Nasdaq Compensation Committee Independence Requirements
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- Richard Lewis
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1 Nasdaq Compensation Committee Independence Requirements SEC Publishes Nasdaq Rule Change Removing Prohibition on Receipt of Compensatory Fees by Compensation Committee Members; Change Aligns Nasdaq Rule with NYSE Rule SUMMARY Yesterday, the Securities and Exchange Commission published immediately effective changes to the NASDAQ Stock Market Listing Rules that remove the prohibition on a compensation committee member s receipt of compensatory fees. Instead, consistent with the New York Stock Exchange compensation committee independence requirements, the board of directors will need to consider the receipt of such fees, along with other relevant factors, when considering a director s independence for purposes of compensation committee membership. Compensation committee members will remain subject to the broader independent director requirements, which, among other things, generally prohibit the receipt of compensation from the company in excess of $120,000 during any 12-month period within the prior three years. The rule changes took effect immediately; however, the SEC has solicited comments on the changes due 21 days after publication in the Federal Register. Issuers must comply with the new Nasdaq compensation committee rules by the earlier of the Company s first annual meeting after January 15, 2014, or October 31, 2014, subject to existing transition periods applicable in the case of initial public offerings, companies listing in connection with a spin-off or carve-out, companies emerging from bankruptcy, and companies that cease to qualify as controlled companies or foreign private issuers. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney
2 CHANGES TO NASDAQ LISTING RULES In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Action of 2010 ( Dodd- Frank ) and Rule 10C-1 under the Securities Exchange Act of 1934, the Nasdaq Listing Rules relating to compensation committee membership were amended in January Among other things, the previous rules prohibited a compensation committee member from directly or indirectly receiving any consulting, advisory or other compensatory fees from the listed company or any of its subsidiaries. 2 According to Nasdaq, subsequent feedback from Nasdaq-listed companies and others indicated that this flat prohibition, which is more stringent than the requirements set forth in Dodd-Frank, Rule 10C-1 or comparable rules adopted by other exchanges, 3 imposed additional burdens on a company s ability to recruit eligible directors. Nasdaq s current rule changes conform the Nasdaq rules regarding compensatory fees to those in the NYSE Listed Company Manual. 4 The current rule changes amend Nasdaq Listing Rule 5605(d)(2)(A) and the related commentary to replace the prohibition on the receipt of consulting, advisory or other compensatory fees with a requirement that the company s board of directors consider the receipt of any such fees when determining the independence of a director who will serve on the compensation committee. Specifically, the board will be required to consider all factors specifically relevant to determining whether a director has a relationship to the company that is material to the director s ability to be independent from management when performing compensation committee duties. The rule change adds as a relevant factor whether any compensation or fees paid to the director would impair the director s ability to make independent judgments about the company s executive compensation. Although the absolute prohibition on the receipt of compensatory fees will no longer apply, compensation committee members will still need to meet the requirements of an Independent Director under the Nasdaq rules, 5 which, among other things, prohibit a member from receiving compensation from the company in excess of $120,000 during any 12-month period within the prior three years, excluding compensation for board or board committee service. 6 In addition, the rule changes remove the exception in Nasdaq Listing Rule 5605(d)(2)(A) that provides that compensatory fees do not include fees received as a member of the board or a board committee or fixed amounts of compensation under a retirement plan for prior service with the company. This will require the board to consider all sources of compensation to the director when subjectively assessing the director s independence for purposes of compensation committee service. The Nasdaq rule changes also provide guidance on the application of the second specified subjective factor that the board must consider in assessing a compensation committee member s independence the director s relationships with the company, its subsidiaries or its affiliates. In particular, consistent with the NYSE rules, the board should consider whether any affiliate relationship places the director under the direct or indirect control of, or creates a relationship with, the company or its senior management that
3 would impair the director s ability to make independent judgments about executive compensation. Nasdaq reiterated its view that ownership of a company s stock by itself does not preclude the board from finding that a director is independent for purposes of serving on the compensation committee. * * * ENDNOTES For a detailed discussion of the NYSE and Nasdaq rules on compensation committees and compensation advisors, see the Sullivan & Cromwell LLP publication entitled Final Stock Exchange Rules for Compensation Committees and Advisers dated January 25, Prior Nasdaq Listing Rule 5605(d)(2)(A). See, e.g., Section 303A.02(a)(ii) of the NYSE Listed Company Manual. See Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend the Listing Rules on Independence of Compensation Committee Members, Rel. No (Dec. 11, 2013), available at See Nasdaq Listing Rule 5605(d)(2)(A). See Nasdaq Listing Rule 5605(a)(2)(D). Copyright Sullivan & Cromwell LLP
4 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. -4- Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Stefanie S. Trilling ( ; trillings@sullcrom.com) in our New York office. CONTACTS New York Robert Buckholz buckholzr@sullcrom.com Catherine M. Clarkin clarkinc@sullcrom.com Jay Clayton claytonwj@sullcrom.com Audra D. Cohen cohena@sullcrom.com H. Rodgin Cohen cohenhr@sullcrom.com Donald R. Crawshaw crawshawd@sullcrom.com Robert W. Downes downesr@sullcrom.com Matthew M. Friestedt friestedtm@sullcrom.com Joseph B. Frumkin frumkinj@sullcrom.com David B. Harms harmsd@sullcrom.com Alexandra D. Korry korrya@sullcrom.com Stephen M. Kotran kotrans@sullcrom.com John P. Mead meadj@sullcrom.com Scott D. Miller millersc@sullcrom.com James C. Morphy morphyj@sullcrom.com Robert W. Reeder III reederr@sullcrom.com Glen T. Schleyer schleyerg@sullcrom.com Marc Trevino trevinom@sullcrom.com Washington, D.C. Rebecca S. Coccaro coccaror@sullcrom.com Janet T. Geldzahler geldzahlerj@sullcrom.com
5 Eric J. Kadel Jr Robert S. Risoleo Los Angeles Patrick S. Brown Eric M. Krautheimer Alison S. Ressler Palo Alto Sarah P. Payne John L. Savva London Nikolaos G. Andronikos Kathryn A. Campbell Richard C. Morrissey John O'Connor David Rockwell George H. White III Paris William D. Torchiana Frankfurt Krystian Czerniecki Melbourne Robert Chu Sydney Waldo D. Jones Jr Tokyo Izumi Akai Keiji Hatano Hong Kong William Y. Chua Michael G. DeSombre Chun Wei John D. Young Jr Beijing Garth W. Bray SC1: v1A
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