Rules 4200(a)(15)(A) and 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:
(A) a director who is, or at any time during the past three years was, employed by the company or by any parent or subsidiary of the company;
(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, other than the following: (i) compensation
for board or board committee service; (ii) payments arising solely from investments in the company’s securities; (iii) compensation paid to a Family Member who is a non-executive employee of the company or a parent or subsidiary of the company; (iv) benefits
under a tax-qualified retirement plan, or non-discretionary compensation; or (v) loans permitted under Section 13(k) of the Act. Provided, however, that audit committee members are subject to additional, more stringent requirements under Listing Rule 4350(d).
Relevant Facts: Since April 2000, a non-executive chairman of the board of directors (the “Director”) has received $150,000 per year for his services in that capacity. The Director did not receive payment from the company in any other capacity. The
Director’s compensation was (but no longer is) paid through the company’s employee payroll system, as a matter of administrative convenience, as if he were an employee. Consistent with the form in which the Director’s compensation was paid at the time in
question, the company characterized him in its 2003 and prior proxy statements as receiving compensation as an employee. The company did not make annual option awards to him under its non-employee directors’ stock option plan. In addition, the Director has
not participated in any of the company’s employee benefit plans and was specifically excluded from the group term life and disability plan in which all employees are automatically enrolled.
Recently, the company has reconsidered the issue of whether the Director is eligible to be an independent director and whether he was in fact an employee of the company, notwithstanding the company’s prior disclosure. The company’s current view that he
is not and never has been an employee of the company, as that term is ordinarily understood. During the period in question, he has instead been a full-time employee of another company. The company concluded that under state law, he would not be found to
be an employee as a result of the scope, character, and nature of his responsibilities. The Director’s only relationship with the company is in his capacity as the non-executive chairman of the board.
Issue: Based on these facts, is the Director precluded from serving as an independent director, pursuant to Rules 4200(a)(15)(A) or 4200(a)(15)(B)?
Determination: No. Based on the company’s representations, NASDAQ determined that the board is not precluded from a finding that the Director is independent pursuant to the Rules. Specifically, the company stated that the Director is not, and never
has been, an employee of the company, and that he has received no payment from the company other than for board service. NASDAQ notes that as stated in 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. At the time the Director became the chairman of the board, the company did not make a determination as to whether or not he was an employee of the company. Moreover,
pursuant to Listing Rule 4350(c), a company is required to disclose in its annual proxy (or, if the company does not file a proxy, in its Form 10-K or 20-F) those directors that the board of directors has determined to be independent under Listing Rule 4200.
In view of the company’s previous disclosure that the Director was an employee, NASDAQ recommended that the company make correcting and clarifying disclosure of the company’s current view of whether the Director is, or ever was, an employee.