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.