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Frequently Asked Questions
  Staff Interpretation Letter 2008-17
Identification Number 761
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 Marketplace Rules 4200(a)(15)(A) and 4200(a)(15)(B) (the “Rules”) notwithstanding the Director’s relationship with the Target and certain payments which the company will make to the Director.
According to the information you provided, the company completed the acquisition of the Target (the “Acquisition”) approximately four months ago.  As a result of the Acquisition, the Target became a wholly-owned subsidiary of the company. Prior to the closing of the Acquisition (the “Closing”), the company and the Target were not affiliated. The Director became an executive officer of the Target several years ago and continued to hold that position until the Closing, at which time her employment ended.  The Director is not currently, and never has been, an officer or employee of the company.  Following the Closing, the Director became a member of the company’s board of directors.
As consideration in the Acquisition, the company issued shares of its common stock in exchange for the outstanding shares of the Target (“Merger Consideration”). Accordingly, as an owner of shares in the Target, the Director received Merger Consideration pro ratably in the same manner as the Target’s other shareholders. The Director will receive additional shares of the company’s common stock as a result of the company’s assumption of the Target’s stock options and restricted stock units (collectively, “Equity Awards”), which were outstanding at the time of the closing and which were converted into the right to purchase or receive, as applicable, shares of the company’s common stock pursuant to the terms of the Acquisition.
The Director’s employment agreement with the Target contained certain “change of control” and severance provisions (the “Control and Severance Provisions”), which were triggered by the Acquisition and pursuant to which the Director is entitled to receive cash payments of specified amounts. As a result of the Acquisition, the company is obligated to make these payments.
In addition, the Target was required to purchase officers’ and directors’ liability insurance policies (the “Insurance Policies”), which would cover the Target’s former directors and officers for a specified number of years following the Closing. As the surviving corporation, the company is obligated to maintain these policies for their full term.
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 given that following the closing the Director ceased to be employed by the Target and did not become an employee of the company. For purposes of the Rules, the Director’s employment by the Target, and compensation paid by the Target to the Director, prior to the closing are not included when determining whether the Director has been employed by the company, or has received compensation from the company, during the past three years.  The Merger Consideration is not compensation under Listing Rule 4200(a)(15)(B) because it was paid pro ratably to all shareholders of the Target.  The issuances under the Equity Awards, the payments under the Control and Severance Provisions, and the payments to maintain the Insurance Policies are not compensation for purposes of Listing Rule 4200(a)(15)(B) because they will be a result of pre-existing agreements between the Director and the Target not involving the company, but which the company assumed in connection with the Acquisition.  Notwithstanding this determination, pursuant to Listing Rule 4200(a)(15) and IM-4200, 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.  You have not asked us to reach, and we have not reached, a conclusion as to whether the Director is eligible to serve on the company’s audit committee.  Such eligibility should be assessed under Marketplace Listing Rule 4350(d) and under Rule 10A-3 of the Securities Exchange Act of 1934.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 761
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