BUSINESS DEPARTMENT E-NEWS ALERT — NOVEMBER 22, 2002 New NYSE and NASD Rules Regarding Standards for Listed Companies On November 4, 2003, the Securities and Exchange Commission (“Commission”) approved new rules proposed by the New York Stock Exchange, Inc. (the “NYSE”) and the The Nasdaq Stock Market, Inc. (“Nasdaq”) intended to strengthen the corporate governance standards and ensure director independence for listed companies. These new corporate governance listing standards supplement the corporate governance reforms already adopted by the Commission pursuant to the Sarbanes-Oxley Act of 2002. Originally filed in 2002, these proposed reforms were in response to a request from the Commission that the exchanges review the listing standards, focusing specifically on corporate governance standards. The NYSE and the National Association of Securities Dealers, through its subsidiary, Nasdaq, filed amendments to their proposed standards in response to the Commission’s adoption of Rule 10A-3 pursuant to the Sarbanes-Oxley Act of 2002 and to harmonize the proposed NYSE and Nasdaq listing rules. 1 The NYSE rules are codified in Section 303A of the NYSE’s Listed Company Manual. The Nasdaq rules amend Nasdaq Marketplace Rules 4200 and 4350. COMPLIANCE DATES Companies currently listed on the NYSE or Nasdaq exchanges are required to comply with the new rules upon the earlier of the first annual meeting after January 15, 2004 or October 31, 2004. Classified or “staggered” boards may have additional time to comply. If it would be necessary to change a classified board member who is not scheduled for election at the first annual meeting, then that election can be postponed until the second annual meeting, but in no event later than December 31, 2005. The exception for classified boards does not apply to the adopted audit committee requirements. Private foreign issuers and Nasdaq small business issuers must comply with any audit committee requirements (as set forth in Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by July 31, 2005. Companies listing on the NYSE or Nasdaq exchanges in conjunction with their initial public offering are required to have committees with at least one independent member at the time of listing, a majority of independent members within 90 days of listing and a fully independent audit, compensation and nominating committees within one year of listing. Additionally, newly listed companies must have a board made up of a majority of independent directors within one year of listing. Companies listing on the NYSE or Nasdaq upon transfer from another exchange are required to comply with the listing rules within one year of the date of transfer for requirements not imposed by the previous exchange. A transferring company will be deemed in compliance if it adopts the new standards within any transition or grace period provided by the rules of the other market. Additionally, Nasdaq provides for cure periods for non-compliance with its rules regarding independent directors and audit committees when a member ceases to be independent for reasons reasonably out of the member’s control or due to one vacancy in the committee. In such circumstances, the listing company has until the earlier of the next annual shareholders meeting or one year from the date of non-compliance to be in compliance. The 1 On October 27, 2003 the American Stock Exchange filed proposed amended rules for enhanced corporate governance with the Commissions (SR-Amex-2003-65). These rules have not yet been approved.
listing company must provide Nasdaq with immediate notification of non-compliance. Finally, Nasdaq allows for limited appointments of non-independent directors to the compensation, nomination and audit committees and under exceptional and limited circumstances. EXEMPT ORGANIZATIONS The new rules generally apply to all domestic corporations listed on either the NYSE or Nasdaq. Foreign Private Issuers The NYSE allows foreign private issuers to follow home country practices except for audit committee requirements in lieu of the new requirements except that they are required to have an audit committee that satisfies the requirements of Rule 10A-3 of the Exchange Act, notify the NYSE in writing after any executive officer becomes aware of any non-compliance with any applicable provision of the new rules, and to provide a summary of the significant ways in which its governance differs from those followed by domestic companies under the NYSE listing standards (either on their website or in their annual report). Nasdaq may grant exemptions to foreign private issuers for acts that are contrary to the laws, rules or regulations of their home country or are contrary to the generally accepted business practices of their home country. However, Nasdaq will not grant exemptions to foreign private issuers that are contrary to U.S. federal securities laws, including the recently adopted Rule 10A-3. Controlled Companies Companies of which more than 50% of the voting power is held by an individual, group or other company (“Controlled Companies”) are exempt from the NYSE and Nasdaq’s rules regarding independent directors, corporate governance and compensation committees. A Controlled Company seeking to take advantage of such exemptions must disclose that choice in their annual proxy statement (or if not filed with the Commission, in its Form 10-K). Limited Partnerships and Bankrupt Companies The NYSE exempts limited partnerships and companies in bankruptcy proceedings from the rules regarding independent directors, corporate governance and compensation committees. Registered Management Investment Companies Because of the pervasive federal regulations applicable to registered management investment companies, the NYSE and Nasdaq exempt these companies, with a few exceptions. The NYSE requires registered closed-end management investment companies to have an audit committee composed of a minimum of three persons, to comply with listing company audit committee provisions (except for the disclosure of simultaneous service on multiple committees) and to comply with listing company certification and notification procedures. Nasdaq exempts management investment companies (including business development companies) from the requirements regarding board and key committee independence and codes of conduct. Passive Business and Other Organizations The NYSE and Nasdaq generally exempt passive business organizations, except to the extent that Rule 10A-3 applies. The NYSE also generally exempts derivatives and special purpose securities and companies listing only preferred or debt securities. Finally, Nasdaq generally exempts cooperative entities that do not have a publicly traded class of common stock. The final rules regarding corporate governance listing standards are as follows:
Requirement NYSE Nasdaq Director Independence • The Board of Directors of a NYSE listed company is • The Board of Directors of a Nasdaq listed company is required to consist of a majority of independent 2 directors required to consist of a majority of independent 3 directors • The listed company is required to disclose the basis for • The listed company is required to disclose those determination of director independence in its annual proxy directors that it has determined to be independent in its statement (or if it does not file a proxy, in its Form 10-K annual proxy statement (or if it does not file a proxy, in its annual report) Form 10-K or 20-F) Stricter Definition of The following persons are not deemed to be independent: The following persons are not deemed to be independent: 5 Independence 4 • employees or immediate family members of executive • employees or family members of an executive officer (of officers of the listed company the listed company or a subsidiary or parent of the listed company) • persons or their immediate family members who receive more than $100,000 per year in direct compensation from • persons or family members of persons who receive more the listed company than $60,000 per year in direct payments from the issuer (or a subsidiary or parent company of the listed company) • persons or their immediate family members affiliated other than certain permitted payments with or employed in a professional capacity by a present or former internal or external auditor of the listed company • partners or family members of partners of external auditors or persons or family members of persons • persons or their immediate family members who are employed by the listed company’s external auditors who employed by another company where any of the worked on the listed company’s audit 2 Independent directors are those that have no material relationship with the company, either directly with the company, or as a partner, shareholder or officer of an organization that has a relationship with the company. 3 Independent directors are those that are not employees of the company or its subsidiaries and have no relationship with the company that would interfere with the exercise of independent judgment. 4 Independence can be obtained if the prohibited relationship has been terminated for more than three years. For the NYSE, this look-back is to be phased in one year after the Commission approves the proposed rule change. 5 In the case of an investment company, a director is not independent if he or she is an “interested person” of the listed company (as defined in Section 2(a)(19) of the Investment Company Act of 1940) other than in his or her capacity as a member of the board of directors or one of its committees 3
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