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.