ARNOLD & PORTER UPDATE

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1 ARNOLD & PORTER UPDATE NASDAQ Revised Corporate Governance Standards November 2003 On November 4, 2003, the Securities and Exchange Commission (SEC) approved the revised listing standards proposed by the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq), including both the Nasdaq National Market and the Nasdaq SmallCap Market. Companies listed on the NYSE or on Nasdaq will need to comply with the revised corporate governance standards generally beginning with their 2004 annual stockholders meeting. We expect that most companies will make any necessary changes to their boards committee structures at the organizational meetings held in connection with the annual stockholders meetings. The revised rules mandate broad changes in the structure and operation of a company s board of directors and mandate various other corporate governance changes as well. Below is a summary of the provisions of the new standards. NYSE Board Composition: The board of directors must be composed of a majority of independent directors. Definition of Independent Director: The definition of independent director has been tightened, including the identification of specific relationships that will disqualify a director from being considered independent. Affirmative Determination and Disclosure: The board of directors must make an affirmative determination that a director designated as independent has no material relationship with the company. Companies must disclose these determinations in their proxy statement. We understand that the NYSE will soon be sending out an to listed companies clarifying that these disclosure requirements will not be applicable until the proxy statement for the 2005 annual stockholders meeting. Executive Sessions: Nonmanagement directors must meet at regularly scheduled executive sessions without management. Companies must also disclose the name of the director chosen to preside at such sessions or the method by which a director is selected to preside at each meeting, as well as a method for interested parties to communicate directly with the presiding WASHINGTON 555 Twelfth Street, NW Washington, DC Fax NEW YORK 399 Park Avenue New York, NY Fax LONDON Tower Old Broad Street London EC2N 1HQ UNITED KINGDOM +44 (0) (0) Fax BRUSSELS 11, Rue des Colonies - Koloniënstraat 11 B-1000 Brussels BELGIUM +32 (0) (0) Fax LOS ANGELES 44th Floor 777 South Figueroa Street Los Angeles, CA Fax CENTURY CITY 17th Floor 1900 Avenue of the Stars Los Angeles, CA Fax NORTHERN VIRGINIA Suite Tysons Boulevard McLean, VA Fax DENVER Suite Seventeenth Street Denver, CO Fax arnoldporter.com

2 director of such executive sessions or with the nonmanagement directors as a group. The NYSE recommends, but does not require, that, if any nonmanagement directors are not independent, the independent directors meet in executive session at least once each year. Independent Nominating/Corporate Governance Committee: The nominating/corporate governance committee must be composed entirely of independent directors and have a charter setting forth the committee s duties and responsibilities as outlined in the rule. The committee must be responsible for identifying individuals qualified to become directors and select or recommend to the board director nominees. Independent Compensation Committee: The compensation committee must be composed entirely of independent directors and have a charter setting forth the committee s duties and responsibilities as outlined in the rule. The committee must (i) review and approve goals and objectives related to CEO compensation, (ii) evaluate CEO performance and either as a committee or together with the other independent directors determine and approve the CEO s compensation level based on the committee s evaluation of the CEO s performance, and (iii) make recommendations to the full board of directors with respect to non-ceo compensation, incentive-compensation plans, and equity based plans. Independent Audit Committee: The audit committee must be composed of at least three directors, each of whom (i) is independent under the general standard, (ii) does not receive any compensation (except board fees and other limited exceptions) from the company, and (iii) is not an affiliated person of the company or any subsidiary. The NYSE incorporated this requirement by reference to SEC Rule 10A-3, which provides a nonexclusive safe harbor that a person who owns 10% or less of any class of the company s voting stock will not be considered an affiliated person. The audit committee must have a charter that outlines its duties and responsibilities as set forth in the new rule, including having sole authority to retain, oversee, compensate, and terminate the independent auditors. While the NYSE, like Nasdaq, requires the charter to include the audit committee responsibilities set out in Rule 10A-3, the NYSE rule requires the charter to include additional audit committee duties and responsibilities. Internal Audit Function: Each listed company must have an internal audit function. Corporate Governance Guidelines: Listed companies must adopt and disclose corporate governance guidelines addressing director qualification standards, responsibilities, access to management and independent advisors, compensation and orientation and continuing education, management succession, and an annual performance evaluation of the board. Code of Conduct: Listed companies must adopt and disclose a code of business conduct and ethics applicable to all employees and directors of the company. Unlike the Nasdaq rule, which requires a code addressing only the topics outlined in Item 406 of SEC Regulation S-K, the NYSE imposes its own requirements. Website Disclosure: Each listed company s website must include its corporate governance guidelines, its code of business conduct and ethics, and the charters of its most important committees, and the availability of this information on the website or in print to shareholders must be referenced in the company s annual report on Form 10-K. NASDAQ Revised Corporate Governance Standards 2

3 CEO Certification: The CEO of each listed company must certify to the NYSE each year that he or she is not aware of any violation by the company of the NYSE s corporate governance standards. This certification must be disclosed in the company s annual report to shareholders. In addition, the CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material noncompliance with any applicable provisions of the new requirements. Foreign Private Issuers: Foreign private issuers may follow home country practice in lieu of the new requirements, except with respect to most audit committee requirements, but they must (1) notify the NYSE in writing after any executive officer becomes aware of any noncompliance with any applicable provision and (2) provide on their website or in their annual report to shareholders a brief, general summary of the significant ways in which its governance differs from those followed by domestic companies under NYSE listing standards. Limited Transition: NYSE-listed companies will have until the earlier of their first annual meeting after January 15, 2004, or October 31, 2004, to comply with the new standards. However, if a company with a classified board is required to change a director who would not normally stand for election in such annual meeting, the company may continue such director in office until the second annual meeting after such date, but no later than December 31, Foreign private issuers will have until July 31, 2005 to comply with any audit committee requirements required by SEC Rule 10A-3. NASDAQ Board Composition: The board of directors must be composed of a majority of independent directors. Definition of Independent Director: The definition of independent director has been tightened, including the expansion of relationships that will disqualify a director as independent. Affirmative Determination and Disclosure: The board of directors must make an affirmative determination that a director designated as independent has no relationship with the company that would impair his or her independence. Companies must name the independent directors in their proxy statement. Executive Sessions: The independent directors must meet in regularly scheduled executive sessions. Note that under the NYSE rules, all nonmanagement directors, even if not independent, must participate in executive sessions. Compensation of Officers: CEO compensation must be determined either by a compensation committee composed solely of independent directors or by a majority of the independent directors. In addition, the compensation of all other officers must be determined or recommended to the board for determination by a majority of the independent directors or a compensation committee comprised solely of independent directors. Unlike the NYSE, Nasdaq does not require a compensation committee charter. NASDAQ Revised Corporate Governance Standards 3

4 Nomination of Directors: Director nominees must be selected or recommended for the board s selection either by a nominations committee composed solely of independent directors or by a majority of the independent directors. Listed companies must certify they have adopted a formal written charter or board resolution, as applicable, addressing the nominations process and such related matters as may be required under the federal securities laws. Independent Audit Committee: The audit committee must be composed of at least three directors, each of whom (i) is independent under the general standard, (ii) does not receive any compensation (except board fees and other limited exceptions) from the company, (iii) is not an affiliated person of the company or any subsidiary, and (iv) has not participated in the preparation of the company s (or a current subsidiary s) financial statements during the past three years. Like the NYSE, Nasdaq incorporates the second of these requirements from SEC Rule 10A-3, which provides a nonexclusive safe harbor that a person who owns 10% or less of any class of the company s voting stock will not be considered an affiliated person. The audit committee must have a charter that specifies the committee s purpose in overseeing the accounting and financial reporting process and that outlines the duties and responsibilities of the audit committee as set forth in SEC Rule 10A-3. Unlike the NYSE, Nasdaq is not requiring companies to have an internal audit function. Code of Conduct: Listed companies must have a code of conduct that applies to all employees and directors and addresses the topics required by a code of ethics for senior financial officers as set forth in Item 406 of SEC Regulation S-K, including honest and ethical conduct including conflicts of interest; compliance with applicable laws, rules, and regulations; reporting of violations; and accountability, and full, fair, accurate, timely, and understandable disclosure in SEC filings and other public disclosures. Public Announcement of Audit Opinions with Going Concern Qualifications: Each listed company must publicly announce via press release the receipt of an audit opinion that contains a going concern qualification not later than seven calendar days following the filing of the audit opinion in a public filing with the SEC. Related Party Transactions: Companies must review related-party transactions (as outlined in Rule 404 of Regulation S-K) for potential conflict of interest situations, and all such transactions must be approved by the audit committee or another independent body of the board of directors. Foreign Issuers: Foreign issuers may be granted exemptions from listing standards that are contrary to a law, rule, or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer s country of domicile. A foreign issuer that receives an exemption must disclose in its annual report on Form 10-K each requirement from which it is exempted and describe the home country practice, if any, followed by the issuer, in lieu of such requirements. Limited Transition: Like NYSE-listed companies, Nasdaq companies must comply with the new standards, except as listed below, with their first annual meeting after January 15, 2004 or October 31, 2004, with companies with staggered boards having an additional year, except for audit committee standards, to comply with provisions that would require the company to replace a director not up for election in Otherwise: NASDAQ Revised Corporate Governance Standards 4

5 The rules relating to disclosure of a going concern qualification and foreign private issuer exemption disclosure are effective as of November 4, The rule regarding approval of related-party transactions is effective January 15, Companies must adopt a code of conduct by May 4, Both foreign private issuers and small business issuers will have until July 31, 2005 to comply with the standards applicable as of the 2004 annual meeting. * * * * * This memorandum is only a general summary and should not be construed as providing legal advice. If you have any questions about the revised listing standards, please feel free to call Richard E. Baltz at , Penny Somer-Greif at , or your Arnold & Porter attorney. NASDAQ Revised Corporate Governance Standards 5

ARNOLD & PORTER UPDATE

ARNOLD & PORTER UPDATE Something Old; Something New Amendments to the SEC s Auditor Independence Rules March 2003 Just two years after adopting controversial and sweeping changes to its auditor independence