Exception”). The company states that
a delay in completing the Proposed Transaction to secure shareholder approval would seriously jeopardize the financial viability of the company. Specifically, the company represents that it would be unable to meet its payroll and trade obligations for the
following month and would be required to file for bankruptcy within two months. The company notes that its Audit Committee has approved reliance on the Exception.
Under the proposal, the company plans to issue common stock up to 20% of its pre-transaction shares at a discount to the market price with 50% warrant coverage. The warrants will have an exercise price 10% above the purchase price of the common stock
and would have only the standard anti-dilution provisions related to changes in the company’s capital structure. The company states that no directors, officers, employees, consultants or affiliates will participate in the private placement. No investor will
obtain a post-transaction holding of 20% of the common stock outstanding. The company represents that the proceeds from the Proposed Transaction will provide sufficient funding for operations for the next nine months.
Issue: Is the company eligible for a Financial Viability Exception, pursuant to Listing Rule 4350(i)(2)?
Determination: NASDAQ noted that the Proposed Transaction would require shareholder approval pursuant to Listing Rule 4350(i)(1)(D). However, based on the company’s representation that without the requested Exception its financial viability would be
seriously jeopardized, NASDAQ determined to grant the company’s request. Under the terms of the Exception, 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 the
closing of the transaction.