This is in response to your letter wherein you asked whether Mr. X is eligible to be an independent director pursuant to the provisions of Marketplace Listing Rule 4200(a)(15). Specifically, your question relates to Rules 4200(a)(15)(B) and 4200(a)(15)(D)
(the “Rules”). Mr. X is the sole owner and president of Consulting Firm, which has nine employees that specializes in receivership services, bankruptcy consulting, and business valuations.
According to the information you provided, in December 2004, the company acquired Target and its three subsidiaries, including the Subsidiary Bank, which became subsidiaries of the company as a result of the acquisition.
You stated that effective on Date 1, a State district court appointed the Consulting Firm as the receiver of various assets of two debtor parties and that in furtherance of that appointment, the Consulting Firm was ordered to take charge of, manage, and
operate the business of one of the debtor parties. The Subsidiary Bank held deed of trust and security interest in certain of the receivership properties.
You further stated that in its “Order Appointing Receiver”, the court authorized the Consulting Firm to issue “receiver’s certificates” to preserve and maintain one of the debtor’s businesses in exchange for funds advanced by third parties or the Subsidiary
Bank during the term of the receivership. The certificates are a lien and security interest superior to all liens.
In addition, you stated that the Subsidiary Bank advanced funds to the Consulting Firm, as receiver, in 2003, 2004, and through June 30, 2005. The Subsidiary Bank expects that any additional advances it makes to the Consulting Firm will be immaterial
in amount. You stated that the value of the assets in the receivership estate substantially exceeds the aggregate amount of the funds advanced, and that because the advances are represented by receiver’s certificates, the Subsidiary Bank expects to recover
all the funds it advanced to the Consulting Firm.
Following our review of the information you provided, we have determined that Mr. X is not eligible to be an independent director under the Rules. The three-year “look-back” period of the Rules applies without regard to whether a subsidiary, which entered
into the relationship giving rise to the payments, was a subsidiary at the time of the entering into of the relationship. Moreover, rather than having ceased by the time of the acquisition of the Subsidiary Bank by the company, the relationship between the
Subsidiary Bank and the Consulting Firm is ongoing and additional payments were made following the acquisition. Accordingly, Mr. X does not meet the requirements of either 4200(a)(15)(B) or 4200(a)(15)(D). Rule 4200(a)(15)(B) applies because Mr. X is the
sole owner of the entity that received the payments, and such payments exceeded the $60,000 threshold. Because the payments exceeded the greater of 5% of the Consulting Firm’s revenues or $200,000, during at least one of the past three years, Mr. X is also
not eligible under Listing Rule 4200(a)(15)(D). Even though, the Subsidiary Bank expects to recover the advances, the Rules are nonetheless applicable because the payments were, in fact, made to the Consulting Firm.