Proposed amendments to NYSE corporate governance rules

News Brief

By Cydney Posner

The NYSE has filed a proposal with the SEC, not yet posted on the SEC website, to amend Section 303A of the NYSE Manual to clarify some of its corporate governance disclosure requirements. The proposal would codify certain current interpretations and, to eliminate some overlap and redundancies, would replace some of the NYSE disclosure requirements by incorporating into the NYSE rules the comparable disclosure requirements of Reg S-K. If approved, the proposed changes would not take effect until January 1, 2010.

More specifically, Item 407 of Reg S-K, which consolidated director independence and related corporate governance disclosure requirements under a single item, duplicates some of the NYSE's Section 303A corporate governance and, in some instances, requires even more detailed disclosure than the current NYSE rules. There has apparently been some confusion among practitioners about whether satisfaction of Item 407 will satisfy the corresponding NYSE requirement and, as a result, to avoid duplication and confusion and to otherwise facilitate compliance, the NYSE is proposing to eliminate each disclosure requirement currently included in Section 303A that is also required by Item 407 and to incorporate directly into Section 303A the applicable disclosure requirement of Item 407. The purpose of the incorporation of Item 407 is that companies with deficient Item 407 disclosure will then be deemed to be out of compliance with NYSE rules and subject to action by the NYSE.

The following are the disclosure items that would be eliminated and the provisions of Item 407 that would be added:

  • Section 303A.00 controlled company exemption disclosure requirement would be replaced by a requirement that a controlled company that chooses to take advantage of the controlled company exemptions comply with the disclosure requirements in Instruction 1 to Item 407(a).
  • Section 303A.02(a) independent director disclosure requirement would be replaced by a requirement that the listed company comply with the disclosure requirements in Item 407(a).
  • Section 303A.05(b)(i)(C) compensation committee charter requirement to produce a compensation committee report would be replaced by a requirement to provide the disclosure required by Item 407(e)(5).
  • Section 303A.07(c)(i)(B) audit committee charter requirement to prepare an audit committee report would be replaced by a requirement to provide the disclosure required by Item 407(d)(3)(i).

The NYSE is also proposing to move the website posting requirements related to audit, compensation and nominating committee charters, corporate governance guidelines and codes of business conduct and ethics to a new Website Posting Requirement section in each of the applicable subsections of Section 303A. To conform the NYSE's disclosure requirements with respect to posting of committee charters to the disclosure required by Instruction 2 to Item 407, the NYSE is proposing to change the disclosure regarding website postings to require a listed company to disclose in its annual proxy statement or Form 10-K that the applicable charters, guidelines and codes are available on the company's website, providing that website address. The requirement in Sections 303A.09 and 303A.10 that the listed company disclose that hard copies of the charters, guidelines and code are available in print upon request would be eliminated.

Section 303A currently requires listed companies to make certain disclosures in the company's annual proxy statement, or, if the company does not file an annual proxy statement, in the company's annual report filed with the SEC. The NYSE is proposing to allow companies the additional option of making the disclosures on the company's website, in which case, the company would be required to disclose that fact in its annual proxy statement or annual report, as applicable, and provide the website address. More specifically, the affected disclosure requirements are as follows:

  • Section 303A.02(b)(v) disclosure with respect to contributions made by the listed company to any tax-exempt organization in which any independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year from the listed company to the organization exceeded the greater of $1 million, or 2% of such tax exempt organization's consolidated gross revenues.
  • Section 303A.03 disclosure with respect to the identity of the director chosen to preside at executive sessions of non-management or independent directors or, if the same individual is not the presiding director at every meeting, the procedure by which a presiding director is selected for each executive session.
  • Section 303A.03 disclosure of a method for interested parties to communicate directly with the presiding director or the non-management or independent directors as a group.
  • Section 303A.07(a) disclosure with respect to the board's determination that the service of any audit committee member on more than three public company audit committees does not impair the ability of that audit committee member to serve effectively on the listed company's audit committee.

Disclosure in the proxy or annual report may be incorporated by reference from another document that is filed with the SEC to the extent permitted by applicable

SEC rules. Special rules apply to companies not required to file Forms 10-K.

Section 303A.00 - Introduction

Currently, companies listing in conjunction with an IPO are required to have at least one independent director on each committee as of the date of listing. However, current practice is that a company does not normally appoint independent directors to its board in advance of listing. As a result, the NYSE is proposing to amend the introduction to Section 303A to specify that companies listing in conjunction with an IPO, spin-off or carve-out must be in compliance as of the listing date (i.e., the date the company's securities first trade on the NYSE) with the applicable provisions of the SEC's audit committee requirements set forth in Rule 10A-3 (which is incorporated into the NYSE's corporate governance rules as Section 303A.06) and would also be required to have a majority of independent members on its audit committee within 90 days of the effective date of its registration statement and a fully independent committee within one year of the effective date of its registration statement.

Although companies are not required to have a fully independent audit committee until a one year after listing, they are currently required to have a three-person audit committee and thus may be forced to appoint non-independent directors to the audit committee. The introduction is proposed to be modified to clarify that companies listing in conjunction with an IPO, spin-off or carve-out may also phase in compliance with the three-person minimum on the following schedule: at least one member by the listing date, at least two members within 90 days of the listing date and at least three members within one year of the listing date. Alternatively, the company may choose to have non-independent directors on the audit committee, subject to the independent director phase-in requirements. For purposes of SEC Rule 10A-3, a company is considered to be listing in conjunction with an IPO only to the extent that, immediately prior to the effective date of the registration statement relating to the IPO, the company is not "required to file" periodic reports under the Exchange Act. The SEC has advised that a voluntarily filer may take advantage of the IPO transition rule. The NYSE proposes to clarify that a company that was required to file periodic reports prior to listing is precluded from including non-independent

directors on its audit committee during the phase-in period.

Proposed additional clarifications related to IPO listing include the requirements that the company:

  • satisfy the majority independent board requirement of Section 303A.0 1, if applicable, within one year of the listing date;
  • satisfy the website posting requirements of Sections 303A.04, 303A.05, 303A.07(b), 303A.09 and 303A.10, to the extent those sections are applicable, by the earlier of the date the IPO closes or five business days from the listing date; and
  • have at least one independent member on its nominating committee and at least one independent member on its compensation committee as required by Sections 303A.04 and 303A.05, if applicable, by the earlier of the date the IPO closes or five business days from the listing date, at least a majority of independent members on each committee within 90 days of the listing date and fully independent committees within one year of the listing date.

The proposed amendments related to companies listing in conjunction with a carve-out or spin-off transaction are slightly different. In addition, the NYSE proposes to include sections detailing the compliance requirements applicable to a company that:

  • lists upon emergence from bankruptcy (which will have the same phase-in schedule as IPOs, except with regard to the audit committee, running from the listing date);
  • transfers from another market;
  • ceases to be a controlled company (which will have the same phase-in schedule as IPOs, except with regard to the audit committee, running from the date of the status change); or
  • ceases to be a foreign private issuer.

As proposed, companies registered under Section 12(b) that are listing upon transfer from another market would have one year from the date of transfer in which to comply with any requirement to the extent the market on which they were listed did not have the same requirement. However, companies registered pursuant to Section 12(g) that transfer to the NYSE would be treated like companies listing in connection with an IPO, with the applicable compliance dates running from the listing date. In addition, only independent directors would be permitted on the audit committee during the transition period.

Currently, a "controlled company" is defined as a listed company of which more than 50% of the voting power is held by an individual, group or another company. The proposal would make clear that "voting power" relates to the election of directors. The proposal also details when a company that ceases to be a foreign private issuer (so that it is required to file on domestic forms with the SEC) must be in compliance with the various domestic company requirements of Section 303A.

The proposal would clarify that companies are no longer required to physically distribute annual reports, but instead are required to post their annual reports filed with the SEC on their websites.

Section 303A.02 - Independence Requirements

The NYSE is proposing to revise the General Commentary to Section 303A.02(b ) to clarify that references to a listed company or any other company relevant to the

independence standards of Section 303A.02(b) include any parent or subsidiary in a consolidated group with that company.

Section 303A.03 - Requirement for meetings of non-management directors

The NYSE is proposing to modify the requirement that listed companies hold regular meetings of non-management directors to allow companies to instead hold regular executive sessions of just independent directors. The proposal would also clarify that all interested parties, not just shareholders, must be able to communicate their concerns regarding the listed company to the presiding director, or the non-management or independent directors as a group.

Section 303A.05 - Requirements for Compensation Committees

The NYSE proposes to update the current requirement for the compensation committee to produce a report to reflect the disclosure required by Item 407(e)(5)

of Reg S-K regarding compensation of executive officers.

Section 303A.06 - Requirements for Audit Committees

The proposal would revise the Commentary to Section 303A.06 to highlight that Rule 10A-3 requires disclosure, where applicable, of reliance on certain exceptions contained in that rule.

Section 303A.07 - Duties of the Audit Committee

The NYSE is proposing to combine the requirements in Sections 303A.07(a) and (b) regarding the minimum number of audit committee members (three) and satisfaction of the independence standards for audit committee members. In addition, Section 303A.07(a) currently requires that, if an audit committee

member simultaneously serves on the audit committees of more than three public companies and the listed company does not limit the number of audit committees on which its audit committee members serve to three or fewer, then, in each case, the board must determine that the simultaneous service would not impair the ability

of the member to serve effectively on the audit committee and must disclose that determination. Apparently, there has been some confusion that disclosure is required only where the company does not limit the number of audit committees to three or fewer. As a result, the proposal would make clear that the disclosure is required to the extent that an audit committee member simultaneously serves on the audit committees of more than three public companies.

The NYSE also intends to clarify that telephonic conference calls constitute meetings for purposes of Section 303A.07, if allowed by applicable corporate law, but that polling directors is not allowed in lieu of a meeting. The current requirement for the audit committee to produce a report is proposed to be updated to reflect the disclosure required by Reg S-K Item 407(d)(3)(i).

Section 303A.08 - Shareholder Approval of Equity Compensation Plans

To the extent that a listed foreign private issuer ceases to qualify as such under SEC rules (so that it is required to file on domestic forms with the SEC) and therefore becomes subject to Section 303A.08 for the first time, the company will be granted a limited transition period with respect to discretionary plans and formula plans that do not comply with Section 303A.08 that were in place prior to the date that its status changed so that additional grants may be made after the date that its status changed without shareholder approval.

Section 303A.10 - Code of Business Conduct and Ethics

Section 303A.10 requires that listed companies disclose any waiver of the code of business conduct and ethics granted to executive officers and directors. The NYSE

proposes to specify that the waiver must be disclosed to shareholders within four business days of the determination (instead of the currently required two to three business days) and that disclosure be made by distributing a press release, providing website disclosure or by filing a Form 8-K with the SEC.

Section 303A.11 - Foreign Private Issuer Disclosure

The NYSE is proposing changes to the location of the disclosure for foreign private issuers regarding the significant differences between the corporate governance practices followed by the company in its home country and the requirements of Section 303A applicable to U.S. companies.

Section 303A.12 - Certification Requirements

The NYSE is proposing to eliminate the current requirement under Section 303A.12(a) that listed companies disclose in the annual report the filing in the prior year of the CEO certification required by the NYSE and any certifications required by the SEC. It's apparently too confusing and of marginal benefit in light of recent SEC and NYSE changes. The NYSE is also proposing to revise Section 303A.12(b) to specify that listed companies must notify the NYSE in writing after any executive officer of the listed company becomes aware of any non-compliance with Section 303A, as opposed to requiring notification in the event of "material non-compliance" as

provided by the current rule.

Section 303A.14 - Website requirement

The requirement in Section 303A.14 that each listed company maintain a publicly accessible website is proposed to be relocated to Section 307.00. The NYSE is also proposing to amend the commentary to clarify that this requirement applies to companies subject to website posting requirements under any applicable provision of the Listed Company Manual, rather than just Section 303A. Section 307 will specify that companies' websites must be accessible from the United States and must clearly indicate in English the location on the website of the documents that are required to be posted (which documents must be printable in the English language).

Section 307.00

Section 307.00, which provides guidance regarding related party transactions, is redundant with Section 314 and is therefore proposed to be eliminated.

Related Contacts
Cydney Posner Special Counsel, San Francisco
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