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Frequently Asked Questions
Staff Interpretation Letter 2017-2
Identification Number
1411

This is in response to your correspondence asking whether certain payments made by the Company to the Director preclude the Director from being considered independent under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the "Rules") and to serve on the Company's audit committee under Listing Rule 5605(c)(2)(A)(ii). The payments were made to the Director as consideration for Director's ownership in the Target in connection with the Company's acquisition of the Target.

According to the information you provided, the Company agreed to acquire a controlling interest in the Target (the "Acquisition") through an offer, open to all Target shareholders, to purchase at least 80% of the outstanding shares of the Target. As a result of the Acquisition, the Target became a subsidiary of the Company. The Director, directly and indirectly, owned approximately 10% of the Target.

As consideration for the Target, the Company paid cash and issued shares of the Company's common stock (the "Merger Consideration"). Accordingly, as an owner of shares in the Target, the Director received Merger Consideration pro ratably in the same manner as the Target's other shareholders. You stated that the Company accounted for the Merger Consideration as acquisition consideration and not as compensation.

Following our review of the information you provided, we have determined that the Company's board of directors is not precluded by the Rules from finding that the Director is independent and that the Director is eligible under Listing Rule 5605(c)(2)(A) to serve on the Company's audit committee. The Merger Consideration is not compensation under Listing Rule 5605(a)(2)(B) because it was paid pro ratably to all shareholders of the Target and the Company accounted for the payment as acquisition consideration and not compensation. Listing Rule 5605(a)(2)(D) is not implicated by the Acquisition because the Merger Consideration is a payment to the shareholders of the Target rather than a payment for "property or services" to the Target itself as an organization, as contemplated by Listing Rule 5605(a)(2)(D). In addition to the independence requirements under Listing Rule 5605(a)(2), Listing Rule 5605(c)(2)(A)(ii) requires that audit committee members meet the criteria for independence set forth in Rule 10A-3(b)(1) under the 1934 Act. Under these facts and circumstances, the Merger Consideration does not constitute a direct or indirect "consulting, advisory or other compensatory fee from the issuer or any subsidiary thereof," as described in by Rule 10A-3(b)(1)(ii)(A) and, therefore, Listing Rule 5605(c)(2)(A)(ii) would not prohibit the Director from serving on the Company's audit committee.

Notwithstanding this determination, the Company remains subject, on an ongoing basis, to Rule 5605(a)(2) and IM-5605, which require the Company's board to make an affirmative determination that no relationship exists between the Company and the Director that would interfere with the exercise of independent judgment in carrying out the responsibilities as a director. We are not expressing any opinion as to the whether the Board could reasonably make such a determination.

Publication Date*: 8/10/2017 Identification Number: 1411 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-5
Identification Number
1091

This is in response to your request asking whether the Director is eligible to be an independent member of the company's board of directors under Listing Rule 5605(a)(2)(A) and IM-5605 (the "Rules"), notwithstanding his prior service as the company's Executive Chairman.

According to the information you provided, the Director previously served as an independent member of the company's board of directors (the "Board") and non-executive Chairman. The Director did not fall within any of the disqualifications from serving as an independent director in Listing Rule 5605(a)(2) and the Board made an affirmative determination that the Director did not have a relationship that would impair his independent judgment in carrying out the responsibilities of a director. Additionally, up until his appointment as Executive Chairman, the Director served as a member of the Compensation Committee and Nominating and Corporate Governance Committee.

Last year, the Board undertook evaluations of the company's management team. In order to get a better inside perspective of senior management, the Board asked the Director to serve as Executive Chairman, given his years of senior executive experience and his professional relationship with the company's President and Chief Executive Officer.

You stated that at the time of the Director's appointment, the independent directors of the Board understood that the Director's service as Executive Chairman would be temporary, allowing the Board to complete its assessment and, if necessary, undertake and complete a change in senior management. To that end, the employment agreement with the Director was structured such that it could be terminated on short notice for any reason whatsoever without incurring significant cost to the company.

Approximately four months later, the company appointed a new President and Chief Executive Officer. Simultaneously with this appointment, the Director resigned his position as Executive Chairman and transitioned back to his position as non-executive Chairman of the Board. Upon resigning from the position as Executive Chairman, the Director ceased to be an officer and employee of the company and his employment agreement was terminated. You stated that in relation to his employment, the Director did not receive severance or termination benefits, was not awarded any equity compensation, is not due any future compensation and did not participate in any employee benefit plan after his employment.

Following our review of the information you provided, we have concluded that the Director's service as Executive Chairman would not preclude the company from making a determination that the Director is independent on a going-forward basis. Under IM-5605, employment by a director as an Executive Officer on an interim basis does not disqualify that director from being considered independent following such employment pursuant to Listing Rule 5605(a)(2)(A), provided that the interim employment did not last longer than one year.

Notwithstanding this conclusion, pursuant to Listing Rule 5605(a)(2) and IM-5605, the company's board has the responsibility to make an affirmative determination that no relationship exists that would interfere with the Director's exercise of independent judgment in carrying out the responsibilities of a director. In assessing the Director's independence, the Board should consider his service as Executive Chairman. We are not expressing an opinion as to whether it would be appropriate for the company's board to make such a finding with respect to the Director. Please also note that if the Director participated in the preparation of the company's financial statements while serving as Executive Chairman, Rule 5605(c)(2)(A)(iii) precludes his service on the audit committee for three years.

Publication Date*: 9/30/2013 Identification Number: 1091 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-2
Identification Number
1039
This is in response to your interpretive request asking whether the Director is eligible to be an independent member of the company's board of directors under Listing Rule 5605(a)(2)(B) (the "Rule").  The Director received certain payments and benefits from the company, which are described below.  You asked whether these amounts are "non-discretionary" for purposes of the Rule and, therefore, not prohibited by the Rule's limit on compensation (the "Limitation").
 
The Director previously was the company's Chief Executive Officer.  He ceased being an employee of the company more than three years ago.  At that time, the company and the Director negotiated an agreement (the "Transition Agreement") pursuant to which the company is obligated to make payments for various periods of time, including ongoing payments for: (i) healthcare coverage; and (ii) payments under the company's Supplemental Executive Retirement Plan (the "SERP").  In addition, other payment obligations under the Transition Agreement ended during the prior three years, including payments for: (i) life insurance coverage; (ii) a car allowance; and (iii) compensation for serving as Chairman of the company's Board, or, if the Director died or was removed as Chairman, the lump sum value of the amounts he would have otherwise received as Chairman (collectively with the ongoing payments described in the prior sentence, the "Payments").  The Transition Agreement accelerated the date when the Director became eligible to receive payments under the SERP and resulted in a recalculation of the amount of those payments.  In addition, the Transition Agreement extended the post-employment period during which the Director retained his eligibility for healthcare coverage under his employment agreement.  You stated that the Payments are legal obligations of the company, which are not contingent in any way on continued service to the company by the Director.
 
Following our review of the information you provided, we have concluded that for purposes of the Rule, the Payments are non-discretionary and, as such, need not be considered in determining whether the Director has accepted compensation from the company in excess of the Limitation.  We have reached this conclusion because the Payments are legal obligations of the company and are not contingent on continued service to the company by the Director. Accordingly, under the Rule, the Payments do not preclude the company's board of directors from determining that the Director is independent.
 
Notwithstanding this conclusion, pursuant to Listing Rule 5605(a)(2) and IM-5605, the company's board has the responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individual serving as an independent director.  In assessing the Director's independence, the Board should consider his prior service as the company's Chief Executive Officer and the Payments made to him pursuant to the Transition Agreement, along with any other relationships that the Director has with the company and its executive officers and employees, in order to determine whether any of these relationships individually or in the aggregate may interfere with the Director's exercise of independent judgment in carrying out his responsibilities of a director.  We are not expressing an opinion as to whether it would be appropriate for the company's board to make such a finding with respect to the Director.
 
Publication Date*: 7/31/2012 Identification Number: 1039 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-13
Identification Number
712
This is in response to your correspondence asking whether the Director can be considered independent under Listing Rule 5605(a)(2)(F) (the “Rule”), even though a member of his family (the “Family Member”) is a partner in a foreign affiliate of a major accounting firm that currently serves as the company’s outside auditor (the “Foreign Affiliate”).
 
According to the information you provided, the company’s outside auditor (“the Auditor”) is based in the United States and is a member of an international cooperative (the “International Cooperative”), along with over 50 other member firms located in various foreign countries, including the Foreign Affiliate. Each member firm of the International Cooperative is an independent, legally separate entity with no overlap of equity, control, or governance functions and no sharing of revenues. Member firms are required to comply with the International Cooperative’s policies and regulations, including quality standards governing how they operate.
 
The Rule states that a director is not independent if the director “is, or has a Family Member who is, a current partner of the company's outside auditor, or was a partner or employee of the company's outside auditor who worked on the company's audit at any time during any of the past three years.” In our view, the proper way to address your question is to consider the meaning of the term “auditor” in the Rule. As we explain below, we have determined that the Director is not independent within the meaning of the Rule.
 
We believe that the term “auditor” in the Rule should be accorded the same meaning as the term “accounting firm” under the Securities and Exchange Commission (“SEC”) rules (described below) on auditor independence. Both the Rule and the SEC rules are concerned with ensuring auditor independence, and, given the importance of maintaining regulatory consistency in this area, it has always been NASDAQ’s intent that the Rule be interpreted in a manner that is consistent with the SEC’s approach. The SEC’s Regulation S-X Rule 2-01(f)(2) defines an “accounting firm” as “an organization... that is engaged in the practice of public accounting ... and all of the organization’s departments, divisions, parents, subsidiaries, and associated entities, including those located outside of the United States.” Given that the Auditor and the Foreign Affiliate are each members of the International Cooperative, we believe that the SEC would consider them “associated entities” under this rule and, therefore, part of the same accounting firm.
 
As explained above, we believe the term “auditor” should be accorded a meaning that is consistent with how the SEC defines the term “accounting firm.” Therefore, we consider the Auditor and the Foreign Affiliate each to be part of the company’s “auditor,” and the Family Member is deemed to be a partner of the company’s outside auditor. Since the Director has a family member who is a current partner of the company’s outside auditor, the Director cannot be considered independent under the Rule.
 
Publication Date*: 7/31/2012 Identification Number: 712 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-10
Identification Number
709
This is in response to your correspondence regarding whether the Directors can be considered independent under Listing Rules 5605(a)(2)(A) and 5605(a)(2)(D) (the “Rules”) notwithstanding: (i) their relationship with the Shareholder and the Firm; and (ii) certain payments the company makes to the Shareholder.
 
According to the information you provided, over the past nine months the Shareholder has reduced its ownership of the company from approximately 67% of the outstanding shares of common stock to approximately 25% through a series of public offerings. You stated that the Shareholder holds its interest in the company for investment purposes and that neither the Shareholder, nor any of its affiliates, has ever consolidated the financials of the company with its own financial statements. Pursuant to an agreement between the company and the Shareholder (the “Agreement”), the company makes an annual payment to the Shareholder in exchange for advisory services provided by an affiliate of the Shareholder (the “Payment”).
 
The Directors are executive officers of the Firm, a private equity firm which, through a series of partnerships (the “Partnerships”), controls a fund which controls the Shareholder. The Directors are not executive officers or partners in the Shareholder but are limited partners of certain of the Partnerships. The Directors and other employees of the Firm provide the services to the company under the Agreement.
 
Following our review of the information you provided, we have determined that the Shareholder’s ownership position in the company does not cause the Directors to be employees of the company within the meaning of Listing Rule 5605(a)(2)(A).  In that regard, we note that IM-5605 provides that the reference to “company” in the Rules includes any parent or subsidiary of the company, but is not intended to cover a situation, such as the company’s, where the ownership position is reflected as an investment rather than being included in the financial statements on a consolidated basis.  Accordingly, with respect to the Shareholder’s current and past ownership in the company, Listing Rule 5605(a)(2)(A) does not preclude the board of directors of the company from finding that the Directors are independent.
 
We have also concluded that for purposes of applying Rule 5605(a)(2)(D), the Payment should be viewed as being made to the Firm given that the Firm controls both the Shareholder, which is receiving the Payment, and the Partnerships, and that employees of the Firm are providing the services through one of the Partnerships. Although the Directors are limited partners at certain of the Partnerships, as noted in IM-5605, the reference to “partner” in Listing Rule 5605(a)(2)(D) is not intended to include limited partners. However, given that the Directors are executive officers of the Firm, the Directors’ eligibility to be independent under Listing Rule 5605(a)(2)(D) is determined by whether the Payment exceeds the greater of 5% of the Firm’s revenues or $200,000 in the current year or any of the Firm’s last three fiscal years.
 
Notwithstanding this determination, pursuant to IM-5605, a company’s board still has an on-going responsibility to make an affirmative determination that no relationship exists with the Directors that would impair their independence. We are not expressing any opinion as to the outcome of any such determination.
 
Publication Date*: 7/31/2012 Identification Number: 709 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-6  
Identification Number
705
This is in response to your correspondence asking whether the Directors can be considered independent  under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the “Rules”), notwithstanding certain payments the company has made, and will continue to make, to the Investor in connection with a private placement (the “Private Placement”).
 
According to the information you provided, the company sold shares of convertible preferred stock to the Investor in a Private Placement, which occurred approximately nine months ago. Pursuant to the rights it obtained in the Private Placement, the Investor elected the Directors, each of whom is an executive officer of the Investor, to the company’s board.
 
The company paid the Investor a one-time fee upon the closing of the Private Placement (the “Transaction Fee”). You stated that the company negotiated the Transaction Fee as a term of the Private Placement and that the Investor provided no property or services for the Transaction Fee. The company accounted for the Transaction Fee as a reduction in the proceeds received in the Private Placement, and the Investor accounted for the fee by deducting it from the aggregate purchase price paid.
 
In addition, pursuant to the provisions of the Private Placement, the company pays ongoing fees of more than $200,000 per year to the Investor. These fees consist of the Annual Director Fees paid to all directors, plus an additional, annual Monitoring Fee. In that regard, you have explained that the Investor provides ongoing services to the company, including consultation and analysis of strategic alternatives, assistance with initiatives to increase revenues and reduce expenses, and facilitation of investment relations activities. The Investor also provides ongoing services related to its investments in the company, including monitoring the company’s performance. Both fees are paid directly by the company to the Investor.
 
Following our review of the information you provided, we have determined that the Transaction Fee is not compensation to the Directors within the meaning of Listing Rule 5605(a)(2)(B) or a payment for property or services to the Directors or the Investor under Listing Rule 5605(a)(2)(D). In that regard, we note that both the Investor and the company accounted for the Transaction Fee as a reduction in the purchase price in the Private Placement. We agree that the Transaction Fee should be viewed as a reduction in the purchase price in the Private Placement, and not as compensation to the Directors or as a payment for property of services by the company. As such, with respect to the Transaction Fee, the company’s board of directors is not precluded by the Rules from finding that the Directors are independent.
 
We have determined that the Monitoring Fee, however, is a payment to the Investor for services under Listing Rule 5605(a)(2)(D). Since the Directors are executive officers of the Investor, their eligibility to be independent is determined by whether the total amount of the Monitoring  Fees in the current year or any of the last three fiscal years exceeds the greater of 5% of the Investor’s revenues for that year, or $200,000. The standard Annual Director Fee is compensation for board service within the meaning of Listing Rule 5605(a)(2)(B) and thus falls outside of this calculation.
 
Notwithstanding this determination, pursuant to IM-5605, a company’s board still has an on-going responsibility to make an affirmative determination that no relationship exists with the Directors that would impair their independence. We are not expressing any opinion as to the outcome of any such determination.
 
 
Publication Date*: 7/31/2012 Identification Number: 705 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-5
Identification Number
704
This is in response to your correspondence regarding the Director’s eligibility to be an independent member of the company’s board of directors under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D).
 
According to the information you provided, the Director and his wife own a construction company (the “Construction Company”).  Pursuant to guidelines established by its audit committee, the company has selected the Construction Company to perform certain construction-related services over the past several years.  In performing these services, the Construction Company provides general contractor services, bids out work to subcontractors, and oversees the progress of the project.  For each project, the payments made by the company to the Construction Company (the “Payments”) equal the sum of subcontractor and material costs, labor expenses, and the Construction Company’s fee.  The entire amount of the Payments is reflected as revenue on the books and records of the Construction Company.
 
You stated that the Director personally spent only a nominal amount of time on the construction projects, consisting of a few inspections of the projects.  For each project, other employees performed the overall supervision of the project, and the Construction Company had both a project manager and a superintendent/foreman, each of whom was responsible for the construction activities.  The Construction Company has approximately 45 employees.
 
Following our review of the information you provided, we have determined that the Payments are not compensation within the meaning of Listing Rule 5605(a)(2)(B).  In that regard, we note that IM-5605 states that in exceptional circumstances, such as where a director has direct, significant business holdings, it may be appropriate to apply the corporate measurements in Listing Rule 5605(a)(2)(D) instead of the individual measurements of Listing Rule 5605(a)(2)(B).  We believe that this is such a case, given that the Payments were made to the Construction Company, the Construction Company is a significant, bona fide business, and the Director had only minimal involvement in the projects.  As such, with respect to the Payments, the company’s board of directors is not precluded by Listing Rule 5605(a)(2)(B) from finding that the Director is independent.  The total amount of the Payments, however, is considered to be payment for property or services for purposes of Listing Rule 5605(a)(2)(D).  Accordingly, under Listing Rule 5605(a)(2)(D), the Director’s eligibility to be considered independent would be determined by whether the total amount of the Payments in the current year or any of the last three fiscal years exceeds 5% of the Construction Company’s revenues for that year, or $200,000, whichever is more.
 
Notwithstanding the Director’s eligibility under Rules 5605(a)(2)(B) and 5605(a)(2)(D), in order for the Director actually to be considered independent under NASDAQ’s rules, the company’s board must make an affirmative factual determination (as described in IM-5605) that no relationship exists that would impair the Director’s independence.  In that regard, we believe that in evaluating whether there are any relationships that may interfere with the Director’s independence, the board should specifically consider the Payments and the ongoing relationship between the company and the Construction Company, particularly given that the company selected the Construction Company without a competitive bidding process, and all other facts and circumstances relating to this relationship.  For this reason, this letter is not, and should not be construed as, expressing a view that the Director is actually independent under the Rules.
 
Publication Date*: 7/31/2012 Identification Number: 704 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-3  
Identification Number
702
This is in response to your correspondence regarding the rights that certain shareholders would have to nominate members of the board of directors (the “Nomination Rights”) following the company’s acquisition of the Target (the “Acquisition”). Your questions relate to the applicability of the voting rights requirements of Listing Rule 5640 (the “Voting Rights Requirements”) and the director nomination requirements of Listing Rule 5605(e) and IM-5605-7 (collectively, the “Nominations Rule”).
 
According to the information you provided, in connection with the Acquisition the company would enter into an agreement with the shareholders of the Target (the “Target Holders”) and certain of the company’s existing shareholders (the “Company Holders”) setting forth the Nomination Rights. As part of the Acquisition consideration, the Target Holders would receive securities (the “Exchangeable Securities”), which would become exchangeable at the Target Holders’ option, generally one year after issuance, either for shares of the company’s common stock or preferred stock which would be immediately convertible into common stock (the “Preferred Stock”).
 
Pursuant to the Nomination Rights, once the Exchangeable Securities become exchangeable, the Target Holders would have the right to nominate members of the board such that the percentage of the company’s board members that they could nominate would approximately equal their percentage equity ownership interest in the company (the “Ownership Percentage”) and would decline pro ratably with a decline in their Ownership Percentage. The Ownership Percentage would be determined by dividing: (i) the sum of the number of shares of common stock held by the Target Holders and any shares of common stock issuable to them upon exchange of the Exchangeable Securities and Preferred Stock that are then exchangeable at the Target Holders’ option, by (ii) the sum of the total number of shares of common stock outstanding and the number of shares of common stock issuable upon exchange of the Exchangeable Securities and Preferred Stock that are then exchangeable at the Target Holders’ option. The maximum number of directors the Target Holders could nominate would equal the product of: (i) the Ownership Percentage, and (ii) the total number of directors on the company’s board, provided that if such product is not a whole number, it would be rounded up to the next whole number unless such rounding would result in the right to nominate a majority of the board, in which case it would be rounded down to the next whole number.
 
In addition, the Nomination Rights would entitle the Company Holders, who would own approximately 15% of the company’s outstanding equity securities following the Acquisition, to nominate one board member for so long as they held more than 5% of the company’s outstanding common stock.
 
Following our review of the information you provided, and in response to your request, we have concluded that in determining compliance with the Voting Rights Requirements, the Exchangeable Securities may be used in calculating the Ownership Percentage as described above to the extent that they are currently exchangeable at the Target Holders’ option for shares of the company’s common stock or Preferred Stock, which is immediately convertible into common stock. In addition, we have concluded that the Nomination Rights proposed for the Company Holders for so long as they hold more than 5% of the company's outstanding shares is consistent with Listing Rule 5605(e), which states that independent director oversight of director nominations shall not apply in a case where the right to nominate a director legally belongs to a third party. Please be advised that notwithstanding this conclusion, the company remains subject to Listing Rule 5605, including those provisions relating to board committee composition and the requirement to have a majority of independent directors on the board.
 
 
Publication Date*: 7/31/2012 Identification Number: 702 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-2  
Identification Number
701
This is in response to your correspondence regarding whether certain members of the company’s board of directors would be eligible to be independent directors under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the “Rules”) notwithstanding payments in connection with a proposed recapitalization (the “Recapitalization”).
 
According to the information you provided, in the Recapitalization, which is subject to shareholder approval, the company would conduct a debt exchange and a rights offering. In connection with the Recapitalization, approximately three months ago the company entered into an agreement (the “Agreement”) with two of its shareholders, each of which beneficially owns approximately 25% of the company’s outstanding shares of common stock (“Holder One” and “Holder Two,” collectively the “Holders”).
 
Under the Agreement, the Holders have agreed: (i) to purchase unsubscribed shares in the rights offering, at the rights offering subscription price, such that the gross proceeds would not be less than a specified amount; and (ii) in the debt exchange, to exchange notes indirectly held by them. The company would reimburse the Holders for reasonable, documented out-of-pocket costs and expenses incurred by the Holders in connection with the Recapitalization (the “Recapitalization Expenses”) and indemnify the Holders and their affiliates, and certain other persons or entities associated with the Holders, against any and all losses arising from any claim instituted by a third party with respect to the Recapitalization.
 
Several lawsuits challenging the Recapitalization were filed and consolidated into a single action, naming the company, each member of its board, and the Holders as defendants. The parties to the consolidated action, including the company and the Holders, have settled the lawsuit, and, as part of the settlement, the company paid the plaintiffs’ attorney fees and expenses (the “Settlement Expenses” and together with the Recapitalization Expenses, the “Payments”).
 
Three members of the company’s board of directors hold positions with affiliates of Holder One, and three other members hold positions with affiliates of Holder Two (the “Holders’ Directors”). You stated that the Recapitalization Expenses, which consisted primarily of fees and disbursements for the Holders’ attorneys and financial advisors, would be paid to the Holders and not to the Holders’ Directors.The Settlement Expenses were paid directly to representatives of the plaintiffs and not to the Holders or the Holders’ Directors. The company will not treat either the Recapitalization Expenses or the Settlement Expenses as compensation expenses with respect to the Holders’ Directors in its financial statements.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rules from finding that the Holders’ Directors are independent, notwithstanding the payment of the Recapitalization Expenses and the Settlement Expenses. The Recapitalization Expenses are the reimbursement of bona fide expenses in connection with a transaction. Similarly, the Settlement Expenses are bona fide expenses paid by the company in settlement of the consolidated lawsuit on its own behalf and pursuant to the indemnification agreements it had with the Holders and the Holders’ Directors. The reimbursement of bona fide expenses generally is not considered to be compensation under Listing Rule 5605(a)(2)(B) or payments for property or services within the meaning of Listing Rule 5605(a)(2)(D).  As such, the Payments do not preclude a finding that the Holders’ Directors are independent under Listing Rule 5605(a)(2)(B) or Listing Rule 5605(a)(2)(D).
 
Notwithstanding this determination, pursuant to IM-5605, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors. We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Holders’ Directors.
 
 
Publication Date*: 7/31/2012 Identification Number: 701 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-19
Identification Number
737
This is in response to your correspondence regarding whether certain members of the company’s board of directors (the “Directors”) may be considered independent directors pursuant to Listing Rule 5605(a)(2) and IM – 5605.
 
According to the information you provided, as a for-profit educational institution, the company is subject to a federal regulation (the “Regulation”) which could negatively impact the company’s access to government funding in the event of a change of control. Under the Regulation, a change of control would be deemed to have occurred if the ownership position of the largest shareholder were to fall to below 25%.
 
Prior to the company’s initial public offering (“IPO”) approximately 10 months ago, the Largest Investor held approximately 31% of the company’s outstanding shares of common stock. In connection with the IPO, the Largest Investor and certain other investors (the “Other Investors”) entered into a voting agreement such that upon completion of the IPO, the Largest Investor had voting power over approximately 43% of the outstanding shares (the “Voting Agreement”). Under the Voting Agreement, the Other Investors granted the Largest Investor a proxy to vote their shares, but did not give dispositive or any economic interest in those shares. You stated that the Voting Agreement is permissible under the Regulation and that no change of control will be deemed to have occurred unless the shares subject to the Voting Agreement decreases to less than 25%.
 
You stated that since the IPO, the Other Investors have sold some of their stock and the company anticipates that over time the voting power of the Largest Investor could decrease to less than 25% as a result of the sale of additional shares that are subject to the Voting Agreement and additional issuances of common stock by the company. To prevent a change of control under the Regulation, the Fund Investor has offered to join the Voting Agreement.
 
The Directors are managing directors of the Fund Investor. You stated that none of the provisions of Listing Rule 5605(a)(2) precludes the Directors from being considered independent and that the company’s board of directors has determined that no other relationship exists that would interfere with the Directors’ exercise of independent judgment in carrying out the responsibilities of a director. The Directors would not serve on the audit committee. The Voting Agreement relates only to the voting of the common stock that is subject to the agreement and in no way relates to the Directors’ voting as board members on matters that come before the board.
 
Following our review of the information you provided, we have concluded that the Fund Investor’s joining the Voting Agreement would not preclude the company’s board from finding that the Directors are independent, provided that the total voting power controlled through the Voting Agreement is less than a majority of the company’s outstanding voting power. We have reached this conclusion based on the provision of IM-5605 which states that NASDAQ does not believe that ownership of company stock by itself would preclude a board finding of independence. Please note that pursuant to IM-5605, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors. We are not expressing any opinion as to whether it would be appropriate for the company’s board to make such a finding regarding the Directors.
 
Publication Date*: 7/31/2012 Identification Number: 737 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-7
Identification Number
725
This is in response to your correspondence regarding whether the Director is eligible to be an independent member of the company’s board of directors under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the “Rules”) notwithstanding payments made by the company to the Director and the Firm in connection with the acquisition of the Target (the “Acquisition”). The Director has been a member of the company’s board of directors for approximately fifteen years and has served as its chairman for about four years.
 
According to the information you provided, the company acquired the Target approximately two years ago. Prior to the closing of the Acquisition, the Director was the chairman of the board and an executive officer of the Target. The Director resigned from these positions immediately prior to the Acquisition. The Target’s capital stock consisted of common stock and preferred stock. The Director personally owned shares of common stock of the Target equal to approximately 15% of the Target’s outstanding capital stock.  In addition, the Director is the founder and a managing director of the Firm, a venture capital firm which was the sole owner of the preferred stock. The number of shares of preferred stock was equal to approximately 40% of the Target’s outstanding capital stock. The consideration for the Acquisition, which the company paid to the Target’s shareholders, consisted of cash and shares of the company’s common stock. All holders of the Target’s common stock received the same consideration per share of Target common stock held (the “Common Stock Consideration”). Due to the liquidation preferences of the preferred stock, the Firm received a higher amount of consideration per preferred share than the per share common stock consideration (the “Preferred Stock Consideration”). You stated that the liquidation preferences were negotiated among the shareholders of the Target well in advance of the Acquisition and were in no way related to the Acquisition. The total number of shares of common stock issued as acquisition consideration was equal to approximately one percent of the company’s total shares outstanding, and the aggregate cash consideration was approximately $3,000,000.
 
In addition, the Firm had outstanding bridge notes of the Target, which were repaid by the Target at the closing of the Acquisition in accordance with the terms of such bridge notes. You represented that the terms of the bridge notes, including the interest rate and maturity triggers, were standard.
 
You stated that the Director and the Firm had no role in determining the allocation of the acquisition consideration among the stockholders of the Target because the allocation was entirely pre-determined on a pro-rata basis by the terms of the Target’s securities. To evaluate the Acquisition, the company’s board of directors established a committee of independent directors (the “Board Committee”) of which the Director was not a member. You stated that the Director did not participate on behalf of the company in any actions with respect to the Acquisition and did not participate in any deliberations or other activities of the Board Committee.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rules from finding that the Director is independent, notwithstanding the payment of the acquisition consideration to the Director and the Firm. The acquisition consideration is not compensation from the company under Listing Rule 5605(a)(2)(B), and it is not a payment for property or services within the meaning of Listing Rule 5605(a)(2)(D).  In reaching this conclusion, we note that the acquisition consideration was paid pro-ratably to all shareholders of the Target based on their ownership interest in the Target. Although the Preferred Stock Consideration was larger than the Common Stock Consideration, such Preferred Stock Consideration was likewise determined pursuant to the terms of the preferred stock, which was negotiated among the Target’s shareholders prior to the Acquisition and was in no way related to the Acquisition.  The repayment by the Target of the bridge loan is also neither compensation by the company under Listing Rule 5605(a)(2)(B) nor a payment by the company for property or services under Listing Rule 5605(a)(2)(D), as the loan terms were standard and it was re-paid by the Target pursuant to its terms.
 
Notwithstanding this determination, pursuant to IM-5605, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.
 
 
Publication Date*: 7/31/2012 Identification Number: 725 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-22
Identification Number
766
This is in response to your correspondence regarding whether the Director is eligible to be an independent member of the company’s board of directors under Marketplace Listing Rule 4200(a)(15)(B) (the “Rule”) notwithstanding certain payments which the company makes to the Director’s father (the “Director’s Father”) under a retirement plan as described below.  Specifically, you asked whether the payments are “non-discretionary” for purposes of the Rule and, therefore, not included in the Rule’s $120,000 annual limitation (the “Limitation”).
 
According to the information you provided, the Director’s Father is the company’s co-founder and former chief executive officer.  The Director has never been an officer or employee of the company.  Approximately five years ago, the Director’s Father ceased to be employed by the company and began receiving retirement benefits under the company’s Non-Qualified Supplemental Executive Retirement Plan (the “SERP”) which was established approximately ten years ago.  The annual payments under the SERP (the “SERP Payments”) to the Director’s Father are of a fixed amount, not subject to change, and exceed the Limitation.  You stated that the payments are legal obligations of the company not contingent in any way on continued service to the company in any capacity.
 
Following our review of the information you provided, we have determined that for purposes of the Rule, the SERP Payments are non-discretionary and, as such, are not considered in determining if there are payments to the Director or a family member of the Director in excess of the Limitation.  We have reached this conclusion because the SERP Payments are legal obligations of the company under a retirement plan and are not contingent on continued service to the company by the Director’s Father.  Accordingly, under the Rule, the SERP Payments will not preclude the company’s board of directors from finding that the Director is independent.  Notwithstanding this determination, pursuant to Listing Rule 4200(a)(15) and IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.
 
Publication Date*: 7/31/2012 Identification Number: 766 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-17
Identification Number
761
This is in response to your correspondence regarding whether the Director is eligible to be an independent member of the company’s board of directors under Marketplace Rules 4200(a)(15)(A) and 4200(a)(15)(B) (the “Rules”) notwithstanding the Director’s relationship with the Target and certain payments which the company will make to the Director.
 
According to the information you provided, the company completed the acquisition of the Target (the “Acquisition”) approximately four months ago.  As a result of the Acquisition, the Target became a wholly-owned subsidiary of the company. Prior to the closing of the Acquisition (the “Closing”), the company and the Target were not affiliated. The Director became an executive officer of the Target several years ago and continued to hold that position until the Closing, at which time her employment ended.  The Director is not currently, and never has been, an officer or employee of the company.  Following the Closing, the Director became a member of the company’s board of directors.
 
As consideration in the Acquisition, the company issued shares of its common stock in exchange for the outstanding shares of the Target (“Merger Consideration”). Accordingly, as an owner of shares in the Target, the Director received Merger Consideration pro ratably in the same manner as the Target’s other shareholders. The Director will receive additional shares of the company’s common stock as a result of the company’s assumption of the Target’s stock options and restricted stock units (collectively, “Equity Awards”), which were outstanding at the time of the closing and which were converted into the right to purchase or receive, as applicable, shares of the company’s common stock pursuant to the terms of the Acquisition.
 
The Director’s employment agreement with the Target contained certain “change of control” and severance provisions (the “Control and Severance Provisions”), which were triggered by the Acquisition and pursuant to which the Director is entitled to receive cash payments of specified amounts. As a result of the Acquisition, the company is obligated to make these payments.
 
In addition, the Target was required to purchase officers’ and directors’ liability insurance policies (the “Insurance Policies”), which would cover the Target’s former directors and officers for a specified number of years following the Closing. As the surviving corporation, the company is obligated to maintain these policies for their full term.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rules from finding that the Director is independent given that following the closing the Director ceased to be employed by the Target and did not become an employee of the company. For purposes of the Rules, the Director’s employment by the Target, and compensation paid by the Target to the Director, prior to the closing are not included when determining whether the Director has been employed by the company, or has received compensation from the company, during the past three years.  The Merger Consideration is not compensation under Listing Rule 4200(a)(15)(B) because it was paid pro ratably to all shareholders of the Target.  The issuances under the Equity Awards, the payments under the Control and Severance Provisions, and the payments to maintain the Insurance Policies are not compensation for purposes of Listing Rule 4200(a)(15)(B) because they will be a result of pre-existing agreements between the Director and the Target not involving the company, but which the company assumed in connection with the Acquisition.  Notwithstanding this determination, pursuant to Listing Rule 4200(a)(15) and IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.  You have not asked us to reach, and we have not reached, a conclusion as to whether the Director is eligible to serve on the company’s audit committee.  Such eligibility should be assessed under Marketplace Listing Rule 4350(d) and under Rule 10A-3 of the Securities Exchange Act of 1934.
 
Publication Date*: 7/31/2012 Identification Number: 761 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-11  
Identification Number
756
This is in response to your correspondence regarding the eligibility of Director One and Director Two (collectively, the “Directors”) to serve as independent directors on the company’s board of directors (the “Board”) under the requirements of Marketplace Listing Rule 4200(a)(15)(A) (the “Rule”).  The company currently trades on the OTCBB and has applied for listing on NASDAQ.
 
According to the information you provided, the company was initially formed as a special purpose acquisition company (the “SPAC”) for the sole purpose of conducting an initial public offering (“IPO”) to raise funds to acquire one or more unidentified operating companies.  The IPO was completed approximately two years ago, and the proceeds were deposited into a trust account pending an acquisition.  Approximately four months ago, the SPAC completed its acquisition of an operating company (the “Target”) and changed its name.
 
You stated that prior to the merger, the SPAC had no operations, no employees, and no assets other than an indirect interest in the trust account.  The Directors were executive officers, but not employees, of the SPAC, and received no compensation from the SPAC for serving as officers.  The Directors were designated as officers to facilitate an acquisition or, if no acquisition were to occur, to liquidate the trust account and distribute the net proceeds to the SPAC’s shareholders.  Upon the closing of the acquisition, the Directors resigned as officers.  Following the acquisition, the sole operations of the company were the operations of the Target, and the CEO, President/COO, CFO, and General Counsel of the Target took those roles with the company.  The company’s financial statements carry forward the historical financial statements of the Target.
 
Following our review of the information you provided, we have determined that the mere fact of the Directors’ prior service without compensation as non-employee officers of the SPAC will not preclude the Board from finding that the Directors are independent under the Rule.  This conclusion is based on your representation that the Directors were not employees of the SPAC or the company and received no compensation for serving as executive officers.  Further, we note that the Directors resigned their positions upon the closing of the acquisition.  As such, the Rule does not preclude the Directors from being considered independent directors in this case.  Please note that pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding regarding the Directors.
 
Publication Date*: 7/31/2012 Identification Number: 756 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-10
Identification Number
755
This is in response to your correspondence regarding the Director’s eligibility to serve as an independent director on the company’s board of directors (the “Board”).  Specifically, you asked about the applicability of Marketplace Listing Rule 4200(a)(15)(B)(ii) to compensation and consulting fees that the company paid to the Director’s Son.
 
According to the information you provided, the Director’s Son was employed as a vice president of the company from August 2002 until September 2005 but was not an “officer” as that term is defined in Rule 16a-1(f) under the Securities Exchange Act of 1934 (the “Act”).  When he ceased to be an employee in September 2005, the Director’s Son entered into an independent contractor agreement (the “Agreement”) with the company pursuant to which he provided consulting services.  In 2005, the company paid the Director’s Son more than $100,000 in compensation as an employee (the “Compensation”).  The aggregate amount the company paid the Director’s Son under the Agreement, which was terminated in 2006, was less than $100,000 (the “Consulting Fees”).
 
Following our review of the information you provided, we have concluded that for determining the Director’s eligibility to be independent, the Compensation is not counted in the calculation of whether the Director’s Son received in excess of $100,000 during any period of twelve consecutive months within three years preceding the date of the independence determination.  The compensation is not counted because Listing Rule 4200(a)(15)(B)(i) excludes compensation paid to a Family Member as an employee other than an executive officer.  IM-4200 indicates that the rule’s reference to executive officer means those officers covered in SEC Rule 16a-1(f) under the Act.  You stated that the Director’s Son was not an executive officer under Rule 16a-1(f).  The Consulting Fees would contribute to the calculation.  However, because the Consulting Fees were less than the $100,000 threshold, they would not preclude the company’s Board from finding that the Director is independent.  As such, the Compensation and Consulting Fees would not preclude the Director from being found to be an independent director under Listing Rule 4200(a)(15)(B).  Please note that pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding regarding the Director.
 
Publication Date*: 7/31/2012 Identification Number: 755 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-12
Identification Number
788
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  Specifically, you asked whether the Director is eligible to be an independent member of the company’s board of directors under Listing Rule 4200(a)(15)(D) (the “Rule”) notwithstanding certain payments made in connection with investment banking services provided by the Firm.  The Director is an executive officer of the Firm.
 
According to the information you provided, the Firm has provided investment banking services for the company during the last three years including a firm commitment underwritten offering of the company’s common stock and best efforts placement agency offerings.  You stated that in connection with these services, payments by the company to the Firm were less than 5% of Firm’s revenues (which exceeded $200,000) in the current year or any of the past three years (the “Threshold”).  This includes any payment that may be ascribed in connection with the Firm’s exercising over-allotment options (“Green Shoes”) where the price the Firm paid for the securities was less than the market value.  The purchase price paid by the Firm in the exercise of Green Shoes was the same as that paid by all other purchasers in the respective offerings.  In addition, you stated that any payments made by the Firm to the company in connection with the investment banking services were less than 5% of the company’s revenues (which exceeded $200,000) in the current year or any of the past three years.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rule from finding that the Director is independent because the payments were less than the Threshold.  Notwithstanding this determination, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director. You have not asked us to reach, and we have not reached, a conclusion as to whether the Director is eligible to serve on the audit committee.  Such eligibility should be assessed under Marketplace Listing Rule 4350(d) and under Exchange Act Rule 10A-3.
 
Publication Date*: 7/31/2012 Identification Number: 788 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-11
Identification Number
787
This is in response to your correspondence wherein you asked whether the company’s proposed process for the selection of the members of its board of directors (the “Nominations Process”) pursuant to a shareholders agreement (the “Shareholders Agreement”) would comply with the requirements of Marketplace Listing Rule 4350(c)(4)(A) and IM-4350-4 (collectively, the “Rule”).  In addition, your question relates to the applicability of the voting rights requirements of Listing Rule 4351 (the “Voting Rights Requirements”) with respect to the rights that the Target Owner and the Chairman would have to nominate directors (the “Nomination Rights”).
 
According to the information you provided, the company will acquire, subject to the approval of its shareholders, certain assets from the Target Owner in exchange for cash and common stock.  In connection with the acquisition, the Shareholders’ Agreement will be entered into among the company, the Chairman, and the Target Owner.  Following the closing, the Target Owner will own approximately 40% of the company’s then outstanding shares of common stock, and the Chairman will own approximately 9%.
 
Pursuant to the Shareholders’ Agreement, the membership of the company’s nine-member board would be determined as follows.  Initially, the Target Owner will have the right to nominate four directors (the “Target Owner’s Directors”), two of whom must be independent, and the Chairman will have the right to nominate one independent director (the “Chairman’s Director”).  The board will also include the company’s Chief Executive Officer.  The remaining three directors will be nominated by the company’s nominating committee and must qualify as independent directors.
 
If their ownership positions were to decline, the number of directors the Target Owner and the Chairman could nominate would decline pro ratably such that the percentage of the board that each could nominate would remain approximately equal to their percentage equity interest in the company.  The nominating committee would be responsible for nominating directors to fill any vacancies created in this manner.  Pursuant to the Shareholders’ Agreement, for so long as either the Target Owner or the Chairman has the right to nominate one or more directors, the other has agreed to vote in favor of such nominee(s).
 
Following our review of the information you provided, we have concluded that the Nominations Process complies with the Rule and that the Nomination Rights comply with the Voting Rights Requirements.  Specifically, the Nominations Process is consistent with Listing Rule 4350(c)(4)(D), which states that independent director oversight of director nominations shall not apply in a case where the right to nominate a director legally belongs to a third party.  In the company’s case, the Shareholders’ Agreement provides the Target Owner and the Chairman with the legal right to nominate board members as described above.  Regarding the Voting Rights Requirements, the Nomination Rights would comply because the percentage of the board members that the Target Owner and the Chairman would be entitled to nominate would approximately equal their percentage equity ownership interest in the company and would decline pro ratably with a decline in their ownership positions.  Please be advised that notwithstanding this conclusion, the company remains subject to the provisions of Rules 4350(c) and 4350(d) including those relating to board committee composition and the requirement to have a majority of independent directors on the board.
 
Publication Date*: 7/31/2012 Identification Number: 787 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-8  
Identification Number
784
This is in response to your correspondence regarding the Director’s eligibility to serve as an independent director on the company’s board of directors (the “Board”).  Specifically, you asked whether certain payments made by the University to the Director (“Director Royalties” as defined below) should be considered to be compensation from the company for purposes of Marketplace Listing Rule 4200(a)(15)(B).
 
According to the information you provided, the Director has been a member of the Board for approximately eight years and has been a professor at the University for more than twenty years.  Pursuant to a license agreement, the University licensed to the company certain intellectual property rights (the “Licensed Technology”), including certain patent rights relating to patents of which the Director is named as inventor.  Under this license agreement, the company pays the University a specified amount of royalties (the “Royalties”) on net sales received by the company from the sale of products based on the Licensed Technology.  The University pays the Director a portion of the Royalties (the “Director Royalties”) pursuant to an agreement between the Director and the University.
 
You stated that the amount of the Director Royalties is controlled solely by the University.  The company has no formal or informal agreement, understanding, or arrangement with the Director or the University regarding the amount, if any, of the Royalties that will be paid to the Director.  In addition, you stated that the amount of Director Royalties is determined according to the University’s fixed rate for this type of arrangement.
 
Following our review of the information you provided, we have determined that the Director Royalties are not compensation from the company for purposes of Listing Rule 4200(a)(15)(B).  We have reached this conclusion:
(i) because the Director Royalties are not paid by the company but instead are paid pursuant to an agreement between the Director and the University and (ii) based on your representations that the company has no control or influence over whether any Director Royalties are paid.  Accordingly, the Director Royalties would not preclude the company’s Board from finding that the Director is independent.  Please note that pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding regarding the Director.
 
Publication Date*: 7/31/2012 Identification Number: 784 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-6
Identification Number
782
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  You asked whether the Director is eligible to be an independent member of the company’s board of directors under Listing Rule 4200(a)(15)(D) (the “Rule”), notwithstanding the receipt of the company’s common stock by the Investor in connection with a merger between Target and the company (the “Merger”).  The Director is a managing member of the general partner of the Investor.
 
Prior to the Merger, the Investor was a shareholder of Target.  As a result of the Merger, the outstanding shares of the common stock of Target were cancelled and exchanged for shares of the company’s common stock.  As such, the Investor received merger consideration in the form of shares of common stock of the company in exchange for the shares previously held in Target.  The shares of stock held by the Investor were treated in the identical manner as shares of stock held by other stockholders of Target.  As a result of the Merger, Target became a wholly-owned subsidiary of the company.  You stated that the merger consideration exceeded 5% of the Investor’s revenues, which is greater than $200,000.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rule from finding that the Director is independent.  The receipt of merger consideration, on a pro rata basis in the same manner as other stockholders of the Target, is not a payment for property or services within the meaning of the Rule.  Notwithstanding this determination, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.
 
 
Publication Date*: 7/31/2012 Identification Number: 782 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-37  
Identification Number
846
This is in response to your correspondence regarding the Director’s eligibility to serve as an independent director on the company’s board of directors.  Specifically, you asked whether certain payments (the “Payments”) should be considered under Listing Rule 4200(a)(15)(B) or Listing Rule 4200(a)(15)(D).  The company has applied to list on The NASDAQ Global Market.
 
The Firm has provided engineering consulting services (the “Services”) to the company or its subsidiaries in exchange for the Payments.  The Director had, and the Director’s Son has, a relationship with the Firm.  Specifically, until 2004, the Director and the Director’s Son were the sole members of the Firm.  Thereafter, the Firm admitted new members.  The Director was the controlling member of the Firm until earlier this year when he sold his ownership interest to the remaining six members.  The Director’s Son is currently the controlling member of the Firm, but plans to sell his ownership interest shortly after the company’s initial public offering.  After this sale, neither the Director nor the Director’s Son will be a partner, controlling shareholder, or executive officer, or their equivalent, of the Firm.  While neither the Director nor the Director’s Son currently personally performs any of the Services, in the past portions of the Services were provided by the Director and the Director’s Son, along with other partners of the Firm.  The Director spent twenty hours performing Services in the current year, all prior to selling his ownership interest, and the Director’s Son has not performed any of the Services for over two years.
 
Following our review of the information you provided and based on your representations, we have determined that the Payments should be considered under Listing Rule 4200(a)(15)(B) during the time period when the Director and the Director’s Son were the sole members of the Firm.  As such, with regard to the Payments, the Director’s eligibility to be independent is measured according to whether the Payments exceeded $60,000 during any period of twelve consecutive months during the period that began on the date that is three years preceding the date of the determination of independence and ended on the date that additional owners acquired their interests in the Firm.  After the date when the additional owners acquired their interests, the assessment of independence may be made under Listing Rule 4200(a)(15)(D).  Under Listing Rule 4200(a)(15)(D), the Director would be eligible to be independent if: (i) neither the Director nor the Director’s Son is a partner in, controlling shareholder, or executive officer of the Firm, or (ii) the Payments in the current fiscal year or any of the past three years do not exceed 5% of the Firm’s consolidated gross revenues or $200,000, whichever is more.  You did not ask us to reach a determination regarding the eligibility of the Director to be an independent director.  Please note that pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding regarding the Director.
 
 
Publication Date*: 7/31/2012 Identification Number: 846 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-31
Identification Number
841
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  You asked whether the Director is eligible to be an independent member of the company’s board of directors notwithstanding a payment (the “Payment”) made to the Investor by the company in connection with a merger between Company A and Company B (the “Merger”).  The Director is an executive officer of the Investor.  Specifically, your question relates to Listing Rule 4200(a)(15)(D) (the “Rule”).
 
According to the information you provided, the company was formed in the Merger and became the successor to Company A and Company B.  As a result of the Merger, the outstanding shares of the common stock of both Company A and Company B were cancelled and exchanged for shares of the company’s common stock.
 
Prior to the Merger, the Investor held senior notes (the “Notes”) issued by, and warrants (the “Warrants”) to purchase shares of common stock of, Company A.  In connection with the Merger, the company, Company A, and the Investor entered into an agreement to restructure the Notes and the Warrants.  Pursuant to the restructuring, upon consummation of the Merger, the Notes and the Warrants were exchanged for the Payment, which consisted of cash and shares of the company’s common stock.  Had the restructuring not occurred, upon the consummation of the Merger, the Warrants would have become exercisable for shares of the company’s stock and the Investor would have had the right to demand repayment in full from Company A, which would then have been a wholly-owned subsidiary of the company.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rule from finding that the Director is independent.  The Rule provides that payments arising from an investment in a company’s securities are not considered in determining whether payments reach the threshold set forth in the Rule.  The Payment was made in exchange for securities which would have become securities in, and ultimately an obligation of, the company upon the consummation of the Merger.  As such, it is appropriate to consider the Payment, which was designed to replace the value of the Investor’s holdings in Company A with approximately the same value in the form of cash and securities in the company, as having arisen from an investment in the company’s securities for purposes of the Rule.  Notwithstanding this determination, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.
 
Publication Date*: 7/31/2012 Identification Number: 841 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-27
Identification Number
837
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  You asked whether the Director is eligible to be an independent member of the company’s board of directors notwithstanding payments made to the Director by the company and the Former Subsidiary in connection with: (i) the spin-off by the company of the Former Subsidiary (the “Spin-off”), and (ii) a rights offering covering shares of the Former Subsidiary’s common stock (the “Rights Offering”) conducted by the Former Subsidiary following the Spin-off.  Specifically, your question relates to Listing Rule 4200(a)(15)(B) (the “Rule”).  Prior to the Spin-off, the Former Subsidiary had been wholly-owned by the company.
 
According to the information you provided, pursuant to a Standby Purchase Agreement (the “Agreement”) relating to the Rights Offering, certain payments were made to the Investor, an entity controlled by the Director and that is the company’s largest shareholder.  The Agreement was entered into among the Investor, the company, and the Former Subsidiary prior to the Spin-off.  Pursuant to the Agreement, the Investor agreed to purchase all of the shares it was eligible to receive in the Rights Offering and all shares that remained unpurchased upon conclusion of the Rights Offering.  In return, the company paid to the Director a fee, which was less than $60,000, following the final approval of the Spin-off by the company’s board of directors and prior to the effectiveness of the Spin-off.  In addition, as compensation for the Agreement, after the effectiveness of the Spin-off, the Former Subsidiary issued to the Director warrants exercisable for shares of the Former Subsidiary’s common stock (the “Warrants”) and reimbursed (or is obligated to reimburse) the Director for expenses relating to the Rights Offering and the Spin-off.  In the aggregate, the fee paid by the company, the value of the Warrants, and the amount of expenses subject to reimbursement (collectively, the “Payments”) exceed $60,000.
 
Following our review of the information you provided, we have determined that the Director is not eligible to be an independent director under the Rule because the Director received payments that exceed $60,000 over a twelve-month period within the past three years.  Although a portion of the Payments were made after the Spin-off and were made by the Former Subsidiary rather than by the company, each component of the Payments was made pursuant to an agreement which was entered into among the company, the Investor, and the Former Subsidiary at a time when the Former Subsidiary was still wholly-owned by the company.  As such, for purposes of the Rule, the Payments are attributed to the company.
 
Publication Date*: 7/31/2012 Identification Number: 837 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-17    
Identification Number
827
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  You asked whether the Director Candidate is eligible to be an independent member of the company’s board of directors notwithstanding: (i) his serving as the Chief Executive Officer of Target, an entity the company expects to acquire; and (ii) the payments he will receive under the terms of the Severance Agreement with the Target.  Specifically, your question relates to Rules 4200(a)(15)(A) and 4200(a)(15)(B) (the “Rules”).
 
In the first quarter of 2006, the company entered into an agreement to acquire the Target.  Effective at the closing of the acquisition, the Director Candidate would no longer be employed by the Target, and he would not become an employee of the company.  The Director Candidate would join the company’s board of directors following the closing of the acquisition.
 
According to the information you provided, under the terms of the Severance Agreement, due to the termination of the Director Candidate’s employment as a result of the acquisition, the Target will be obligated to: (i) pay the Director Candidate an amount equal to 24 months of his base salary; and (ii) reimburse the Director Candidate’s expenses for continuing healthcare coverage for up to an 18-month period.
 
You stated that the company’s President and Chief Executive Officer has been a member of Target’s board of directors since April 2005, but played no role in recommending or approving the Director Candidate’s compensation or the Severance Agreement.
 
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rules from finding that the Director Candidate is independent.  Specifically, the Director Candidate is not precluded by Listing Rule 4200(a)(15)(A) because, following the closing of the acquisition, the Director Candidate: (i) will no longer be employed by the Target; and (ii) will not become an employee of the company.  The Director Candidate is not precluded by Listing Rule 4200(a)(15)(B) because the payments under the Severance Agreement will be non-discretionary and will be as a result of a pre-existing agreement not involving the company.  Please note that we are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).  In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director Candidate.
 
Publication Date*: 7/31/2012 Identification Number: 827 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-13
Identification Number
823
This is in response to your correspondence regarding Marketplace Rules 4200(a)(15)(B) and 4200(a)(15)(D) (the “Rules”).  You asked whether the Director is eligible to serve as an independent director notwithstanding the payments the company made to an insurance agency (the “Agency”) of which the Director is a 52% owner and President.
 
According to the information you provided, the Agency has approximately 20 employees.  The company makes payments (the “Premiums”) to the Agency consisting of insurance policy premiums payable by the company to insurance companies (the “Insurance Companies”) under the terms of the company’s insurance policies with the Insurance Companies.  You stated that the Agency, as part of its normal course of business as an insurance agency, collects the Premiums from the company and remits the bulk of the Premiums to the Insurance Companies.  You further stated that the amounts retained constitute commissions payable by the company’s insurers to the Agency (the “Commissions”).
 
The Premiums were approximately $200,000 in 2003, $65,000 in 2004, and $100,000 in 2005, and the Commissions were approximately $20,000, $8,000, and $10,000, respectively.  You stated that the Agency was acting in its capacity as the agent of the Insurance Companies in collecting the premiums and was obligated to pass those amounts, less the Commissions, to the Insurance Companies.  You stated that the only amounts included in the Agency’s revenues were the Commissions, which were less than $200,000 during each of 2003, 2004, and 2005.  The Commissions are income to the Agency, and any profits of the Agency are distributed to its shareholders according to their respective ownership interest in the company.
 
Following our review of the information you provided and based on your representations, we have determined the company’s Board is not precluded by the Rules from finding that the Director is independent.  As the Premiums are paid to the Agency for services of the Agency, they are appropriately considered under Listing Rule 4200(a)(15)(D), rather than Listing Rule 4200(a)(15)(B).  Further, in reviewing the payments made to the Agency under Listing Rule 4200(a)(15)(D), it is appropriate to consider only the Commissions, as these are the amounts retained by the Agency and included in the Agency’s revenues and are the amounts that represent the payments from the company to the Agency for “property or services”.  The Director is not ineligible under Listing Rule 4200(a)(15)(D) because the Commissions did not exceed $200,000 in any of the past three fiscal years.  We also note, in any event, that the Premiums did not exceed 5% of the total premiums collected by the agency in any of the past three fiscal years.  Please note that we are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).  In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding.
 
Publication Date*: 7/31/2012 Identification Number: 823 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-1
Identification Number
812
This is in response to your correspondence regarding Marketplace Rules 4200(a)(15)(A) and 4200(a)(15)(B) (the “Rules”).  You asked whether the Director is eligible to serve as an independent director notwithstanding the duties he performed, and the compensation he received, in connection with carrying out an oversight function of the company’s management as you described.
 
According to the information you provided, the Director has served as non-executive Chairman of the board of directors and as the Presiding Director.  He is neither an officer nor an employee of the company, nor has he been within the past three years.  The company hired a new chief executive officer (“CEO”) on Date.  The Board felt that due to the unfamiliarity of the CEO with the company and its industry, a Board member should exercise particularly close oversight of management during a transition period (the “Oversight Function”).  On behalf of the Board and in his capacity as Chairman, the Director agreed to perform the Oversight Function.
 
You stated that as compensation for the additional time required for the Oversight Function, the Director received a cash retainer upon appointment as Chairman and was to receive a monthly retainer in recognition of the expected time commitment.  In addition, the Director received an award of an option (from a shareholder-approved plan) to purchase shares of common stock.  Because the time commitment of the Oversight Function turned out to be less than originally expected, the monthly retainer fee was subsequently reduced.  You stated that all compensation paid by the company to the Director was for Board service only, and that the duties associated with the Oversight Function are board services.  You further stated that this arrangement, including the associated compensation, was approved by the Board’s Nominating and Corporate Governance Committee and Compensation Committee, and by the independent directors other than the Director.
 
Following our review of the information you provided and based on your representations, we have determined the company’s Board is not precluded by the Rules from finding that the Director is independent.  The Director is not ineligible under Listing Rule 4200(a)(15)(A) because he has not been employed by the company within the past three years.  He is not ineligible under Listing Rule 4200(a)(15)(B) because all payments made by the company to the Director were for Board service only.  Please note that we are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).  In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding.
 
Publication Date*: 7/31/2012 Identification Number: 812 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-54
Identification Number
901
This is in response to your letters regarding the applicability of the audit committee eligibility requirements.  Specifically, your question relates to Marketplace Rules 4200(a)(15)(B) and 4350(d)(2)(A) and to SEC Rule 10A‑3(b)(1) under the Securities Exchange Act of 1934 (the “Rules”).  You asked whether a potential candidate (the “Candidate”) could satisfy the requirements after having served as a financial consultant to the audit committee.
 
According to the information you provided, the company currently has three members on its audit committee, each of whom has the ability to read and understand financial statements, and two of whom are considered to have “financial sophistication”  as described in Marketplace Listing Rule 4350(d)(2)(A).  The company has not, however, designated one of these audit committee members to be an “audit committee financial expert,” as defined in Item 402(h)(2) of SEC Regulation S-K.  You stated that the company has conducted a search for an individual with the necessary experience, education, background, and knowledge to qualify as the audit committee financial expert.  The timing of the appointment of any such candidate, however, will be affected by the regulations applicable to the company.  Specifically, as a manufacturer and distributor of supplies in a regulated industry, any member of the company’s board of directors must be found suitable by the applicable regulatory authorities in most of the over 100 jurisdictions where the company operates.
 
You stated that to access the financial expertise of the Candidate during the screening process but prior to appointment to the board of directors, the company proposed to engage the Candidate as a paid financial consultant to the audit committee.  The payment for the consulting services (the “Consulting Payments”)  would not exceed $60,000 in any twelve-month period, and you stated that the Candidate would be eligible to be an independent director under the criteria for independence set forth in the Listing Rule 4200(a)(15).  The Candidate would advise the audit committee members on topics or situations that are under the purview of the audit committee but would not directly participate in the preparation of the company’s financial statements and would not provide any advice or other consulting services directly to management of the company.  The consulting relationship and the Consulting Payments would cease prior the Candidate’s becoming a member of the board and the audit committee.
 
Following our review of the information you provided, we have determined that the company’s board would not be precluded by the Rules from finding that the Candidate would be eligible to serve on the audit committee.  The Consulting Payments would not preclude the Candidate from being independent under Listing Rule 4200(a)(15)(B) because such payments would be less than $60,000 during any period of twelve consecutive months.  Further, because the payments would cease prior to the Candidate’s appointment to the Audit Committee, the Consulting Payments would not otherwise preclude the Candidate from audit committee eligibility.*  In addition, service as a consultant to the audit committee in the manner you described will not be considered to be participation in the preparation of the financial statements of the company.  Please note, however, that pursuant to IM-4200, the company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s board to make such a finding.
*We note that SEC Rule 10A-3 does not contain a look-back period in its prohibition on payments to directors, and, as noted above, the NASDAQ lookback period would not be applicable as the payment is less than $60,000.
Publication Date*: 7/31/2012 Identification Number: 901 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-49
Identification Number
896
This is in response to your letter regarding the applicability of Marketplace Listing Rule 4200(a)(15)(E) (the “Rule”).  You asked whether Mr. X, a member of the company’s board of directors since May 2002, is eligible to serve as an independent director pursuant to the definition set forth in the Rule under the circumstances you described.
 
According to the information you provided, in August 2004, Mr. X was appointed to serve as Chairman of the board of directors and interim Chief Executive Officer of Company A.  At the time of such appointment, Mr. Y, co-Chairman of the board of directors, co-President and co-Chief Executive Officer of the company, served on the compensation committee of the board of directors of Company A.  Later in August of 2004, Mr. Y resigned as a member of Company A’s compensation committee.  Mr. X resigned as the interim CEO of Company A on August 1, 2005.  Both Mr. Y and Mr. X continue to be members of Company A’s Board.
 
Following our review of the information you provided, we have determined the company’s Board is not precluded by the Rule from finding that Mr. X is independent.  The Rule applies in the event a director of the listed company is currently employed as an executive officer the other entity.  Because Mr. X is no longer employed by Company A, the Rule does not apply.  Please note that we are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).  In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding.
 
Publication Date*: 7/31/2012 Identification Number: 896 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-44
Identification Number
891
This is in response to your letter wherein you asked whether Mr. X is eligible to be an independent director pursuant to the provisions of Marketplace Listing Rule 4200(a)(15).  Specifically, your question relates to Rules 4200(a)(15)(B) and 4200(a)(15)(D) (the “Rules”).  Mr. X is the sole owner and president of Consulting Firm, which has nine employees that specializes in receivership services, bankruptcy consulting, and business valuations.
 
According to the information you provided, in December 2004, the company acquired Target and its three subsidiaries, including the Subsidiary Bank, which became subsidiaries of the company as a result of the acquisition.
 
You stated that effective on Date 1, a State district court appointed the Consulting Firm as the receiver of various assets of two debtor parties and that in furtherance of that appointment, the Consulting Firm was ordered to take charge of, manage, and operate the business of one of the debtor parties.  The Subsidiary Bank held deed of trust and security interest in certain of the receivership properties.
 
You further stated that in its “Order Appointing Receiver”, the court authorized the Consulting Firm to issue “receiver’s certificates” to preserve and maintain one of the debtor’s businesses in exchange for funds advanced by third parties or the Subsidiary Bank during the term of the receivership.  The certificates are a lien and security interest superior to all liens.
 
In addition, you stated that the Subsidiary Bank advanced funds to the Consulting Firm, as receiver, in 2003, 2004, and through June 30, 2005.  The Subsidiary Bank expects that any additional advances it makes to the Consulting Firm will be immaterial in amount.  You stated that the value of the assets in the receivership estate substantially exceeds the aggregate amount of the funds advanced, and that because the advances are represented by receiver’s certificates, the Subsidiary Bank expects to recover all the funds it advanced to the Consulting Firm.
 
Following our review of the information you provided, we have determined that Mr. X is not eligible to be an independent director under the Rules.  The three-year “look-back” period of the Rules applies without regard to whether a subsidiary, which entered into the relationship giving rise to the payments, was a subsidiary at the time of the entering into of the relationship.  Moreover, rather than having ceased by the time of the acquisition of the Subsidiary Bank by the company, the relationship between the Subsidiary Bank and the Consulting Firm is ongoing and additional payments were made following the acquisition.  Accordingly, Mr. X does not meet the requirements of either 4200(a)(15)(B) or 4200(a)(15)(D).  Rule 4200(a)(15)(B) applies because Mr. X is the sole owner of the entity that received the payments, and such  payments exceeded the $60,000 threshold.  Because the payments exceeded the greater of 5% of the Consulting Firm’s revenues or $200,000, during at least one of the past three years, Mr. X is also not eligible under Listing Rule 4200(a)(15)(D).  Even though, the Subsidiary Bank expects to recover the advances, the Rules are nonetheless applicable because the payments were, in fact, made to the Consulting Firm.
 
Publication Date*: 7/31/2012 Identification Number: 891 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-39  
Identification Number
886
This is in response to your letter, regarding the company, which is a Foreign Private Issuer as defined in Rule 3b-4 under the Securities Exchange Act of 1934.  You asked whether the exemptive process (the “Exemptive Process”) pursuant to Marketplace Listing Rule 4350(a) (the “Rule”) may be utilized with regard to the requirement under Listing Rule 4350(d)(2)(A) that a company have at least three members on its audit committee (the “Three-Member Requirement”).  You stated that the company intends to have an audit committee consisting of one member.
 
Pursuant to the Rule, a Foreign Private Issuer may follow its home country practice in lieu of the requirements of Listing Rule 4350, provided, however, that such an issuer shall comply with Rules 4350(b)(1)(B) (Disclosure of Going Concern Opinion), 4350(j) (Listing Agreement) and 4350(m) (Notification of Material Noncompliance). Such an issuer must have an audit committee that satisfies Listing Rule 4350(d)(3), and the members of the audit committee must meet the criteria for independence referenced in Listing Rule 4350(d)(2)(A)(ii) (the criteria set forth in Rule 10A-3(b)(1), subject to the exemptions provided in Rule 10A-3(c) under the Securities Exchange Act of 1934).  As such, the Exemptive Process may be utilized for the Three-Member Requirement such that a Foreign Private Issuer may have fewer than three persons on its audit committee.  Note, however, that any member of the audit committee must meet all applicable requirements of Rule 10A-3.
 
Pursuant to IM-4350-6, a Foreign Private Issuer that elects to follow home country practice in lieu of a requirement of Listing Rule 4350 must submit to NASDAQ a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. This certification is required at the time the company seeks to adopt its first non-compliant practice.  Rule 4350 requires the company to make appropriate disclosures in its annual filings with the Securities and Exchange Commission and also disclose each requirement of Listing Rule 4350 that it does not follow and include a brief statement of the home country practice the issuer follows in lieu of these corporate governance requirement(s).
 
 
Publication Date*: 7/31/2012 Identification Number: 886 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-37
Identification Number
884
This is in response to your letter regarding Marketplace Rules 4200(a)(15)(B) and 4200(a)(15)(D) (the “Rules”).  You asked whether Mr. X (the “Director”) would be eligible to be an independent director following a purchase and sale transaction (the “Transaction”) and a leasing agreement (the “Leasing Agreement”) involving the company and the Director as described below.
 
According to the information you provided, Mr. X has been a member of the company’s board of directors (the “Board”) since 2002.  In the Transaction, a wholly-owned subsidiary (the “Subsidiary”) of the company will sell an office building (the “Office Building”) to the Director for an amount that is higher than either of two appraisals obtained by the Subsidiary. In the Leasing Agreement, the Subsidiary will lease space in the Office Building currently occupied by the Subsidiary as a bank branch, resulting in annual lease payments to the Director of less than $60,000, an amount which you stated is in line with the rates mentioned in the aforementioned appraisals. The Board and the audit committee of the Board have approved the Transaction.
 
Following our review of the information you provided, we have determined the company’s Board would not be precluded by the Rules from finding that the Director is independent. With respect to the sale of the Office Building, Listing Rule 4200(a)(15)(D) does not preclude the Director from being independent because the payment in the Transaction is less than 5% of the revenues of the recipient (which is the company). Further, Listing Rule 4200(a)(15)(B) does not preclude the Director from being independent, provided the payments the Director will receive pursuant to the Leasing Agreement are less than $60,000 during any period of twelve consecutive months. We are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15). In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding.
 
Publication Date*: 7/31/2012 Identification Number: 884 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-35
Identification Number
882
This is in response to your letters regarding Marketplace Rules 4200(a)(15)(B) and 4200(a)(15)(D) (the “Rules”).  You asked whether Mr. X (the “Proposed Director”) would be eligible to serve as an independent director on the company’s board of directors (the “Board”) pursuant to the definition set forth in the Rules.
 
According to the information you provided, the Proposed Director is the Chief Executive Officer and controlling stockholder of the Firm, which was retained by the company in 2004 to assist the Board in formulating and implementing an executive succession plan (the “Project”).  You stated that the Firm reported to the company’s board of directors in connection with the Project.  The Proposed Director owns 80% of the Firm, and the balance is held by other executives and consultants of the Firm, none of whom is a family member or affiliate of the Proposed Director.  You stated that while the number of employees can vary according the requirements of specific projects, the Firm currently has 15 employees.
 
The Project was completed, and all of the consulting fees paid, in 2004.  During the fiscal year ended December 31, 2004, the company paid less than $20,000 to the Firm including amounts for the reimbursement of expenses and amounts the Firm paid to a subcontractor.  You stated that the Project was not unusual or remarkable in size or scope of billings for the Firm.  You also stated that upon election of the Proposed Director to the Board, it is expected that neither the Proposed Director nor the Firm would be hired for any future consulting engagements with the company.
 
Following our review of the information you provided, we have determined the company’s Board is not precluded by the Rules from finding that the Proposed Director is independent.  In this regard, we note that Listing Rule 4200(a)(15)(D) is applicable, rather than Listing Rule 4200(a)(15)(B), because the payments were made to an entity (the Firm) of which the Proposed Director is an executive officer and the controlling shareholder and not directly to or for the benefit of the Proposed Director.  Under Listing Rule 4200(a)(15)(D), the Proposed Director is eligible to be independent because the payments were less than the greater of 5% of the Firm’s revenues or $200,000 in the current year or any of the past three fiscal years.  We are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).   In addition, pursuant to IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.
 
Publication Date*: 7/31/2012 Identification Number: 882 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-12  
Identification Number
859
This is in response to your letter wherein you requested an interpretation of the definition of the term “independent director” set forth in Marketplace Listing Rule 4200(a)(15)(B).  Specifically, you asked whether Mr. X (the “Director”) would be considered “independent”, notwithstanding the fact that his son, Mr. Y, received a payment from the company as described below.
 
Prior to the acquisition, Mr. Y and his wife owned 26% Target.  The company acquired Target in a transaction structured such that the assets of Target were distributed to its shareholders and then sold to a subsidiary of the company in exchange for cash payments.  Mr. Y received a payment in excess of $60,000 from the company as part of this transaction.
 
Following our review of the information you provided, we have determined that the Director is not considered “independent” under the Rule because the payment to his son, Mr. Y, exceeds the threshold amount of $60,000.  As stated in the Rule, a director is not considered independent who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during any period of twelve consecutive months within the three years preceding the determination of independence.
 
Publication Date*: 7/31/2012 Identification Number: 859 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-1  
Identification Number
856
This is in response to your letter regarding Marketplace Listing Rule 4200(a)(15)(B) and IM-4200 (collectively, the “Rule”).  You asked whether the value of health-care benefits would be included for purposes of determining whether a director has accepted payments from the company for purposes of the Rule.
 
According to the information you provided, the company plans to offer health-care benefits, in the form of health insurance coverage, to its non-employee directors and their families (the “Benefits”).  The directors will not have to become employees to receive the benefits, and their status as “non-employees” will not change.  You stated that the Benefits are compensation for board service.
 
Following our review of the information you provided and based on your representation that the Benefits are for board service only, we have determined the company’s board is not precluded from finding that non-employee directors who receive the Benefits are independent under the Rule even if the value of the Benefits exceeds $60,000.  Please note that we are not making a determination regarding the eligibility to qualify as an independent director under any other provision of Listing Rule 4200(a)(15).  In addition, pursuant to IM-4200, the company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.
 
Publication Date*: 7/31/2012 Identification Number: 856 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-68
Identification Number
948
Rule 4200(a)(15)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years.
 
IM-4200.  Definition of Independence:  It is important for investors to have confidence that individuals serving as independent directors do not have a relationship with the listed company that would impair their independence.  The board has a responsibility to make an affirmative determination that no such relationships exist through the application of Listing Rule 4200.
 
Relevant Facts:  A company proposes to add a new director (the “Nominee”) to its board of directors and its Audit Committee.  The Nominee presently serves on the company’s Scientific Advisory Board (“SAB”).  In that capacity, the Nominee provides consulting services to the company and receives payments of $2,000 per quarter for this service.  In addition, the company has granted the Nominee options to purchase 50,000 shares of its common stock, with the exercise price set at market value on the date of the grant.  Using the Black-Scholes method, the aggregate value of the options on the grant dates was $25,000.  After his appointment to the Board and the Audit Committee, the Nominee would remain on the SAB but would no longer be paid any compensation for his service on the SAB or as a consultant.  In addition, he would forfeit his right to all unvested options granted in connection with his SAB or consultancy services (the “Forfeiture”).  Because the company is “modifying” the option, the Forfeiture would require the company to take a non-cash accounting charge (the “Charge”).  The Nominee is not, and has not been, an employee of the company.
 
Issue:  How does NASDAQ value options that vest over time for purposes of calculating the $60,000 payment threshold under Listing Rule 4200(a)(15)(B)?
 
Determination:  For purposes of the Rule, the payment is deemed to have been made as of the date of grant as calculated according to a generally accepted pricing model.
 
Issue:  Would NASDAQ view the Charge, either at the time of the amendment or spread over the option vesting period, as a payment to the director, such that it would need to be considered in calculating whether the Nominee satisfies the $60,000 payment threshold under Listing Rule 4200(a)(15)(B)?
 
Determination:  The Charge will not be considered when calculating whether the $60,000 payment is reached because it will not result in a payment to the Nominee.
 
Issue:  Based on these facts, is the Nominee precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B)?
 
Determination:  No.  Based on the information provided, NASDAQ determined that the company’s Board is not precluded from finding that the Nominee is independent under Listing Rule 4200(a)(15)(B).  Notwithstanding these determinations, the company’s board has a responsibility, pursuant to IM-4200, to make an affirmative determination that no relationship exists (including those described) that would impair the independence of the Nominee.
 
Publication Date*: 7/31/2012 Identification Number: 948 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-57
Identification Number
941
Rule 4200(a)(15)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years, other than the following: (i) compensation for board or board committee service; (ii) payments arising solely from investments in the company’s securities; (iii) compensation paid to a Family Member who is a non-executive employee of the company or a parent or subsidiary of the company; (iv) benefits under a tax-qualified retirement plan, or non-discretionary compensation; or (v) loans permitted under Section 13(k) of the Act. Provided, however, that audit committee members are subject to additional, more stringent requirements under Listing Rule 4350(d).
 
Relevant Facts:  A company granted a stock option for 25,000 shares of its common stock with an exercise price of $6.00 to a member of its board of directors (the “Director”).  The exercise price represented 50% of the fair market value of the common stock at the time the Director joined the board in November 1999.  The practice of the company is to issue stock options to outside directors upon their appointment to the board.  However, in this case, the stock option grant to the Director was delayed until February 2000, when the company filed its registration statement with the Securities and Exchange Commission for its initial public offering (“IPO”).  With the IPO underway, the exercise price of the stock option was reset to $12.50 per share.  Because the stock option had an exercise price in excess of the price promised when the Director joined the board, the company agreed to extend a forgivable loan (the “Loan”) to him in an amount equal to the difference to honor its prior commitment.  The Loan stipulated that if the Director served three years as a director of the company, the Loan would be forgiven in full.  The maximum value of the Loan was $150,000.  In November 2002, the company entered into a written agreement with the Director, whereby the Loan was terminated, and the Director received a lump sum cash payment of $150,000 from the company (the “Cash Payment”).  The company stated that the Cash Payment was an ancillary component of the stock option granted to the Director in connection for his services as a director and was properly characterized as compensation for board services.  The company believed that the Cash Payment satisfied the company’s commitment to grant the Director a stock option at the previously agreed per share exercise price and ensured that he would receive the full economic benefit of that commitment.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B)?
 
Determination:  No.  Based on the facts presented, NASDAQ determined that the Director is not precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), because of the company’s representation that the Cash Payment was for board services only.  Notwithstanding this determination, NASDAQ noted that, pursuant to IM-4200, a company’s board has the responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individual serving as an independent director.
 
Publication Date*: 7/31/2012 Identification Number: 941 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-55
Identification Number
940
Rules 4200(a)(15)(A) and 4200(a)(15)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:
 
(A) a director who is, or at any time during the past three years was, employed by the company or by any parent or subsidiary of the company;
 
(B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years, other than the following: (i) compensation for board or board committee service; (ii) payments arising solely from investments in the company’s securities; (iii) compensation paid to a Family Member who is a non-executive employee of the company or a parent or subsidiary of the company; (iv) benefits under a tax-qualified retirement plan, or non-discretionary compensation; or (v) loans permitted under Section 13(k) of the Act. Provided, however, that audit committee members are subject to additional, more stringent requirements under Listing Rule 4350(d).
 
Relevant Facts:  Since April 2000, a non-executive chairman of the board of directors (the “Director”) has received $150,000 per year for his services in that capacity.  The Director did not receive payment from the company in any other capacity.  The Director’s compensation was (but no longer is) paid through the company’s employee payroll system, as a matter of administrative convenience, as if he were an employee.  Consistent with the form in which the Director’s compensation was paid at the time in question, the company characterized him in its 2003 and prior proxy statements as receiving compensation as an employee.  The company did not make annual option awards to him under its non-employee directors’ stock option plan.  In addition, the Director has not participated in any of the company’s employee benefit plans and was specifically excluded from the group term life and disability plan in which all employees are automatically enrolled.
 
Recently, the company has reconsidered the issue of whether the Director is eligible to be an independent director and whether he was in fact an employee of the company, notwithstanding the company’s prior disclosure.  The company’s current view that he is not and never has been an employee of the company, as that term is ordinarily understood.  During the period in question, he has instead been a full-time employee of another company.  The company concluded that under state law, he would not be found to be an employee as a result of the scope, character, and nature of his responsibilities.  The Director’s only relationship with the company is in his capacity as the non-executive chairman of the board.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director, pursuant to Rules 4200(a)(15)(A) or 4200(a)(15)(B)?
 
Determination:  No.  Based on the company’s representations, NASDAQ determined that the board is not precluded from a finding that the Director is independent pursuant to the Rules.  Specifically, the company stated that the Director is not, and never has been, an employee of the company, and that he has received no payment from the company other than for board service.  NASDAQ notes that as stated in IM-4200, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  At the time the Director became the chairman of the board, the company did not make a determination as to whether or not he was an employee of the company.  Moreover, pursuant to Listing Rule 4350(c), a company is required to disclose in its annual proxy (or, if the company does not file a proxy, in its Form 10-K or 20-F) those directors that the board of directors has determined to be independent under Listing Rule 4200.  In view of the company’s previous disclosure that the Director was an employee, NASDAQ recommended that the company make correcting and clarifying disclosure of the company’s current view of whether the Director is, or ever was, an employee.
 
Publication Date*: 7/31/2012 Identification Number: 940 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-52
Identification Number
937
Rules 4200(a)(15)(B) and 4200(a)(15)(C):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:
 
(B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years, other than the following: (i) compensation for board or board committee service; (ii) payments arising solely from investments in the company’s securities; (iii) compensation paid to a Family Member who is a non-executive employee of the company or a parent or subsidiary of the company; (iv) benefits under a tax-qualified retirement plan, or non-discretionary compensation; or (v) loans permitted under Section 13(k) of the Act. Provided, however, that audit committee members are subject to additional, more stringent requirements under Listing Rule 4350(d).
 
(C) a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by the company or by any parent or subsidiary of the company as an executive officer;
 
Relevant Facts:  In November 2002, a director (the “Director”) was appointed to the audit committee of a company.  At the time, and until October 2003, the company was a wholly-owned subsidiary of the parent company (the “Parent”).  In October 2003, the Parent distributed to its stockholders on pro-rata basis all of the outstanding shares of the company (the “Distribution’).  Upon the closing of the Distribution, the company commenced trading on The NASDAQ Stock Market.  The Director’s sibling was employed by the Parent as an executive officer from February 2002 until the Distribution.  The Director’s sibling then ceased to be employed by the Parent.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director for the company, pursuant to Listing Rule 4200(a)(15)(B) or Listing Rule 4200(a)(15)(C)?
 
Determination:  Yes.  NASDAQ determined that the Director is not independent under the Rules.  For purposes of the three-year look-back under the Rules, employment with a parent company is deemed to end on the earlier of when: (i) the employment relationship with the former parent terminates; or (ii) the parent/subsidiary relationship terminates.  Because the Parent employed the Director’s sibling as an executive officer within the past three years, and because the sibling was employed during a period in which the parent/subsidiary relationship existed, the Director is not currently eligible to serve as an independent director, pursuant to Listing Rule 4200(a)(15)(C).  Further, in the event that the Parent paid the Director’s sibling in excess of $60,000 during one of the past three years, the Director would also be ineligible, pursuant to Listing Rule 4200(a)(15)(B).
 
Publication Date*: 7/31/2012 Identification Number: 937 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-39
Identification Number
931
Rule 4200(a)(15)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years.
 
IM-4200.  Definition of Independence:  The Rule’s reference to a “parent or subsidiary” is intended to cover entities the issuer controls and consolidates with the issuer’s financial statements as filed with the U.S. Securities and Exchange Commission (but not if the issuer reflects such entity solely as an investment in its financial statements).
 
Rule 4350(d)(2)(A):  Each issuer must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must: (i) be independent as defined under Listing Rule 4200(a)(15); (ii) meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Act (subject to the exemptions provided in Rule 10A-3(c)); (iii) not have participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past three years; and (iv) be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement.  Additionally, each issuer must certify that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
 
Relevant Facts:  A company stated that a member of its board of directors (the “Director”) had accepted payments from an entity (“Target A”), which had been acquired by the company approximately two years ago.  The Director had been granted options by Target A for services provided prior to the acquisition.  Upon consummation of the acquisition, the company assumed all of Target A’s outstanding options.  Target A also continued to provide services to the newly combined company.  The Director in question received payments, less than $60,000, for services he provided to the company shortly after the acquisition.  The services were rendered within the past two years, but not within the last year.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), or as an audit committee member, pursuant to Listing Rule 4350(d)(2)(A)?
 
Determination:  No.  NASDAQ determined that the company’s board is not precluded from finding that the Director is independent under the Rule and that the Director is not precluded from serving on the Audit Committee.  With regard to the options, the Director’s payments are deemed to have been made as of the date of the award as calculated according to a generally accepted pricing model.  In this case, the options were awarded before the three-year look-back period set forth in Listing Rule 4200(a)(15)(B).  Further, the Director did not receive payments in excess of $60,000 from Target A other than for board service (and any value provided by the assumption of the options, which were for board service only, and the reimbursement of expenses) during the current or any of the past three fiscal years.  Moreover, because the Director did not participate in the preparation of the financial statements of the company or its subsidiary at any time during the past three years, he is not precluded from serving on the company’s audit committee pursuant to Listing Rule 4350(d)(2)(A).
 
Notwithstanding these determinations that such service is not precluded by the Rule, pursuant to IM-4200, the company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.
 
Publication Date*: 7/31/2012 Identification Number: 931 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-27
Identification Number
925
Rule 4200(a)(15)(A):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:  (A) a director who is, or at any time during the past three years was, employed by the company or by any parent or subsidiary of the company.
 
IM-4200.  Definition of Independence:  The Rule’s reference to a “parent or subsidiary” is intended to cover entities the issuer controls and consolidates with the issuer’s financial statements as filed with the U.S. Securities and Exchange Commission (but not if the issuer reflects such entity solely as an investment in its financial statements).
 
Relevant Facts:  Listed Company has a Director on its board who was formerly employed by another entity (“Entity A”).  Entity A is a Foreign Private Issuer incorporated in England.  During the period of the Director’s employment, Entity A owned approximately 50% to 60% of the Listed Company’s outstanding common stock, but Entity A’s voting power was limited to 49% of the total votes eligible to be cast on any matter submitted to a vote of the Listed Company’s stockholders.  Following the recent sale of a portion of its holdings, Entity A now owns less than 10% of the Listed Company’s common stock and holds less than 10% of the voting power.
 
Entity A prepares its financial statements in accordance with U.K. GAAP, and such information is available to U.S. investors through Entity A’s filings with the Securities and Exchange Commission.  For the past three years, Entity A has held less than 50% of the voting power in the Listed Company’s securities.  Consequently, the Listed Company was considered an “associate” and was not consolidated as part of Entity A’s financial statements.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director to the Listed Company, pursuant to Listing Rule 4200(a)(15)(A) or IM-4200?
 
Determination:  No.  NASDAQ determined that the Listed Company’s board is not precluded from finding that the Director is independent, since Entity A held less than 50% of the voting power in the Listed Company’s securities during the previous three years and did not consolidate its financial statements with those of the Listed Company.  Accordingly, Entity A is not the parent of the Listed Company within the meaning of the Rule and IM-4200.
 
Publication Date*: 7/31/2012 Identification Number: 925 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-26
Identification Number
924
Rule 4350(c)(5):  A Controlled Company is exempt from the requirements of Listing Rule 4350(c), except for the requirements of subsection (c)(2), which pertain to executive sessions of independent directors.  A Controlled Company is a company of which more than 50% of the voting power is held by an individual, a group or another company.  A Controlled Company relying upon this exemption must disclose in its annual meeting proxy statement (or, if the issuer does not file a proxy, in its Form 10-K or 20-F) that it is a Controlled Company and the basis for that determination.
 
Relevant Facts:  A company represented that two separate corporate entities currently together own in excess of 50% of the voting power in the company’s securities.  The company stated, and Staff verified, that each of the entities has a Schedule 13D on file with the Securities and Exchange Commission, wherein each acknowledges that it may be considered to be acting as a member of a group with the other.
 
Issue:  Is the company considered a “Controlled Company,” as defined in Listing Rule 4350(c)(5), and thus eligible for the exemptions from certain independent director requirements set forth in Listing Rule 4350(c)?
 
Determination:  Yes.  Based on these representations, NASDAQ has no reason to disagree with the company’s assertion that it is a “Controlled Company.”  As such, the company is eligible for exemptions under Listing Rule 4350(c), except for the “executive sessions” requirements of subsection (c)(2).  NASDAQ also reminded the company that the Rule requires the company to disclose its status as a “Controlled Company” in its next annual meeting proxy statement and to provide the basis for that determination.
 
Publication Date*: 7/31/2012 Identification Number: 924 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-22
Identification Number
920
Rule 4200(a)(15)(D):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (D) a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than the following: (i) payments arising solely from investments in the company’s securities; or (ii) payments under non-discretionary charitable contribution matching programs.
 
Relevant Facts:  A director of a listed company is a partner of a law firm that serves as executor and trustee for a client of one of the company’s bank subsidiaries.  The law firm does not provide any services to the parent company or the subsidiary, nor does the director in question directly provide any services to the accounts in question.  The legal fees billed by the law firm are paid from the assets of the estate/trust and do not exceed the 5%/$200,000 test of Listing Rule 4200(a)(15)(D).  Lastly, the law firm was only retained after a specific, unsolicited request by the client and after the subsidiary’s determination as a fiduciary that the representation was appropriate.
 
Issue:  Based on these facts, is the director precluded from serving as an independent director on the audit committee?
 
Determination:  No.  The director would not be precluded from serving as an independent member of the audit committee.  The law firm was selected to serve as counsel for trusts and estates overseen by the subsidiary at the specific, unsolicited recommendation of a client and upon the subsidiary’s determination as a fiduciary that such representation is appropriate.  The director will not serve as counsel to the subsidiary’s clients.  While it is NASDAQ’s view that this relationship would not constitute a direct or indirect “consulting, advisory or other compensatory fee from the issuer or any subsidiary thereof,” as contemplated by Rule 10A-3(b)(1)(ii)(A), should the Securities and Exchange Commission determine otherwise, this interpretation could no longer be relied upon.  NASDAQ is not making a determination regarding the eligibility of the director to qualify as an independent director under any other provision of the rules.  In addition, a company’s board has a responsibility to make an affirmative determination that no relationships exist that would impair the independence of an individual serving as an independent director
 
Publication Date*: 7/31/2012 Identification Number: 920 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-14
Identification Number
914
Rule 4200(a)(15)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years.
 
Rule 4350(c)(3)(C):  If the compensation committee is comprised of at least three members, one director who is not independent as defined in Listing Rule 4200 and is not a current officer or employee or a Family Member of an officer or employee, may be appointed to the compensation committee if the board, under exceptional and limited circumstances, determines that such individual’s membership on the committee is required by the best interests of the company and its shareholders, and the board discloses, in the proxy statement for the next annual meeting subsequent to such determination (or, if the issuer does not file a proxy, in its Form 10-K or 20-F), the nature of the relationship and the reasons for the determination. A member appointed under this exception may not serve longer than two years.
 
Relevant Facts:  Mr. X served as the interim chief executive officer from June 30 through September 30, 2003.  The company paid him in excess of $60,000 for his service as interim CEO.
 
Issue:  Notwithstanding the amount of compensation received from the company, is Mr. X precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B)?
 
Determination:  Yes.  Based on the facts presented, NASDAQ determined that Mr. X is precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), because the compensation received as interim CEO was in excess of $60,000.
 
Issue:  In the event that Mr. X is precluded from serving as an independent director, do “exceptional and limited” circumstances exist such that the board may appoint Mr. X to the compensation committee?
 
Determination:  When a director is not a current officer or employee or a Family member of an officer or employee, use of the exception is contingent on whether a company’s board determines that the individual’s membership on the committee is required by the best interests of the company and its shareholders.  Approval by NASDAQ is not required.  Rather, pursuant to Listing Rule 4350(c)(3)(C), the board must disclose, in its proxy statement for the next annual meeting subsequent to the board’s determination, the nature of the relationship and the reasons for the determination to rely upon the exception.
 
Publication Date*: 7/31/2012 Identification Number: 914 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-13
Identification Number
913
Rules 4200(a)(15)(B) and 4200(a)(15)(D):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:
 
(B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years.
 
(D) a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more.
 
Relevant Facts:  A company represented that a member of its board of directors (the “Director”) is an officer of a partnership that manages several venture capital funds (“Management Partnership”).  The company is a limited partner in one of these funds (the “Capital Fund”) and has invested approximately $3 million over the past four years, which represents only 2% of Capital Fund’s investments.  The Capital Fund pays a management fee to the Management Partnership, which does not exceed 5% of that entity’s consolidated gross revenues and is less than $200,000 per year.  The company also stated that while the Capital Fund does not hold any of the company’s securities, the Director in question personally holds an indirect equity interest in the company of less than 5% of the total voting power outstanding.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director, pursuant to Rules 4200(a)(15)(B) or 4200(a)(15)(D)?
 
Determination:  No.  Because the Director is an executive officer of an organization to which the company made payments for services, it is appropriate to apply the corporate measurements of paragraph (D) rather than the individual measurements of paragraph (B) under Listing Rule 4200(a)(15).  In that regard, because the company’s payments do not exceed the greater of 5% of the Management Partnership’s consolidated gross revenues or $200,000 per year, the Director is not precluded from serving as an independent director.  Moreover, as stated in IM-4200, NASDAQ does not believe that ownership of company stock by itself would preclude a board finding of independence.  Accordingly, the Director’s indirect equity interest in the company’s common stock also does not preclude a board finding of independence.
 
 
Publication Date*: 7/31/2012 Identification Number: 913 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-9
Identification Number
909
Rule 4200(a)(15)(E):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.  The following persons shall not be considered independent … (E) a director of the listed company who is, or has a Family Member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the listed company served on the compensation committee of such other entity.
 
Relevant Facts:  An individual (the “Director”) was appointed to the company’s board of directors in April 2003.  Before joining the company’s board, the Director was an executive officer at another company (“Entity A”).  The Director retired from Entity A in September 2002.  An executive officer of the company (the “Officer”) has served on Entity A’s compensation committee since 1997.
 
Issue:  Based on these facts, is the Director precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(E)?
 
Determination:  Since the Director is no longer employed as an executive officer of Entity A, NASDAQ determined that the company’s board is not precluded by Listing Rule 4200(a)(15)(E) from finding that the Director is independent.
 
 
Publication Date*: 7/31/2012 Identification Number: 909 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-7
Identification Number
908
Rule 4200(a)(15):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
 
Rule 4350(c)(4)(D):  Independent director oversight of director nominations shall not apply in cases where the right to nominate a director legally belongs to a third party.  However, this does not relieve a company’s obligation to comply with the committee composition requirements under Rules 4350(c) and (d).
 
Relevant Facts:  A Governance Agreement exists between the company and Entity A that provides Entity A with the right to designate directors to the company’s board.  Two of the directors nominated, pursuant to the governance agreement, are not employed by Entity A or its affiliates.  Neither director has received any compensation from the company other than for board service, nor do they fall under other provisions that would disqualify them under Listing Rule 4200(a)(15).
 
Two other directors nominated pursuant to the governance agreement received compensation, either directly or indirectly, from the company for activities other than board service, in the prior fiscal year.  One of these directors received compensation in an amount less than $60,000 for consulting work.  The company may pay the director for consulting services in the current year in an amount less than $60,000.  The other director is “Of Counsel” to a law firm, which provides legal services to the company.  For the past three fiscal years, the law firm has not received fees from the company in excess of the greater of $200,000 or 5% of the law firm’s consolidated gross revenues for each year.
 
Issue:  Can the directors designated by Entity A be considered independent pursuant to Listing Rule 4200(a)(15)?
 
Determination:  Pursuant to Listing Rule 4200(a)(15), the directors designated by Entity A are not precluded from being found independent by the company’s board.  They are also not subject to the additional requirements of Listing Rule 4350(c)(4)(A), which set forth the requirements for the nomination of directors by independent directors.  NASDAQ’s determination is based on the fact that the Governance Agreement assigns the right to nominate these directors to Entity A.  Notwithstanding this finding, the company must comply with the independent board and committee composition requirements set forth in Rules 4350(c) and (d).
 
Issue:  Are the directors who provided services (directly and indirectly) considered independent under Listing Rule 4200(a)(15)?
 
Determination:  The director who provided consulting services for the company would not be precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), because the payments received are less than $60,000.  Additionally, future payments for consulting services in an amount under $60,000 per year likewise would not preclude a board finding of independence under the provisions of Listing Rule 4200(a)(15).  However, such future payments would preclude the director from service on the Audit Committee, pursuant to Listing Rule 4350(d)(2)(A) and IM 4350-4.
 
Similarly, the director, who is “Of Counsel” to a law firm providing services to the company, is not precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(D), because the payments received are less than the greater of $200,000 or 5% of the law firm’s consolidated gross revenues for each year.  Any such on-going payments, however, would make the director ineligible to serve on the Audit Committee, pursuant to Listing Rule 4350(d)(2)(A) and IM 4350-4.
 
 
 
Publication Date*: 7/31/2012 Identification Number: 908 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-35  
Identification Number
1004
Rule 4200(a)(15):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
 
Relevant Facts:  Upon the retirement of the company’s chairman of the board and chief executive officer in 2001, the position of chief executive officer (“CEO”) was offered to Mr. X, who was then serving as an outside director to the company.  Mr. X informed the company’s board that his acceptance of the CEO position was contingent upon the appointment of another individual, Mr. Y, to the position of non-executive chairman of the board  (“Chairman”).  Mr. Y, who was then serving as an outside director to the company, had a previous working relationship with Mr. X at another organization.  The company represented that its board of directors had reviewed this relationship and had determined that it did not interfere with Mr. Y’s exercise of independent judgment.
 
The company further represented that its compensation committee considered the additional time and responsibilities associated with the position of Chairman and granted Mr. Y additional annual compensation for his board services.
 
Issue:  Does the compensation paid to Mr. Y for his services as a non-executive Chairman preclude him from serving as an independent director, pursuant to Listing Rule 4200(a)(15)?
 
Determination:  No.  The fees paid to Mr. Y for his service as Chairman do not preclude him from serving as an independent director, pursuant to Listing Rule 4200(a)(15), because it was for board services only.  Please note, however that NASDAQ did not make a determination regarding Mr. Y’s independence, as that requires a subjective determination by the company’s board of directors.
 
 
Publication Date*: 7/31/2012 Identification Number: 1004 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-27
Identification Number
997
Rule 4200(a)(14)(B):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director   The following persons shall not be considered independent … (B) a director who accepts any compensation from the corporation or any of its affiliates in excess of $60,000 during the previous fiscal year, other than compensation for board service.
 
Relevant Facts:  In April 2003, Mr. X was appointed by the company’s board to serve as “Lead Director” and to coordinate the search for a new chief executive officer (“CEO”), following to the departure of the company’s former CEO.  The company agreed to pay this individual a $25,000 monthly fee with a cap of $60,000 for his service as Lead Director.
 
In August 2003, the company announced the appointment of a new CEO and eliminated the function of Lead Director.  Therefore, the monthly compensation for the Lead Director covered the period between April and August 2003, subject to the $60,000 cap.  Effective September 2003, Mr. X was elected non-executive chairman of the board of directors (“Chairman”).  In this capacity, he is entitled to compensation consisting of cash and the company’s common stock in an amount that will not exceed $60,000 annually.  Such compensation is in addition to the annual fees paid to directors for board service, which consists of $15,000 in cash and $20,000 in common stock.
 
The company represented that all payments made to Mr. X were for board services only.  Additionally, the company stated that it did not consider Mr. X as either an officer or an employee.
 
Issue:  Notwithstanding the compensation received from the company, is this individual precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(14)(B)?
 
Determination:  No.  Based on the company’s submissions, it was determined that Mr. X is not precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(14)(B), because the compensation received as Lead Director and Chairman were related to his board service, and therefore, the Rule was not applicable in this case.
 
Publication Date*: 7/31/2012 Identification Number: 997 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2017-1
Identification Number
1351

This is in response to your correspondence asking whether Listing Rule 5605(a)(2) (the “Rule”) specifically prohibits the Company from deeming the Directors independent.

The Listing Rules specifically prohibit a finding of independence in certain circumstances, as set forth in the Rule. If any of the circumstances enumerated in the Rule are present with respect to a director, then that director cannot be deemed independent, and the board is not permitted to conclude otherwise. On the other hand, if the enumerated circumstances are not present, then the board must, under the Rule and IM-5605, affirmatively determine that no relationship exists that would interfere with the exercise of independent judgment in carrying out the director’s responsibilities.

We discuss below whether the Rule specifically prohibits a finding of independence with respect to the Directors, given payments the Company has made, and will continue to make, to the Lessor, which is partially owned by the Directors. We do not address the broader question of whether the relationships described among the Directors, the Lessor, and the Company would interfere with the exercise of the Directors’ independent judgment and express no opinion as to the whether such a determination by the Company’s board that they do not interfere would be appropriate in this instance.

According to the information you provided, the Company has a lease agreement for its main office with the Lessor. You also indicated that the annual lease payments made by the Company to the Lessor in the current fiscal year are in excess of $200,000 and 5% of the Lessor’s consolidated gross revenues for the year (the “Payments”).

You explained that the Lessor is organized as Limited Liability Company and that it currently has less than 10 members, each holding a membership interest between 5% and 22.5%. You also stated that one of these members, the only managing member of the Lessor, holds a 20.0% membership interest. Under the Lessor’s operating agreement, the managing member makes all of the control decisions for the Lessor. The operating agreement also provides that all material items require approval of 65% of the membership and routine items require the approval of 51% of the membership. Each of the Directors indirectly owns membership interests in the Lessor of between 17% and 20%.

You also stated that the Directors do not perform any policy making function for the Lessor and do not have a family member who is a partner in, or controlling Shareholder, or an Executive Officer of the Lessor. You further stated that under the Lessor’s operating agreement, you believe the non-managing members’ interest in the Lessor is similar to the interest of a limited partner in a partnership.

Following our review of the information you provided, we have determined that the Company’s board of directors is not precluded by Rule 5605(a)(2)(D) from finding that the Directors are independent, notwithstanding the Payments. We have reached this conclusion because none of the Directors is (i) a partner in; (ii) a controlling Shareholder of; or (iii) an Executive Officer of the Lessor.

Although the Directors are members of the Lessor, and the Lessor is a limited liability company, you suggested that the Company’s structure could more appropriately be viewed as similar to that of a limited partnership. To the extent that we accept that view, the Directors’ membership interests would be analogous to limited partnership interests and, as noted in IM-5605, the reference to “partner” in Listing Rule 5605(a)(2)(D) is not intended to include limited partners. On the other hand, to the extent the Company’s structure is treated like a corporation, the Directors would be shareholders and none of the Directors would be a controlling Shareholder of the Lessor because under the current ownership and operational structure of the Lessor, as governed by the operating agreement, neither of the Directors has the ability individually to exercise either significant influence over the Lessor’s operations or the power to direct or cause the direction of the management and policies of the Lessor. This determination is made based on the specific facts and circumstances you described, including the small number of members of the Lessor, the Directors’ inability (based on their membership interests) to determine the vote on either routine or material items; and the fact that there is a member -- the only managing member -- who makes all the control decisions for the Lessor and has an ownership position that is no less than each of the Directors’. Finally, none of the Directors is an Executive Officer of the Lessor under the Listing Rules because they are not the managing member of the Lessor and do not perform any policy making function for the Lessor. In addition, and as explained in IM-5605Rule 5605(a)(2)(B) is generally intended to capture situations where compensation is made directly to (or for the benefit of) a director. Nonetheless we note that to the extent we were to look through the Lessor and treat the Payments as compensation made directly to the Lessor’s members, the portion of the payments attributable to each Director would be less than $120,000 in the current fiscal year and the Payments would therefore not prevent the Directors from being considered independent by Rule 5605(a)(2)(B).

Notwithstanding this determination, the Company remains subject, on an ongoing basis, to Rule 5605(a)(2) and IM-5605, which require the Company’s board to make an affirmative determination that no relationship exists between the Company and the Directors that would interfere with their exercise of independent judgment in carrying out their responsibilities as directors. As noted above, we are not expressing any opinion as to the whether the Board could reasonably make such a determination.

Publication Date*: 4/11/2017 Identification Number: 1351 Mailto Link
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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