CLIENT ALERT Securities & Public Companies November 12, 2003

Transcription

1 CLIENT ALERT Securities & Public Cmpanies Nvember 12, 2003 Supplement: Summary f NYSE and NASDAQ Crprate Gvernance Rules The NYSE and NASDAQ have adpted, and the SEC has apprved, changes t their crprate gvernance rules, which are summarized belw. The mst recent changes apprved by the SEC are italicized. The New Yrk Stck Exchange The principal NYSE rule changes are cntained in Sectin 303A f the NYSE Listed Cmpany Manual. Independent Directrs Independent directrs must cmprise a majrity f the bard f every listed cmpany. NYSE rules previusly required that nly 3 members f a cmpany s bard qualify as independent directrs, regardless f the size f the bard. Cntrlled Cmpany Exemptin An exemptin is available fr cntrlled cmpanies (cmpanies f which ver 50% f the vting pwer is held by a single persn, entity r grup). A cntrlled cmpany must disclse its reliance n this exemptin and the basis fr cnsidering itself a cntrlled cmpany in its prxy statement r Frm 10-K. Standards fr Directr Independence The bard must affirmatively determine that an independent directr has n material relatinship with the cmpany and disclse the basis fr this determinatin in its prxy statement r Frm 10-K. Categrical Standards A cmpany may create (and disclse) categrical standards fr determining independence. Only deviatins frm the standards require specific explanatin in the prxy statement r Frm 10-K. Stck Ownership Ownership f a significant amunt f the listed cmpany s stck, in and f itself, des nt preclude a finding f independence. The cncern is independence frm management. Prhibited Relatinships Several relatinships d preclude a finding f independence, including: Emplyee Test A directr wh is emplyed by, r whse immediate family member is emplyed as an executive fficer f, the listed cmpany wuld nt be independent until three years after the end f the emplyment relatinship. Emplyment as an interim chairman r CEO will nt disqualify a directr fllwing that emplyment. The Direct Cmpensatin Test A directr wh receives, r whse immediate family member receives, mre than $100,000 per year in direct cmpensatin frm the listed cmpany is nt independent until three years after he r she, r such family member, ceases t receive mre than $100,000 in such cmpensatin.

2 Client Alert: Page 2 Under revised rules prpsed by the NYSE in March 2003, a directr wh received such cmpensatin was presumed nt t be independent. The final rules eliminate the presumptin and impse a bright-line test. Cmpensatin paid t an immediate family member wh is nt an executive fficer des nt cunt fr this test. Auditr Affiliatin Test A directr wh is affiliated with r emplyed by, r whse immediate family member is affiliated with r emplyed in a prfessinal capacity by, a present r frmer auditr f the listed cmpany is nt independent until three years after the end f either the affiliatin r the auditing relatinship. Interlcking Directrate Test A directr wh is emplyed, r whse immediately family member is emplyed, as an executive fficer f anther cmpany where any f the listed cmpany s current executive fficers serve n that cmpany s cmpensatin cmmittee is nt independent until three years after the end f such service r the emplyment relatinship. Business Relatinship Test A directr wh is an executive fficer r an emplyee, r whse immediate family member is an executive fficer, f anther cmpany, that makes payments t, r receives payments frm, the listed cmpany fr prperty r services in an amunt which, in any single year accunts fr at least 2% r $1 millin, whichever is greater, f such ther cmpany s cnslidated grss revenues is nt independent until three years after falling belw such threshld. The final rules clarify that charitable rganizatins are nt cnsidered cmpanies fr purpses f the business relatinship test, prvided that a listed cmpany shall disclse any charitable cntributins made by the listed cmpany t any charitable rganizatin in which a directr serves as an executive fficer if, within the preceding three years, cntributins in any single year exceeded the greater f $1 millin, r 2% f the charitable rganizatin s cnslidated grss revenues. The final rules cautin bards t cnsider the materiality f any relatinships between directrs and charitable cntributins when assessing independence under Sectin 303A(2). The payments and the cnslidated grss revenues t be measured under this test are thse reprted in the last cmpleted fiscal year. The prvisin applies nly t the financial relatinship between the listed cmpany and the directr r immediate family member s current emplyer. A listed cmpany wuld nt need t cnsider frmer emplyment f the directr r immediate family member. Definitin f Immediate Family Member Fr purpses f these tests, an immediate family member includes a persn s spuse, parents, children, siblings, mthers and fathers-in-law, sns and daughters-in-law, brthers and sisters-in-law, and anyne (ther than emplyees) wh shares such persn s hme. When applying the lk-back prvisins, listed cmpanies d nt need t cnsider individuals wh are n lnger family members because f legal separatin r divrce, r thse wh have died r becme incapacitated. Definitin f Cmpany Fr purpses f these tests, a cmpany includes any parent r subsidiary in a cnslidated grup with the cmpany. Cling-Off Perids Each f the independence tests cntains a three-year cling-ff perid befre the directr wuld becme eligible t be independent directrs. Under revised rules prpsed by the NYSE in March 2003, the cling-ff perid was nly t be applied prspectively. Relatinships that ended prir t the effective date f the new rules wuld nt disqualify a directr. Under the final rules, the independence tests

3 Client Alert: Page 3 have a ne-year lk-back perid during the first year after the effective date f the rules and a three-year lk back thereafter. Fr example, if a directr received in excess f $100,000 per year in direct cmpensatin frm a listed cmpany during the year prir t the effective date f the rules, the directr wuld be disqualified; if he received the $100,000 nly during the year befre that, he wuld nt be disqualified. Hwever, nce the three-year lk back became applicable, the directr wuld again be disqualified. By cntrast, under current listing standards, the three independent directrs requirement has been unwritten and independence determinatins have been left entirely within the bard s discretin. Meetings f Nn-Management Directrs Nn-management directrs must hld regularly scheduled meetings, utside the presence f management. Independent Directrs This grup may include nn-management directrs nt therwise cnsidered independent. If this grup includes directrs wh are nt independent, the cmpany shuld schedule an executive sessin including nly independent directrs at least nce a year. Presiding Directrs The cmpany must designate a lead directr t preside at these meetings. The cmpany need nt appint a single lead directr fr all meetings, but if ne is chsen, the lead directr must be publicly identified. If different presiding directrs are chsen fr different meetings, the cmpany must disclse the prcedures fr chsing the presiding directrs. In either case, a cmpany must disclse a methd fr third parties t cntact the nn-management grup r presiding member directly. Nminating and Cmpensatin Cmmittees Listed cmpanies must have a nminating/crprate gvernance cmmittee and a cmpensatin cmmittee, each cmprised entirely f independent directrs. Cntrlled Cmpany Exemptin Cntrlled cmpanies are exempt frm the requirement that these cmmittees include slely independent directrs. A cntrlled cmpany must disclse its reliance n this exemptin in its prxy statement r Frm 10-K. Duties f the Nminating Cmmittee The duties f the nminating cmmittee include the identificatin, selectin r recmmendatin, f qualified candidates fr bard membership. Nminatins gverned by third party cntractual rights (fr example, stckhlders agreements) need nt be subject t the nminating cmmittee prcess. Duties f the Cmpensatin Cmmittee The duties f the cmpensatin cmmittee include reviewing and apprving crprate gals and bjectives relevant t CEO cmpensatin, evaluating the CEO s perfrmance in light f thse gals and setting the CEO s cmpensatin level based n this evaluatin. The cmpensatin cmmittee is required t prduce a reprt n executive cmpensatin t be included in the cmpany s prxy statement r Frm 10-K filed with the SEC. The cmpensatin f the CEO may be determined either by the cmpensatin cmmittee alne r tgether with the ther independent directrs (as directed by the full bard). The NYSE has clarified that the bard in general is nt prhibited frm discussing the CEO s cmpensatin.

4 Client Alert: Page 4 Independence and Authrity f Audit Cmmittee NYSE listed cmpanies must cmply with the audit cmmittee requirements impsed by the Sarbanes-Oxley Act and adpted as Rule 10A-3 f the Securities Exchange Act f The audit cmmittee must have sle respnsibility fr hiring and firing the independent auditrs and fr apprving significant nn-audit wrk by the auditrs. Listed cmpanies may still have stckhlders ratify the chice f independent directrs. The current rules, by cntrast, prvide that the audit cmmittee and the bard retain ultimate respnsibility fr selectin, evaluatin and replacement f the auditrs. Other respnsibilities with which the audit cmmittee is expressly charged include: Reviewing internal cntrls, evaluating the perfrmance f the auditrs and reviewing at least annually all relatinships between the auditr and the cmpany. Peridic meetings with management and the independent auditrs and discussing with them all annual and quarterly reprts, including MD&A. Discussing earnings press releases, as well as financial data and guidance prvided t analysts and rating agencies, which may be satisfied by a general discussin f apprpriate types f infrmatin rather than case-by-case reviews f releases and guidance. Setting hiring plicies fr frmer emplyees f the auditrs. Crprate Gvernance Guidelines and Officer Certificatins Listed cmpanies must adpt and disclse their crprate gvernance guidelines, written charters fr the audit, nminating and cmpensatin cmmittees, and a cde f business ethics fr directrs, fficers and emplyees. Cmpanies must state in their Frm 10-K filed with the SEC that these charters and cdes have been adpted and are available n the cmpany s website. Any waivers f the cde fr directrs and executive fficers must be prmptly disclsed. Each listed cmpany CEO must certify t the NYSE that he r she is nt aware f any vilatin by the cmpany f the listing standards. Freign Private Issuers Listed freign private issuers are allwed t fllw the practices f their hme cuntries in lieu f the new requirements, except that these issuers must have an audit cmmittee that meets the requirements f Rule 10A-3 f the Exchange Act and must ntify the NYSE in writing when any executive fficer becmes aware f any nn-cmpliance with any applicable prvisin. Listed freign private issuers must disclse any significant ways in which their crprate gvernance practices differ frm thse fllwed by dmestic listed cmpanies. The NYSE ntes in cmmentary that a detailed line-by-line analysis f the differences is nt required. The issuer may prvide a brief, general discussin f the differences n its website (prvided the website is in English and is accessible frm the United States) and/r in its annual reprt distributed t sharehlders in the United States. Equity-Based Cmpensatin Plans Fr a discussin f the final rules apprved by the SEC relating t equity-based cmpensatin plans, please see ur SEC Alert dated July 22, 2003 available n ur website r by clicking n the fllwing link: July 22, 2003 Alert

5 Client Alert: Page 5 Deadlines fr Cmpliance Currently Listed Cmpanies Listed cmpanies must cmply with the new crprate gvernance rules by the earlier f their first annual meeting after January 15, 2004, r Octber 31, Cmpanies with classified bards are nt required t replace a directr if that directr wuld nt nrmally stand fr electin in the first annual meeting after January 15, Such a directr may cntinue in ffice until the secnd annual meeting after January 15, 2004, but n later than December 31, Freign Private Issuers Listed freign private issuers must cmply with the new audit cmmittee standards by July 31, 2005 and all ther requirements by the earlier f their first annual meeting after January 15, 2004, r Octber 31, Initial Public Offerings; Bankruptcy; Others Cmpanies listing in cnnectin with their initial public ffering may phase in their independent nminatin and cmpensatin cmmittees n the same schedule as that required fr audit cmmittees under Rule 10A-3 f the Securities Exchange Act f These cmpanies must have ne independent member n each cmmittee at the time f listing, a majrity f independent members within 90 days f listing, and fully independent cmmittees within ne year f listing. These cmpanies wuld be required t meet the majrity independent bard requirement within 12 mnths f listing. Transitin Rules Cmpanies that are emerging frm bankruptcy r that have ceased t be cntrlled cmpanies may phase in their independent nminatin and cmpensatin cmmittees n the same schedule as cmpanies listing in cnnectin with their initial public ffering. Cmpanies that are transferring frm anther market t the NYSE have 12 mnths frm the date f transfer t cmply with any requirement t which it was nt previusly subject in the ther market. The Nasdaq Stck Market The principal Nasdaq rule changes are cntained in NASD Rules 4200 (Definitins) and 4350 (Qualitative Listing Requirements fr Nasdaq Natinal Market and Nasdaq SmallCap Market Issuers Except fr Limited Partnerships). Independent Directrs Independent Directrs t Cmprise a Majrity f the Bard. Every listed cmpany must have a bard f directrs cmprised f a majrity f independent directrs. Cure Perid If a cmpany des nt have a majrity f independent directrs because f ne vacancy r ne directr ceases t be independent due t circumstances beynd his r her reasnable cntrl, the issuer must remedy the situatin befre the earlier f its next annual sharehlders meeting r ne year frm the date f the ccurrence f the event that caused the failure t cmply. Disclsure A cmpany must disclse the directrs that the bard determines t be independent in its prxy statement r Frm 10-K. Executive Sessins The new rules require that the independent directrs hld regularly scheduled executive sessins at which nly independent directrs are present. The cmparable NYSE prvisin requires regularly scheduled meetings f nnmanagement directrs, whether independent r nt. Definitin f Independent Directr. The new rules clarify and tighten the definitin f independence and preclude the fllwing individuals frm being cnsidered independent:

6 Client Alert: Page 6 Payments Test A directr wh accepts payments, r has a family member wh accepts payments, in excess f $60,000 during the current r any f the past three fiscal years except fr the fllwing: Cmpensatin fr bard r bard cmmittee service; Payments arising slely frm investments in the cmpany s securities; Cmpensatin paid t a family member wh is a nn-executive emplyee f the cmpany r a parent r subsidiary f the cmpany; Benefits under tax-qualified retirement plans; r Lans permitted under Sectin 13(k) f the Exchange Act. 1 Emplyee Test Under current Nasdaq rules, which are nt being amended by the new rules, a directr is nt independent if the directr is an fficer r emplyee f the cmpany r any f its subsidiaries r the directr has a relatinship which, in the pinin f the bard, wuld interfere with the exercise f independent judgment in carrying ut the respnsibilities f a directr. Business Relatinship Test A directr wh is, r wh has a family member wh is, an executive fficer, partner r cntrlling sharehlder f any rganizatin (including charities) t which the cmpany paid r frm which the cmpany received payments exceeding the greater f $200,000 r 5% f the recipient s cnslidated grss revenue in the current year r any f the past three years. Family f Executive Officer Test A directr wh has a family member wh is, r was at any time during the previus three years, an executive fficer f the cmpany r its affiliates. Auditr Relatinship Test A directr wh is, r has a family member wh is, a current partner f the utside auditrs, r frmer partner r emplyee f the utside auditrs wh wrked n the cmpany s audit engagement during the previus three years. Interlcking Directrate Test A directr wh is, r wh has a family member wh is, emplyed as an executive fficer f anther entity in which any f the executive fficers f the listed cmpany have served n the ther entity s cmpensatin cmmittee during the past three years. Definitin f Family Member A family member is defined as a persn s spuse, parents, children and siblings, whether by bld, marriage r adptin, r anyne residing in such persn s hme. Investment Cmpany Directrs. Directrs f investment cmpanies will nt be cnsidered independent if the directr is an interested persn under Sectin 2(a)(19) f the Investment Cmpany Act f This standard will apply t directrs f investment cmpanies in lieu f the ther standards fr determining independence. Cmpensatin f Officers The new rules mandate the invlvement f the independent directrs in setting cmpensatin fr executives f the cmpany. They d nt, hwever, mandate that there be a cmpensatin cmmittee, althugh mst cmpanies will prbably chse t establish ne. CEO Cmpensatin Independent directrs are required t determine, r recmmend t the Bard fr determinatin, CEO cmpensatin, either by an independent cmpensatin cmmittee r a majrity f independent directrs. The CEO may nt be present during these deliberatins r vting. 1 A limited exceptin permitted by the Sarbanes-Oxley Act fr cmpanies in the business f lending.

7 Client Alert: Page 7 Officer Cmpensatin Independent directrs are required t determine, r recmmend t the Bard fr determinatin, executive fficer cmpensatin, either by an independent cmpensatin cmmittee r a majrity f independent directrs. Exceptin A single nn-independent directr wuld be permitted t serve n the cmpensatin cmmittee fr n lnger than tw years if: The individual is nt a current fficer r emplyee (r a family member f an fficer r emplyee). The bard, under exceptinal and limited circumstances, determines that the persn s membership n the cmmittee is required by the best interests f the cmpany. A cmpany is required t disclse its reliance n this exceptin in its prxy statement r Frm 10-K. Nminatin f Directrs The new rules als require invlvement f the independent directrs in nminating individuals t serve n the bard f directrs. Selectin f Nminees Directr nminees must be selected, r recmmended fr the Bard s selectin, by a majrity f the independent directrs r a nminatins cmmittee cmprised slely f independent directrs unless the right t nminate a directr legally belngs t a third party r the cmpany is subject t a binding bligatin that requires a different and cnflicting directr nminatin structure that pre-dates the effectiveness f the new rules. Certificatin Each listed cmpany must certify that it has adpted a frmal written charter r bard reslutins addressing the nminatins prcess. Exceptin A single nn-independent directr wuld be permitted t serve n the nminating cmmittee fr n lnger than tw years if: The individual is nt a current fficer r emplyee (r family member f an fficer r emplyee). The bard, under exceptinal and limited circumstances determines that the persn s membership n the cmmittee is required by the best interests f the cmpany. A cmpany is required t disclse its reliance n this exceptin in the cmpany s prxy statement r Frm 10-K. Exemptin fr Cntrlled Cmpanies A cntrlled cmpany is exempt frm the requirement t have a majrity f independent directrs and frm the cmpensatin and nminatin cmmittee requirements. Hwever, independent directrs f cntrlled cmpanies are required t hld regularly-scheduled executive sessins. Definitin f Cntrlled Cmpany A cntrlled cmpany is ne in which mre than 50% f the vting pwer is held by an individual, a grup r anther cmpany. Disclsure A cntrlled cmpany must disclse that it is a cntrlled cmpany and the basis fr that determinatin in its annual prxy statement r Frm 10-K.

8 Client Alert: Page 8 Audit Cmmittee The rules cntain a number f new requirements regarding cmpsitin and respnsibilities f the audit cmmittee. Membership Each member f the audit cmmittee must be independent, must meet the definitin f independence under Rule 10A- 3(b)(1) f the Exchange Act, and must nt have participated in the preparatin f the financial statements f the cmpany r any current subsidiary f the cmpany at any time during the past three years. A single nn-independent directr wuld be permitted t serve n the audit cmmittee fr n lnger than tw years, during which time the directr may nt chair the audit cmmittee, if: The individual meets the criteria set frth in Sectin 10A(m)(3) f the Exchange Act and the rules thereunder. The bard, under exceptinal and limited circumstances, determines that the persn s membership n the cmmittee is required by the best interests f the cmpany. A cmpany is required t disclse its reliance n this exceptin in the cmpany s prxy statement r Frm 10-K. Respnsibilities The audit cmmittee is t have the respnsibilities and authrity necessary t cmply with Rules 10A-3(b)(2), (3), (4) and (5) f the Exchange Act relating t (a) registered public accunting firms, (b) cmplaints relating t accunting, internal accunting cntrls r auditing matters, (c) authrity t engage advisrs and (d) funding as determined by the audit cmmittee. Investment Cmpanies Audit cmmittees f investment cmpanies must establish prcedures fr the cnfidential and annymus submissin f cmplaints regarding accunting r auditing matters by emplyees f the investment cmpany, investment adviser, administratr, principal underwriter, r any ther prvider f accunting related services. Cmmittee Charter The rules require that an audit cmmittee charter nw include the cmmittee s purpse in verseeing the accunting and financial reprting prcesses f the issuer and audits f the issuer s financial statements, as well as specific audit cmmittee respnsibilities. Cure Perid If a cmpany fails t have an audit cmmittee with at least three independent members because a member ceases t be independent due t circumstances beynd his r her reasnable cntrl, the issuer must remedy the situatin prir t the earlier f its next annual sharehlders meeting r ne year frm the date f the ccurrence f the event that caused the failure t cmply. Disclsure f Ging-Cncern Opinins Ging cncern qualificatins in the pinin f a cmpany s independent auditrs must be disclsed in a press release. Related Party Transactins All related party transactins must be reviewed (as required by current Nasdaq rules) and affirmatively apprved by the audit cmmittee r cmparable bdy. Ntice f Nn-Cmpliance

9 Client Alert: Page 9 An issuer must ntify Nasdaq prmptly f any material nncmpliance by the issuer with the requirements f NASD Rule 4350 (Qualitative Listing Requirements fr Nasdaq Natinal Market and Nasdaq SmallCap Market Issuers Except fr Limited Partnerships). Freign Issuers Nasdaq rules currently prvide that a freign issuer is nt required t d any act that wuld vilate the laws f any public authrity having jurisdictin ver it r that is cntrary t generally accepted business practices in its hme jurisdictin. Nasdaq may prvide exemptins frm Rule 4350 necessary t carry ut this intent. The new rules clarify that the authrity t grant exemptins is limited t freign private issuers instead f all freign issuers. The new rules require that a freign issuer that receives an exemptin frm Rule 4350 disclse in its annual reprt filed with the SEC each requirement frm which it is exempted and describe the practice fllwed in its hme jurisdictin, if any. A freign issuer making its initial public ffering r first U.S. listing n Nasdaq is required t disclse any exemptins in its registratin statement. Deadlines fr Cmpliance Currently Listed Cmpanies Listed cmpanies must cmply with the new crprate gvernance rules by the earlier f their first annual meeting after January 15, 2004, r Octber 31, Cmpanies with classified bards are nt required t replace a directr if that directr wuld nt nrmally stand fr electin in the first annual meeting after January 15, Such a directr may cntinue in ffice until the secnd annual meeting after January 15, 2004, but n later than December 31, Freign Private Issuers Freign private issuers must cmply with the new crprate gvernance rules by July 31, Initial Public Offerings; Bankruptcy; Others Cmpanies listing in cnnectin with their initial public ffering may phase in their independent nminatin and cmpensatin cmmittees n the same schedule as that required fr audit cmmittees under Rule 10A-3 f the Securities Exchange Act f These cmpanies must have ne independent member n each cmmittee at the time f listing, a majrity f independent members within 90 days f listing, and fully independent cmmittees within ne year f listing. These cmpanies wuld be required t meet the majrity independent bard requirement within 12 mnths f listing. Cmpanies Transferring t Nasdaq Cmpanies that are transferring frm anther market t Nasdaq have ne year frm the date f listing n Nasdaq t cmply with any requirement t which it was nt previusly subject in the ther market. Stckhlder Apprval f Optin and Stck Purchase Plans Fr a discussin f the final rules apprved by the SEC relating t equity-based cmpensatin plans, please see ur SEC Alert dated July 22, 2003 available n ur website r by clicking n the fllwing link: July 22, 2003 Alert. Cntact Infrmatin If yu have any questins r wuld like t learn mre abut these rules, please cntact yur usual legal advisr at Rpes & Gray.