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)(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.
Issue: The company proposes to raise capital through the sale of convertible preferred stock and warrants (the “transaction”) to another corporation (the “Investor”). The proposed transaction would result in a change of control and therefore required
shareholder approval. The company requested a financial viability waiver to the shareholder approval requirement.
Relevant Facts: The company stated that a delay in securing shareholder approval would seriously jeopardize its financial viability. Specifically, it noted that without this transaction, the company would be unable to meet its current obligations, including,
but not limited to, lease payments and payroll, and would therefore be forced to seek bankruptcy protection within the next two weeks. The company also indicated that it was currently in default on several of its credit obligations.
The company stated that it had been attempting to raise additional equity over the last several months, but had been unsuccessful in those efforts until now. The company also stated that the purchaser was only willing to proceed with the financing if
it could immediately close on the entire transaction.
Finally, the company represented that upon closing the transaction, it would satisfy the continued listing requirements for The NASDAQ National Market and would have sufficient capital to fund operations for the next twelve months. The company’s audit
committee approved the company’s reliance on the financial viability exception to the shareholder approval requirement.
Determination: Without the requested exception, shareholder approval would be required, pursuant to Listing Rule 4350(i)(1)(B). However, based on a review of the circumstances described above, NASDAQ determined to grant the company’s request for an exception
to the shareholder approval requirements. This determination was based on representations made by the company regarding its ability to meet certain financial obligations, including the possibility that the company could be subject to bankruptcy proceedings,
in the event that the transaction was delayed. The company was required to send a letter to all shareholders and issue a press release describing the transaction at least ten days prior to closing the transaction.