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  Staff Interpretation Letter 2009-7
Identification Number 725
This is in response to your correspondence regarding whether the Director is eligible to be an independent member of the company’s board of directors under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the “Rules”) notwithstanding payments made by the company to the Director and the Firm in connection with the acquisition of the Target (the “Acquisition”). The Director has been a member of the company’s board of directors for approximately fifteen years and has served as its chairman for about four years.
According to the information you provided, the company acquired the Target approximately two years ago. Prior to the closing of the Acquisition, the Director was the chairman of the board and an executive officer of the Target. The Director resigned from these positions immediately prior to the Acquisition. The Target’s capital stock consisted of common stock and preferred stock. The Director personally owned shares of common stock of the Target equal to approximately 15% of the Target’s outstanding capital stock.  In addition, the Director is the founder and a managing director of the Firm, a venture capital firm which was the sole owner of the preferred stock. The number of shares of preferred stock was equal to approximately 40% of the Target’s outstanding capital stock. The consideration for the Acquisition, which the company paid to the Target’s shareholders, consisted of cash and shares of the company’s common stock. All holders of the Target’s common stock received the same consideration per share of Target common stock held (the “Common Stock Consideration”). Due to the liquidation preferences of the preferred stock, the Firm received a higher amount of consideration per preferred share than the per share common stock consideration (the “Preferred Stock Consideration”). You stated that the liquidation preferences were negotiated among the shareholders of the Target well in advance of the Acquisition and were in no way related to the Acquisition. The total number of shares of common stock issued as acquisition consideration was equal to approximately one percent of the company’s total shares outstanding, and the aggregate cash consideration was approximately $3,000,000.
In addition, the Firm had outstanding bridge notes of the Target, which were repaid by the Target at the closing of the Acquisition in accordance with the terms of such bridge notes. You represented that the terms of the bridge notes, including the interest rate and maturity triggers, were standard.
You stated that the Director and the Firm had no role in determining the allocation of the acquisition consideration among the stockholders of the Target because the allocation was entirely pre-determined on a pro-rata basis by the terms of the Target’s securities. To evaluate the Acquisition, the company’s board of directors established a committee of independent directors (the “Board Committee”) of which the Director was not a member. You stated that the Director did not participate on behalf of the company in any actions with respect to the Acquisition and did not participate in any deliberations or other activities of the Board Committee.
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rules from finding that the Director is independent, notwithstanding the payment of the acquisition consideration to the Director and the Firm. The acquisition consideration is not compensation from the company under Listing Rule 5605(a)(2)(B), and it is not a payment for property or services within the meaning of Listing Rule 5605(a)(2)(D).  In reaching this conclusion, we note that the acquisition consideration was paid pro-ratably to all shareholders of the Target based on their ownership interest in the Target. Although the Preferred Stock Consideration was larger than the Common Stock Consideration, such Preferred Stock Consideration was likewise determined pursuant to the terms of the preferred stock, which was negotiated among the Target’s shareholders prior to the Acquisition and was in no way related to the Acquisition.  The repayment by the Target of the bridge loan is also neither compensation by the company under Listing Rule 5605(a)(2)(B) nor a payment by the company for property or services under Listing Rule 5605(a)(2)(D), as the loan terms were standard and it was re-paid by the Target pursuant to its terms.
Notwithstanding this determination, 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 with respect to the Director.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 725
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