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Frequently Asked Questions
  Staff Interpretation Letter 2006-31
Identification Number 841
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4200(a)(15).  You asked whether the Director is eligible to be an independent member of the company’s board of directors notwithstanding a payment (the “Payment”) made to the Investor by the company in connection with a merger between Company A and Company B (the “Merger”).  The Director is an executive officer of the Investor.  Specifically, your question relates to Listing Rule 4200(a)(15)(D) (the “Rule”).
According to the information you provided, the company was formed in the Merger and became the successor to Company A and Company B.  As a result of the Merger, the outstanding shares of the common stock of both Company A and Company B were cancelled and exchanged for shares of the company’s common stock.
Prior to the Merger, the Investor held senior notes (the “Notes”) issued by, and warrants (the “Warrants”) to purchase shares of common stock of, Company A.  In connection with the Merger, the company, Company A, and the Investor entered into an agreement to restructure the Notes and the Warrants.  Pursuant to the restructuring, upon consummation of the Merger, the Notes and the Warrants were exchanged for the Payment, which consisted of cash and shares of the company’s common stock.  Had the restructuring not occurred, upon the consummation of the Merger, the Warrants would have become exercisable for shares of the company’s stock and the Investor would have had the right to demand repayment in full from Company A, which would then have been a wholly-owned subsidiary of the company.
Following our review of the information you provided, we have determined that the company’s board of directors is not precluded by the Rule from finding that the Director is independent.  The Rule provides that payments arising from an investment in a company’s securities are not considered in determining whether payments reach the threshold set forth in the Rule.  The Payment was made in exchange for securities which would have become securities in, and ultimately an obligation of, the company upon the consummation of the Merger.  As such, it is appropriate to consider the Payment, which was designed to replace the value of the Investor’s holdings in Company A with approximately the same value in the form of cash and securities in the company, as having arisen from an investment in the company’s securities for purposes of the Rule.  Notwithstanding this determination, pursuant to 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.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 841
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