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Libraries:
Staff Interpretation Letters
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All Years; Board Composition/Committee Assignments; All
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Identification Number
941
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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, 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: A company granted a stock option for 25,000 shares of its common stock with an exercise price of $6.00 to a member of its board of directors (the “Director”). The exercise price represented 50% of the fair market value of the common stock
at the time the Director joined the board in November 1999. The practice of the company is to issue stock options to outside directors upon their appointment to the board. However, in this case, the stock option grant to the Director was delayed until February
2000, when the company filed its registration statement with the Securities and Exchange Commission for its initial public offering (“IPO”). With the IPO underway, the exercise price of the stock option was reset to $12.50 per share. Because the stock option
had an exercise price in excess of the price promised when the Director joined the board, the company agreed to extend a forgivable loan (the “Loan”) to him in an amount equal to the difference to honor its prior commitment. The Loan stipulated that if the
Director served three years as a director of the company, the Loan would be forgiven in full. The maximum value of the Loan was $150,000. In November 2002, the company entered into a written agreement with the Director, whereby the Loan was terminated, and
the Director received a lump sum cash payment of $150,000 from the company (the “Cash Payment”). The company stated that the Cash Payment was an ancillary component of the stock option granted to the Director in connection for his services as a director and
was properly characterized as compensation for board services. The company believed that the Cash Payment satisfied the company’s commitment to grant the Director a stock option at the previously agreed per share exercise price and ensured that he would receive
the full economic benefit of that commitment.
Issue: Based on these facts, is the Director precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B)?
Determination: No. Based on the facts presented, NASDAQ determined that the Director is not precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), because of the company’s representation that the Cash Payment was
for board services only. Notwithstanding this determination, NASDAQ noted that, pursuant to IM-4200, a company’s board has the responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individual
serving as an independent director.
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Publication Date*:
7/31/2012
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Identification Number:
941
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