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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
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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