This is in response to your correspondence regarding the rights that certain shareholders would have to nominate members of the board of directors (the “Nomination Rights”) following the company’s acquisition of the Target (the “Acquisition”). Your questions
relate to the applicability of the voting rights requirements of
Listing Rule 5640 (the “Voting Rights Requirements”) and the director nomination requirements of
Listing Rule 5605(e) and
IM-5605-7 (collectively, the “Nominations Rule”).
According to the information you provided, in connection with the Acquisition the company would enter into an agreement with the shareholders of the Target (the “Target Holders”) and certain of the company’s existing shareholders (the “Company Holders”)
setting forth the Nomination Rights. As part of the Acquisition consideration, the Target Holders would receive securities (the “Exchangeable Securities”), which would become exchangeable at the Target Holders’ option, generally one year after issuance, either
for shares of the company’s common stock or preferred stock which would be immediately convertible into common stock (the “Preferred Stock”).
Pursuant to the Nomination Rights, once the Exchangeable Securities become exchangeable, the Target Holders would have the right to nominate members of the board such that the percentage of the company’s board members that they could nominate would approximately
equal their percentage equity ownership interest in the company (the “Ownership Percentage”) and would decline pro ratably with a decline in their Ownership Percentage. The Ownership Percentage would be determined by dividing: (i) the sum of the number of
shares of common stock held by the Target Holders and any shares of common stock issuable to them upon exchange of the Exchangeable Securities and Preferred Stock that are then exchangeable at the Target Holders’ option, by (ii) the sum of the total number
of shares of common stock outstanding and the number of shares of common stock issuable upon exchange of the Exchangeable Securities and Preferred Stock that are then exchangeable at the Target Holders’ option. The maximum number of directors the Target Holders
could nominate would equal the product of: (i) the Ownership Percentage, and (ii) the total number of directors on the company’s board, provided that if such product is not a whole number, it would be rounded up to the next whole number unless such rounding
would result in the right to nominate a majority of the board, in which case it would be rounded down to the next whole number.
In addition, the Nomination Rights would entitle the Company Holders, who would own approximately 15% of the company’s outstanding equity securities following the Acquisition, to nominate one board member for so long as they held more than 5% of the company’s
outstanding common stock.
Following our review of the information you provided, and in response to your request, we have concluded that in determining compliance with the Voting Rights Requirements, the Exchangeable Securities may be used in calculating the Ownership Percentage
as described above to the extent that they are currently exchangeable at the Target Holders’ option for shares of the company’s common stock or Preferred Stock, which is immediately convertible into common stock. In addition, we have concluded that the Nomination
Rights proposed for the Company Holders for so long as they hold more than 5% of the company's outstanding shares is consistent with Listing Rule 5605(e), which states that independent director oversight of director nominations shall not apply in a case where
the right to nominate a director legally belongs to a third party. Please be advised that notwithstanding this conclusion, the company remains subject to Listing Rule 5605, including those provisions relating to board committee composition and the requirement
to have a majority of independent directors on the board.