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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
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