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  Staff Interpretation Letter 2004-68
Identification Number 948
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:  It is important for investors to have confidence that individuals serving as independent directors do not have a relationship with the listed company that would impair their independence.  The board has a responsibility to make an affirmative determination that no such relationships exist through the application of Listing Rule 4200.
Relevant Facts:  A company proposes to add a new director (the “Nominee”) to its board of directors and its Audit Committee.  The Nominee presently serves on the company’s Scientific Advisory Board (“SAB”).  In that capacity, the Nominee provides consulting services to the company and receives payments of $2,000 per quarter for this service.  In addition, the company has granted the Nominee options to purchase 50,000 shares of its common stock, with the exercise price set at market value on the date of the grant.  Using the Black-Scholes method, the aggregate value of the options on the grant dates was $25,000.  After his appointment to the Board and the Audit Committee, the Nominee would remain on the SAB but would no longer be paid any compensation for his service on the SAB or as a consultant.  In addition, he would forfeit his right to all unvested options granted in connection with his SAB or consultancy services (the “Forfeiture”).  Because the company is “modifying” the option, the Forfeiture would require the company to take a non-cash accounting charge (the “Charge”).  The Nominee is not, and has not been, an employee of the company.
Issue:  How does NASDAQ value options that vest over time for purposes of calculating the $60,000 payment threshold under Listing Rule 4200(a)(15)(B)?
Determination:  For purposes of the Rule, the payment is deemed to have been made as of the date of grant as calculated according to a generally accepted pricing model.
Issue:  Would NASDAQ view the Charge, either at the time of the amendment or spread over the option vesting period, as a payment to the director, such that it would need to be considered in calculating whether the Nominee satisfies the $60,000 payment threshold under Listing Rule 4200(a)(15)(B)?
Determination:  The Charge will not be considered when calculating whether the $60,000 payment is reached because it will not result in a payment to the Nominee.
Issue:  Based on these facts, is the Nominee precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B)?
Determination:  No.  Based on the information provided, NASDAQ determined that the company’s Board is not precluded from finding that the Nominee is independent under Listing Rule 4200(a)(15)(B).  Notwithstanding these determinations, the company’s board has a responsibility, pursuant to IM-4200, to make an affirmative determination that no relationship exists (including those described) that would impair the independence of the Nominee.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 948
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