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.