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Staff Interpretation Letters
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Identification Number
931
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Rule 4200(a)(15)(B): “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: … (B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent
or subsidiary of the company in excess of $60,000 during the current or any of the past three fiscal years.
IM-4200. Definition of Independence: The Rule’s reference to a “parent or subsidiary” is intended to cover entities the issuer controls and consolidates with the issuer’s financial statements as filed with the U.S. Securities and Exchange Commission
(but not if the issuer reflects such entity solely as an investment in its financial statements).
Rule 4350(d)(2)(A): Each issuer must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must: (i) be independent as defined under Listing Rule 4200(a)(15); (ii) meet the criteria for independence
set forth in Rule 10A-3(b)(1) under the Act (subject to the exemptions provided in Rule 10A-3(c)); (iii) not have participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past
three years; and (iv) be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement. Additionally, each issuer must certify that it has, and will continue to have, at least
one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication,
including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
Relevant Facts: A company stated that a member of its board of directors (the “Director”) had accepted payments from an entity (“Target A”), which had been acquired by the company approximately two years ago. The Director had been granted options by
Target A for services provided prior to the acquisition. Upon consummation of the acquisition, the company assumed all of Target A’s outstanding options. Target A also continued to provide services to the newly combined company. The Director in question
received payments, less than $60,000, for services he provided to the company shortly after the acquisition. The services were rendered within the past two years, but not within the last year.
Issue: Based on these facts, is the Director precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), or as an audit committee member, pursuant to Listing Rule 4350(d)(2)(A)?
Determination: No. NASDAQ determined that the company’s board is not precluded from finding that the Director is independent under the Rule and that the Director is not precluded from serving on the Audit Committee. With regard to the options, the Director’s
payments are deemed to have been made as of the date of the award as calculated according to a generally accepted pricing model. In this case, the options were awarded before the three-year look-back period set forth in Listing Rule 4200(a)(15)(B). Further,
the Director did not receive payments in excess of $60,000 from Target A other than for board service (and any value provided by the assumption of the options, which were for board service only, and the reimbursement of expenses) during the current or any
of the past three fiscal years. Moreover, because the Director did not participate in the preparation of the financial statements of the company or its subsidiary at any time during the past three years, he is not precluded from serving on the company’s audit
committee pursuant to Listing Rule 4350(d)(2)(A).
Notwithstanding these determinations that such service is not precluded by the Rule, pursuant to IM-4200, the 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.
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Publication Date*:
7/31/2012
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Identification Number:
931
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