NYSE Corporate Governance Standards

Transcription

1 SEC Publishes Proposed Changes to Update and Clarify NYSE Corporate Governance Standards SUMMARY The SEC has published for public comment proposed changes to the New York Stock Exchange corporate governance standards in Section 303A of the NYSE Listed Company Manual. The proposed amendments would clarify existing disclosure requirements, codify NYSE interpretations and eliminate disclosure requirements that are duplicative of similar SEC disclosure requirements. Comments are due 21 days after publication in the Federal Register. If approved, the changes would become effective on January 1, Among other things, the proposed changes would: Require Notification of Immaterial Non-Compliance with NYSE Standards. Require the listed company CEO to notify the NYSE promptly after any executive officer becomes aware of any noncompliance with the NYSE standards (not just material non-compliance). Harmonize Independence Disclosure with SEC Requirements. Replace specific disclosure requirements with a direct reference to similar disclosure requirements in Item 407 of Regulation S-K. Allow Exclusion of Non-Independent Directors from Executive Sessions. Allow companies to exclude non-independent directors from the required regular executive session of non-management directors. Permit Increased Use of Website Disclosure. Allow companies to post certain disclosures on their websites rather than include them in an annual report or proxy statement. Clarify Controlled Company Definition. Revise the definition of controlled company to make it clear that controlled company status is based on more than 50% of the voting power in director elections. Specify Disclosure Procedures for Code of Ethics Waivers. Require companies to disclose within four business days that a waiver to the code of business conduct and ethics has been granted to executive officers (the four-day requirement parallels the timing imposed by Item 5.05 of Form 8-K and would replace the current requirement that the disclosure be made promptly ). New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 BACKGROUND In 2003, the NYSE adopted enhanced corporate governance listing standards that imposed significantly greater corporate governance requirements on NYSE-listed companies. 1 In November 2005 and June 2007, the NYSE proposed additional changes to their corporate governance rules that were never published by the SEC, except for amendments to the auditor affiliation and direct compensation independence tests, which were adopted in The rules currently published for public comment 2 contain some new proposals, as well as some proposals that had been previously filed by the NYSE but were never published by the SEC. The more significant proposed revisions are described below. DISCLOSURE OF IMMATERIAL NON-COMPLIANCE WITH NYSE LISTING STANDARDS The current NYSE rules require the CEO of a listed company to notify the NYSE promptly in writing after any executive officer becomes aware of any material non-compliance with the NYSE listing standards. The proposed revisions would require prompt notification for any non-compliance, whether material or immaterial. Listed companies should assess their internal reporting procedures to ensure that, if the revisions become effective, all executive officers are instructed to report to the CEO any non-compliance, material or immaterial, with the NYSE listing standards. 3 INCORPORATION OF ITEM 407 OF REGULATION S-K The SEC adopted Item 407 of Regulation S-K in 2006 to expand corporate governance disclosure requirements and consolidate existing governance-related requirements. Item 407 contains disclosure requirements that are similar, but not identical, to the NYSE s current corporate governance disclosure requirements in Section 303A of the NYSE Listed Company Manual, including with regard to director independence. For example, Section 303A.02(a) provides that the board may adopt and disclose The current NYSE corporate governance listing standards are set out in the NYSE Listed Company Manual, which is available at These listing standards are discussed in Chapters 10, 11 and 12 of The Sarbanes-Oxley Deskbook, by John T. Bostelman of our firm ( 2009, Practising Law Institute), available through PLI s website at or by calling The rule proposal was published by the SEC on September 11, See Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 to Amend Certain Corporate Governance Requirements, Rel. No , File No. SR-NYSE (Sept. 11, 2009), available at The NYSE rule proposal, including the text of the proposed rule changes, was filed with the SEC on August 26, 2009, with Amendment No. 1 filed on September 10, The NYSE filings are available at pub19b4.nsf/rulefilings. Section 303A.12 of the current rules already provides that the CEO of a listed company must certify to the NYSE each year that he or she is not aware of any violation of the NYSE corporate governance listing standards, qualifying the certification as necessary. That requirement does not specify a materiality threshold. -2-

3 categorical standards for independence and specifically explain any determination of independence if a director does not meet these categorical standards. A similar requirement in Item 407(a) requires companies to disclose, by specific category or type, for each director and nominee for director that is identified as independent, any transaction, relationship or arrangement not otherwise disclosed pursuant to the SEC rules that were considered by the board in determining independence. According to the NYSE, this disclosure overlap has caused confusion among some listed companies who have questioned whether compliance with Item 407 would satisfy their obligations under Section 303A. If the proposed rules are adopted, the NYSE Listed Company Manual would eliminate the separate disclosure requirements relating to director independence currently found in Section 303A and instead refer directly to Item 407. Consequentially, if a company fails to comply with the specified requirements of Item 407, the company will be out of compliance with NYSE listing rules. Many NYSE-listed companies have adopted categorical independence standards to assist the board in making independence determinations and to facilitate disclosure of the basis for these determinations as required by current NYSE rules. If the proposed rule changes are adopted, a listed company might determine not to maintain and publish categorical independence standards since it would no longer be required to do so. However, besides providing the board with guidelines to assist the directors in making independence determinations, categorical standards can also facilitate compliance with the SEC s requirement to disclose, by category or type, the relationships or other arrangements considered by the board in making an independence determination. If a company maintains and discloses categorical standards and the board considers a particular arrangement that falls into one of those categories, Item 407(a)(3) permits the company to disclose the category rather than the particular arrangement itself. Other disclosure requirements of Section 303A that will be replaced with references to Item 407 include: Controlled company exemption disclosure requirement in Section 303A.00, as duplicative of Instruction 1 to Item 407(a); Compensation committee requirement to produce the compensation committee report in Section 303A.05, as duplicative of Item 407(e)(5); and Audit committee requirement to produce an audit committee report in Section 303A.07, as duplicative of Item 407(d)(3)(i). EXECUTIVE SESSIONS OF INDEPENDENT DIRECTORS The current NYSE rules provide that each listed company s non-management directors must meet regularly in executive session without management present. Non-management director includes any director who is not an executive officer of the listed company, and therefore may include directors who are not independent under the NYSE independence standards. In that case, there must be a separate session at least annually that includes only independent directors. -3-

4 The proposed revisions would permit companies to choose to hold regular sessions of independent directors instead of holding regular sessions of non-management directors in order to avoid a separate annual session. In addition, the proposed rules would clarify that listed companies must provide a process whereby all interested parties, not just shareholders, are able to communicate their concerns regarding the listed company to the non-management or independent directors as a group, or to the presiding director. WEBSITE DISCLOSURE Companies would be permitted to make certain disclosures on their website, rather than in their proxy statement or annual report as currently required. If the company chooses website disclosure, it must disclose that fact and provide the website address in its proxy statement or annual report, as applicable. The disclosure that would now be permitted to be made on a website would include: the name of the director chosen to preside at executive sessions or the method by which the presiding director is chosen; the method by which interested parties can communicate directly with the presiding director or the non-management or independent directors as a group; the amount of contributions made to tax exempt organizations for which any independent director serves as an executive officer, if the contributions exceed the NYSE-specified threshold; and the board determination that the service of an audit committee member on more than three public company audit committees does not impair the ability of the audit committee member to serve effectively on the company s audit committee. CONTROLLED COMPANY DEFINITION The proposed rule changes would clarify that controlled company status for purposes of the exemption from the NYSE independence requirements is based on whether a person or group controls more than 50% of the voting power for the election of directors (as opposed to, for example, more than 50% of the voting power to approve the disposition of assets). DISCLOSURE OF CODE OF ETHICS WAIVERS The existing NYSE rules provide that any waiver of the code of business conduct and ethics for executive officer or directors must be promptly disclosed to shareholders, but does not specify the timing or method of disclosure. The proposed revisions would require disclosure within four business days of any board determination to grant a waiver, with disclosure to be made by distributing a press release, by providing website disclosure or by filing a Form 8-K with the SEC. This generally conforms the NYSE waiver disclosure requirements with the SEC s requirements for financial officer codes of ethics under Item 5.05 of Form 8-K. -4-

5 ADDITIONAL PROPOSED CHANGES The proposed revisions would also: Eliminate the requirement that a listed company disclose in the following year s annual report that it filed the CEO certification required by the NYSE rules and the CEO/CFO certifications required under Sarbanes-Oxley. Provide that IPO companies must have an independent director on their nominating and compensation committees only as of the closing date of the IPO and not as of the listing date, and that the audit committee of an IPO company may consist of fewer than three directors during the oneyear phase-in period. Subject closed-end funds to the rules on shareholder approval of equity-based compensation plans. This requirement is currently applicable to listed companies generally, but not to closed-end funds. It is likely to have only limited application because the preponderance of closed-end funds do not have equity-based compensation plans. The NYSE proposal explains that this change is the correction of an oversight. Specify that the audit committee of a closed-end fund must meet to review and discuss the fund s annual audit financial statements and semi-annual financial statements (rather than quarterly financial statements, as specified in the current rules and which most funds do not produce), as well as the fund s Management s Discussion of Fund Performance, if the fund chooses voluntarily to include that section in its Form N-CSR. Revise compliance deadlines for companies that cease to be foreign private issuers to coordinate with 2008 changes to the SEC rules that allow annual testing of foreign private issue status generally changes would provide for a six-month deadline from the most recent Rule 3b-4 determination date (end of second fiscal quarter) to comply. Clarify that while audit committee meetings may be conducted by telephone if permitted by applicable corporate law, the polling of audit committee members individually outside an actual meeting is not permitted. Eliminate the requirement that companies agree to provide hard copies of committee charters, corporate guidelines and codes of ethics upon request. Require foreign private issuers that file annual reports on Form 20-F to include in the Form 20-F, as required by SEC rules, the statement of significant differences between home country governance practices and those required of U.S. listed companies. * * * Copyright Sullivan & Cromwell LLP

6 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance and corporate transactions, significant litigation and corporate investigations, and complex regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 700 lawyers on four continents, with four offices in the U.S., 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 Jennifer Rish ( ; rishj@sullcrom.com) or Alison Alifano ( ; alifanoa@sullcrom.com) in our New York office. CONTACTS New York John E. Baumgardner, Jr baumgardnerj@sullcrom.com Robert E. Buckholz, Jr buckholzr@sullcrom.com Catherine M. Clarkin clarkinc@sullcrom.com Jay Clayton claytonwj@sullcrom.com William G. Farrar farrarw@sullcrom.com David B. Harms harmsd@sullcrom.com James C. Morphy morphyj@sullcrom.com Robert W. Reeder III reederr@sullcrom.com Glen T. Schleyer schleyerg@sullcrom.com Andrew D. Soussloff soussloffa@sullcrom.com Donald C. Walkovik walkovikd@sullcrom.com Washington, D.C. Eric J. Kadel, Jr kadelej@sullcrom.com Robert S. Risoleo risoleor@sullcrom.com Dennis C. Sullivan sullivand@sullcrom.com Los Angeles Patrick S. Brown brownp@sullcrom.com Frank H. Golay, Jr golayf@sullcrom.com Alison S. Ressler resslera@sullcrom.com -6-

7 Palo Alto Scott D. Miller John L. Savva London Nikolaos G. Andronikos Kathryn A. Campbell Richard C. Morrissey John O'Connor William A. Plapinger David B. Rockwell George H. White III Paris Krystian Czerniecki William D. Torchiana Frankfurt Mathias Strasser Melbourne John E. Estes Sydney Waldo D. Jones, Jr Tokyo Izumi Akai Hong Kong William Y. Chua Chun Wei John D. Young, Jr Beijing Robert Chu NY12528: