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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 Mailto Link Identification Number: 1411
Frequently Asked Questions
  Staff Interpretation Letter 2016-3
Identification Number 1145
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
 
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
 
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
 
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
 
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
 
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
 
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
 
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
 
Publication Date*: 5/11/2016 Mailto Link Identification Number: 1145
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 Mailto Link Identification Number: 709
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 Mailto Link Identification Number: 701
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 Mailto Link Identification Number: 1351
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 Mailto Link Identification Number: 725
Frequently Asked Questions
  Staff Interpretation Letter 2014-4
Identification Number 1130
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
 
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
 
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
 
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
 
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 10/7/2014 Mailto Link Identification Number: 1130
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 Mailto Link Identification Number: 705
Frequently Asked Questions
  Staff Interpretation Letter 2009-21
Identification Number 739
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue warrants (the “Warrants”) to a current shareholder (the “Shareholder”) in connection with the Shareholder’s providing a credit facility (the “Credit Facility”). The Warrants would be exercisable for less than the book value per share. The aggregate number of shares of common stock that could be issued upon the exercise of the Warrants would be limited to 19.99% of the pre-transaction outstanding shares of common stock subject to proportional adjustment for stock splits and similar events (the “Aggregate Limit”). In addition, a holder of the Warrants, whether the Shareholder or a subsequent transferee, could not exercise the Warrants if the result would be the holder’s owning more than 19.99% of the company’s outstanding shares of common stock or voting power after giving effect to the shares issued as a result of such exercise (the “Ownership Limit”). The Credit Facility is not convertible into common stock.
 
Following our review of the information you provided, we have determined that the Proposed Transaction, structured as you described, would not require shareholder approval under the Rules. Given the Ownership Limit, shareholder approval is not required under Listing Rule 5635(b) because the issuance could not result in a change control.  Given the Aggregate Limit, shareholder approval is not required under Listing Rule 5635(d) because the number of shares that could be issued is less than 20% of the pre-transaction outstanding shares.
 
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 739
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 Mailto Link Identification Number: 704
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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