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Frequently Asked Questions
  Staff Interpretation Letter 2010-10
Identification Number 709
This is in response to your correspondence regarding whether the Directors can be considered independent under Listing Rules 5605(a)(2)(A) and 5605(a)(2)(D) (the “Rules”) notwithstanding: (i) their relationship with the Shareholder and the Firm; and (ii) certain payments the company makes to the Shareholder.
According to the information you provided, over the past nine months the Shareholder has reduced its ownership of the company from approximately 67% of the outstanding shares of common stock to approximately 25% through a series of public offerings. You stated that the Shareholder holds its interest in the company for investment purposes and that neither the Shareholder, nor any of its affiliates, has ever consolidated the financials of the company with its own financial statements. Pursuant to an agreement between the company and the Shareholder (the “Agreement”), the company makes an annual payment to the Shareholder in exchange for advisory services provided by an affiliate of the Shareholder (the “Payment”).
The Directors are executive officers of the Firm, a private equity firm which, through a series of partnerships (the “Partnerships”), controls a fund which controls the Shareholder. The Directors are not executive officers or partners in the Shareholder but are limited partners of certain of the Partnerships. The Directors and other employees of the Firm provide the services to the company under the Agreement.
Following our review of the information you provided, we have determined that the Shareholder’s ownership position in the company does not cause the Directors to be employees of the company within the meaning of Listing Rule 5605(a)(2)(A).  In that regard, we note that IM-5605 provides that the reference to “company” in the Rules includes any parent or subsidiary of the company, but is not intended to cover a situation, such as the company’s, where the ownership position is reflected as an investment rather than being included in the financial statements on a consolidated basis.  Accordingly, with respect to the Shareholder’s current and past ownership in the company, Listing Rule 5605(a)(2)(A) does not preclude the board of directors of the company from finding that the Directors are independent.
We have also concluded that for purposes of applying Rule 5605(a)(2)(D), the Payment should be viewed as being made to the Firm given that the Firm controls both the Shareholder, which is receiving the Payment, and the Partnerships, and that employees of the Firm are providing the services through one of the Partnerships. Although the Directors are limited partners at certain of the Partnerships, as noted in IM-5605, the reference to “partner” in Listing Rule 5605(a)(2)(D) is not intended to include limited partners. However, given that the Directors are executive officers of the Firm, the Directors’ eligibility to be independent under Listing Rule 5605(a)(2)(D) is determined by whether the Payment exceeds the greater of 5% of the Firm’s revenues or $200,000 in the current year or any of the Firm’s last three fiscal years.
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: 709
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