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 a private placement (the “Private Placement”) and a recapitalization (the “Recapitalization”).
Pursuant to the Private Placement, the company intends to sell common stock and warrants (the “New Warrants”) to 30 accredited investors. The stock issuance will exceed 20% of its company’s pre-transaction outstanding shares and the company will also
issue warrants in an amount equal to 35% of the newly issued common shares. The price of the units of common stock and warrants will be fixed using the market value immediately preceding the execution of the binding agreement, plus $0.04375 to allow for the
attribution of $0.125 for each full warrant (i.e., 35% multiplied by $0.125 equals $0.04375). The warrants will be exercisable at a fixed price at any time after their issuance and will expire in five years. The warrants will contain anti-dilution protection
for stock splits and similar events, but will not contain price adjustments. According to the terms of the transaction, no investor individually, or as part of a group, can beneficially own more than 15% of the company’s outstanding common shares or voting
power as a result of this transaction.
A portion of the proceeds from the Private Placement will be used to fund the cash portion of an exchange agreement with the holders of the company’s existing preferred stock and existing warrants (the “Recapitalization”). In addition, the company will
issue non-convertible term loans and new warrants (the “Loan Warrants”) to the preferred stock holders. The Loan Warrants will enable the holder to purchase a certain number of common shares at a fixed exercise price, which will be the average closing bid
price for the four or five days immediately preceding the issuance of the warrants. The terms of the Loan Warrants will contain a provision limiting their exercisability, so that no holder can beneficially own more than 15% of the company’s outstanding common
shares.
Issue: Does NASDAQ require shareholder approval for either or both of these transactions?
Determination: Pursuant to NASDAQ’s rules, shareholder approval is not required for either the Private Placement or the Reorganization. Although the share issuance will exceed 20% of the company’s pre-transaction shares outstanding, the fixed issuance
price of the units and the fixed exercise prices of the warrants will not be less than the greater of book and market value. Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D). Further, shareholder approval is not required
pursuant to Listing Rule 4350(i)(1)(B), because no purchaser in either the Private Placement or in the Reorganization can acquire alone, or together with others, more than 20% of the company’s outstanding common stock or voting power. Accordingly, there is
no change of control.