NYSE, NASDAQ and AMEX Publish Final Corporate Governance Rules

Transcription

1 CORPORATE GOVERNANCE UPDATE DECEMBER 2003 NYSE, NASDAQ and AMEX Publish Final Corporate Governance Rules NYSE, NASDAQ and AMEX (the "SROs") have each recently published their final corporate governance rules as approved by the SEC. The accompanying chart compares the major provisions of the new rules to facilitate analyses of the differences among the various rules of the SROs. Compliance Dates: Companies (other than foreign private issuers and small business issuers) listed on the SROs must be in compliance with the new SRO rules by the earlier of their first annual meeting of shareholders held after January 15, 2004, or October 31, (AMEXlisted companies must be in compliance with the new rules other than those relating to audit committees by the earlier of their first annual meeting of shareholders held after March 15, 2004, or October 31, 2004.) Foreign private issuers and small business issuers must be in compliance with the rules relating to audit committees (i.e., independence, complaint procedures, responsibilities relating to audit firms, authority to engage advisers, and funding) by July 31, If a company has a classified board and a change is required with respect to a director whose term does not expire within the time frame set forth above, the compliance date is delayed until the second annual meeting of shareholders held after January 15, 2004 (or, in the case of AMEX-listed companies, March 15, 2004), but not later than December 31, The dates for compliance with other rules are set forth on Page 3. Organization of Comparison Chart: The accompanying chart covers the following topics: Topic Page(s) Applicability Compliance Dates... 3 Increased Independence Requirements Independence Standards for Audit Committee Members Responsibilities of Audit Committees Financial Expertise of Audit Committee Members Strengthening the Role of Independent Directors in Compensation and Nomination Decisions Adoption and Disclosure of Corporate Governance Guidelines Codes of Conduct Approval by Shareholders of Issuance of Shares and Options Other Requirements In organizing the material in the accompanying chart, we have attempted to align similar provisions of each of the SROs to facilitate comparison of their different standards. We use italics in the chart to designate comments that are not part of the rule proposals or the SROs' commentaries.

2 The information and statements contained in this Update should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult with an attorney regarding your own circumstances and any specific legal questions you may have. This Update was prepared by Patricia A. Gritzan, Co-Chair of our Securities Transaction Group, with the assistance of Jim Connolly and Brian Curci, Associates in our Business Department, and edited by members of the Editorial Board of our Corporate Governance Group. Saul Ewing s Corporate Governance Group includes litigation and business attorneys with extensive experience in counseling businesses, charitable and non-profit organizations, management, directors and professionals on sensitive operations matters and the duties and responsibilities of management. Saul Ewing attorneys advise independent directors and committees of directors, conduct special investigations on behalf of boards, committees or management, and represent individuals and entities in litigation, governmental inquiries and investigations and other disputes. If you have any questions or require any assistance from Saul Ewing's Corporate Governance Group, please contact either of the Co-Chairs of the Group, Timothy E. Hoeffner ( ; thoeffner@saul.com) or Charles C. Zall ( ; czall@saul.com). If you have any questions or require any assistance regarding the matters discussed in this Update, please contact Patricia A. Gritzan ( ; pgritzan@saul.com).

3 COMPARISON CHART: NYSE, NASDAQ AND AMEX CORPORATE GOVERNANCE RULES ADOPTED IN 2003 APPLICABILITY Rules apply in full to all companies listing securities, except: Controlled companies If more than 50% of voting power held by an individual, group or another company, rules requiring (i) a majority of independent directors, (ii) a compensation committee, and (iii) a nominating/corporate governance committee will not apply. Limited partnership and companies in bankruptcy Rules requiring (i) a majority of independent directors, (ii) a compensation committee, and (iii) a nominating/corporate governance committee will not apply. Closed-end funds and open-end funds that are registered under the Investment Company Act of 1940 Exempt from certain requirements. Rules apply in full to all companies listing securities, except: Controlled companies If more than 50% of voting power is held by an individual, group or another company, rules requiring (i) a majority of independent directors, and (ii) approval of compensation and director nominations will not apply. Limited partnerships Special rules apply to limited partnerships. Management investment companies that are registered under the Investment Company Act of 1940 Exempt from certain requirements. Rules apply in full to all companies listing securities except: Controlled companies Limited partnerships and companies in bankruptcy Same as NYSE. Note that if a limited partnership is managed by a general partner rather than a board, the audit committee requirements applicable to the listed entity should be satisfied by the general partner. Registered management investment companies Cooperatives Certain cooperatives are exempt from certain requirements relating to independent directors. Cooperatives -

4 APPLICABILITY (cont d) Foreign private issuers Are permitted to follow home country practice in lieu of the provisions of the NYSE rules, except such issuers must comply with certain provisions relating to audit committees and notice of noncompliance to NYSE. Foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. Other entities Except as otherwise required by Rule 10A-3 under the Exchange Act, these rules will not apply to passive business organizations in the form of trusts or to derivatives and special purpose securities. To the extent Rule 10A-3 applies to such entities, they are required to comply with certain provisions relating to audit committees and notice of compliance to NYSE. Foreign private issuers May be exempted from the applicability of the rules, except to the extent that such exemptions would be contrary to the federal securities laws. A company that receives such an exemption must disclose in its annual report filed with the SEC each requirement from which it is exempted and describe the home country practice, if any, followed by the company in lieu of these requirements. Asset backed issuers and other passive issuers Exempt from requirements for (i) independent directors, (ii) audit committees, and (iii) codes of conduct. Foreign private issuers May be exempted from the applicability of the rules regarding (i) election and composition of the board, (ii) issuance of quarterly earnings statement, (iii) shareholder approval requirements, and (iv) quorum requirements for shareholder meetings, except to the extent that such exemptions would be contrary to federal securities laws. A company that receives such an exemption must disclose in its annual report distributed to shareholders or on its website any significant ways in which its corporate governance practices differ from those required by AMEX standards. If the disclosure is only available on the website, the annual report must so state and provide the web address. Other entities Same as NYSE; asset-backed securities also exempt except as otherwise required by Rule 10A-3. Rules do not generally apply to companies listing only preferred or debt securities, except compliance may be required with certain provisions relating to audit committees and notice of non-compliance to NYSE. Rules relating to independent directors and audit committees apply to companies listing only preferred or debt securities only to the extent required by SEC Rule 10A

5 COMPLIANCE DATES Listed companies must comply with certain of the new rules (regarding independent directors, audit committees and notice of non-compliance with Nasdaq rules) by the earlier of their first annual meeting of shareholders held after January 15, 2004, or October 31, 2004, except that (i) a listed company with a classified board shall have until its second annual meeting after January 15, 2004, but not later than December 31, 2005, to implement all new requirements relating to board composition (other than audit committee requirements), if the company would be required to change a director who would not normally stand for election at an earlier annual meeting; (ii) foreign private issuers and small business issuers will have until July 31, 2005 to comply with the rules; (iii) listed companies must comply with (A) the code of conduct requirements by May 4, 2003, and (B) audit committee approval of related party transactions by January 15, 2004; and (iv) all other provisions became effective on November 4, Listed companies must comply with the new rules by the earlier of their first annual meeting of shareholders held after January 15, 2004, or October 31, 2004, except that (i) if a listed company with a classified board would be 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, 2005; and (ii) foreign private issuers will have until July 31, 2005 to comply with the audit committee rules. To the extent not inconsistent with Rule 10A-3 under the Exchange Act (see note below), listed companies must comply with certain of the new rules (regarding independent directors, audit committees, nominations and compensation) by the earlier of their first annual meeting after March 15, 2004, or October 31, 2004, except that (i) a listed company with a classified board shall have until the second annual meeting after March 15, 2004, but no later than December 31, 2005, if the company would be required to change a director who would normally not stand for election in the first annual meeting after March 15, 2004; (ii) foreign private issuers and small business issuers will have until July 31, 2005 to comply with the rules; (iii) listed companies must comply with (A) the code of conduct requirements by June 1, 2004, and (B) related party transactions and going concern disclosures by December 31, 2003; and (iv) all other provisions became effective December 1, Note: The audit committee requirements of Rule 10A-3 (relating to independence of audit committee members, complaint procedures, responsibilities relating to the auditor, authority to engage advisors, and funding) require compliance by the earlier of the company's first annual meeting of shareholders after January 15, 2004, or October 31, 2004 (other than for foreign private issuers and small business issuers). Certain exceptions may apply to companies listing in conjunction with an initial public offering, companies emerging from bankruptcy, companies that have ceased to be controlled companies and companies listing upon transfer from another market. Other exceptions may apply to companies listed in conjunction with an initial public offering or transferring from other markets. Same as NYSE. -3-

6 INCREASED INDEPENDENCE REQUIREMENTS Require a majority of independent directors. Require a majority of independent directors. Require a majority of independent directors, except that small business issuers must have at least 50% independent directors. The Board must affirmatively determine that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). Prohibit a director from being deemed independent if the director (or an immediate family member, as defined below) receives from the listed company direct compensation (other than compensation for board service or committee fees, or pension or other forms of deferred compensation for prior service) in excess of $100,000 per year until three years after the person ceases to receive more than $100,000 per year in such compensation. Prohibit a director from being deemed independent if he is an executive officer or employee, or if an immediate family member is an executive officer, of another company (excluding a charitable organization) that makes payments to, or receives payments from, the listed company for property or services in an amount that exceeds the greater of $1 million or 2% of such other company's consolidated gross revenues in any single fiscal year, until three years after falling below such threshold. A director will not qualify as independent if the director has a relationship which in the opinion of the company's board would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. (Requires affirmative determination by board.) Prohibit a director from being deemed independent if he (or a "family member," as defined below) accepts from the company, its parent or any subsidiary of the company, any payments in excess of $60,000 during the current or any of the past three fiscal years other than for (i) compensation for board or board committee service, (ii) payments arising solely from investment in the company's securities, (iii) compensation paid to a family member who is a non-executive employee of the company, parent or subsidiary, (iv) benefits under a tax-qualified retirement plan, or (v) loans not prohibited by the Sarbanes Oxley Act of Prohibit a director from being deemed independent if the company makes payments to, or receives payments from, any organization of which the director is a partner (other than limited partner), controlling shareholder or executive officer, and such payments (other than payments arising solely from investments in the company's securities or payments under non-discretionary charitable contribution matching programs) exceed the greater of $200,000 or 5% of the recipient's consolidated gross revenues during the current or any of the past three fiscal years. The Board must affirmatively determine that the director does not have a material relationship with the listed company that would interfere with the exercise of independent judgment. Same as Nasdaq but for AMEX's reference to "immediate family member," as defined below, rather than Nasdaq's use of "family member." Same as Nasdaq, except that the "look-back" period is any of the most recent three fiscal years. -4-

7 INCREASED INDEPENDENCE REQUIREMENTS (cont'd) Prohibit a director from being deemed independent if the director is an employee, or has an immediate family member who is an executive officer of the listed company, until three years after the end of such employment; except for service as an interim chairman or CEO. Prohibit a director from being deemed independent if the director is employed by the listed company, its parent or its subsidiaries, or if any family member is or was an executive officer of the company, its parent or subsidiaries, in either case, at any time during the past three years. Same as NYSE. Prohibit a director from being deemed independent if the director is employed, or whose immediate family member is employed, as an executive officer of another company, where any of the listed company's executives serve on that company's compensation committee, until three years after the end of such service or employment relationship. Prohibit a director from being deemed independent if the director, or an immediate family member, is affiliated with, or employed by, a present or former internal or external auditor of the company, until three years after the end of the affiliation, employment, or auditing relationship. Same as NYSE except for reference to "family member." Prohibit a director from being deemed independent if the director is, or has a family member who is, a current partner of the company's outside auditor, or was a partner or employee of the company's outside auditor and worked on the company's audit at any time during any of the past three years. Same as NYSE. "Immediate family member" includes a person's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothersand sisters-in-law and anyone (other than domestic employees) who shares such person's home. "Family member" means a person's spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone who resides in such person's home. Same as NYSE. -5-

8 INCREASED INDEPENDENCE REQUIREMENTS (cont'd) Same as NYSE. The three year "look back" provisions will begin to apply only from and after November 4, A one year "look back" will be in effect prior to that date. The three year "look back" provisions will begin to apply only from and after December 1, 2004 except with respect to directors who are members of the audit committee, the "look back" period applicable to (i) employment with the company by the director or a family member, (ii) receipt by an organization of which the director is a partner or officer of payments from the company, and (iii) making of payments to the company by an organization of which the director is a partner or officer, will be three years commencing December 1, When applying the "look back" provisions, listed companies need not consider persons who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated. Require regularly scheduled executive sessions of non-management directors. "Non-management" directors are all those who are not company officers and includes such directors who are not independent. If non-management directors include directors who are not independent, listed companies should at least once a year schedule an executive session including only independent directors. If one director is chosen to preside at these meetings, that director's name must be disclosed. Alternatively, a listed company may disclose a procedure by which a presiding officer is selected for each executive session. Such disclosure is required so that interested parties may communicate directly with the presiding director or with the non-management directors as a group. Require regularly scheduled meetings at which only independent directors are present; should occur at least twice a year in conjunction with regularly scheduled board meetings. Require board meetings to be held at least quarterly and regularly scheduled meetings of independent directors as necessary to fulfill their responsibilities, including at least one annual meeting in executive session without the non-independent directors and management. An AMEX employee or floor member may not serve on the board of a listed company. -6-

9 INDEPENDENCE STANDARDS FOR AUDIT COMMITTEE MEMBERS Require all audit committee members to be independent pursuant to the rules set forth above and the requirements of Rule 10A-3 under the Exchange Act (see note below). Same as NYSE (except as discussed below). Same as NYSE (except as discussed below). No comparable exceptions. Note: Rule 10A-3 prohibits audit committee members from: Accepting directly or indirectly any consulting, advisory, or other compensatory fee from the company or any subsidiary thereof, provided that, unless the rules of the exchange provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the listed company (provided that such compensation is not contingent in any way on continued service). The term "indirect acceptance" includes acceptance by (i) a spouse, a minor child or stepchild or a child or stepchild sharing a home with the person or (ii) an entity in which Exceptions: One director who (i) is not independent pursuant to the requirements set forth above, (ii) meets the requirements of Section 10A(m)(3) of the Exchange Act and Rule 10A-3 thereunder, and (iii) is not a current officer or employee of the company, or a family member of such an officer or employee, may be appointed to the audit committee under exceptional and limited circumstances. A member appointed under this exception may not serve longer than two years and may not chair the committee. No member may have participated in the preparation of the financial statement of the company or any subsidiary at any time during the past three years. Same as NYSE. Exception: No comparable exception. Same as NYSE. -7-

10 INDEPENDENCE STANDARDS FOR AUDIT COMMITTEE MEMBERS (cont d) such member is a partner, member, managing director, executive officer, or similar position (except limited partners, non-managing members and those occupying similar positions who have no active role in providing services to the entity), and which provides accounting, consulting, legal, investment banking or financial advisory services to the company or any subsidiary of the issuer; or Being an affiliated person of the company or any subsidiary thereof. The term "affiliate of," or a "person affiliated with," a specified person means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. A person will be deemed not to be in control of a specified person for purposes of this rule if the person: (i) is not the beneficial owner, directly or indirectly, of more than 10% of any class of voting equity securities of the specified person; and (ii) is not an executive officer of the specified person. The foregoing does not create a presumption that a person exceeding the 10% beneficial ownership requirement controls or is otherwise an affiliate of a specified person. The following will be deemed to be affiliates: an executive officer of an affiliate, a director who also is an employee of an affiliate, a general partner of an affiliate, and a managing member of an affiliate. -8-

11 RESPONSIBILITIES OF AUDIT COMMITTEES Require audit committee to have a minimum of three members. Require audit committee to have a minimum of three members. Require audit committee to have a minimum of at least three members, except that small business issuers need only have a minimum two person audit committee. Require the audit committee to have a written charter that addresses (i) the committee's purpose, (ii) duties and responsibilities, and (iii) an annual performance evaluation of the audit committee; each of (i) and (ii) as more particularly specified in the rule. Note: Rule 10A-3 of the Exchange Act also requires that the Audit Committee: Be directly responsible for the appointment, compensation, retention, and oversight of the work of the company's independent auditor. Have authority to obtain advice and assistance from outside legal, accounting or other advisors as the audit committee deems necessary to carry out its duties. Receive funding, as determined by the audit committee, for payment of compensation to outside legal, accounting or other advisors employed by the audit committee. Require that the audit committee have a written charter that addresses (i) the scope of the committee's responsibilities and how it carries out those responsibilities (including structure, processes, and membership requirements); (ii) responsibilities with respect to overseeing the independence of the outside auditor; (iii) the committee's purpose of overseeing the accounting and financial reporting processes of the company and the audits of the financial statements of the company; and (iv) the authority and responsibilities required by Rule 10A- 3 of the Exchange Act (see note below). Same as NYSE. Same as NYSE. -9-

12 RESPONSIBILITIES OF AUDIT COMMITTEES (cont'd) Establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, as well as for confidential, anonymous submissions by employees of the company of concerns regarding questionable accounting or auditing matters. Audit committee must meet at least quarterly. Require that, at least annually, the audit committee obtain and review a report by the independent auditor describing (i) the firm's internal qualitycontrol procedures, any material issues raised by the most recent internal quality-control review or peer review, or by any inquiry or investigation within the preceding five years with respect to one or more independent audits carried out by the firm, and (ii) all relationships between the auditor and the company. Require that the audit committee discuss the company's annual and quarterly financial statements with management and the independent auditor, including the company's MD&A disclosure. Require that the audit committee discuss the company's earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies. Require that the audit committee discuss the company's policies with respect to risk assessment and risk management. -10-

13 RESPONSIBILITIES OF AUDIT COMMITTEES (cont'd) Require that the audit committee meet separately, periodically, with management, internal auditors, and independent auditors. Require that the audit committee review with the independent auditor any audit problems or difficulties and management's response. Require that the audit committee set clear hiring policies for employees or former employees of the independent auditors. Require that the audit committee report regularly to the board. Listed companies are expected to review and oversee related party transactions on an on-going basis. A company's audit committee or a comparable body could be considered as the forum for such review and oversight. Require that a company's audit committee or another independent body of the board of directors review and approve all related party transactions. Related party transactions must be subject to review and oversight by a company's audit committee or a comparable body of the board. -11-

14 FINANCIAL EXPERTISE OF AUDIT COMMITTEE MEMBERS Require that all audit committee members be financially literate as such qualification is interpreted by the company's board in its business judgment, or must become financially literate within a reasonable period of time after appointment to the audit committee. Require that all audit committee members be able to read and understand fundamental financial statements. Require that at least one member of the audit committee have accounting or related financial management expertise, as the company's board interprets such qualification in its business judgment. Require companies to have at least one member of the audit committee that has past employment experience in finance or accounting, requisite professional certification in accounting, or comparable experience or background which results in the individual's financial sophistication, including being, or having been, a chief executive officer, chief financial officer or the senior officer with financial oversight responsibilities. -12-

15 STRENGTHENING THE ROLE OF INDEPENDENT DIRECTORS IN COMPENSATION AND NOMINATION DECISIONS Require that listed companies have a nominating/corporate governance committee with a written charter. The charter must address (i) the committee's purpose and responsibilities (as more particularly specified in the rule), and (ii) an annual performance evaluation of the committee. Listed companies are not required to have a nominating committee. Regardless of whether the company has a nominating committee, the company must adopt a formal written charter or board resolution addressing the nominations process and related matters as required by federal securities law. Require that the nominating/corporate governance committee be composed entirely of independent directors. Require the nominating/corporate governance committee to identify individuals qualified to become board members and to select, or recommend that the board select, the director nominees. If a company has a nominating committee, it may be composed of independent or non-independent directors, provided that, approval of all director nominees complies with the rules set forth below. Require approval, or recommendation to Board for approval, of director nominations by (i) a nominating committee comprised solely of independent directors (subject to the exceptions set forth below) or (ii) a majority of the independent directors. No comparable exception. Exceptions: If the nominating committee is comprised of at least three members, then one non-independent director may serve on the nominating committee, provided that (i) the director is not an officer or employee or a family member of such person, (ii) the board, under exceptional and limited circumstances, determines that membership in the committee is required by the best interests of the company and its shareholders, and (iii) the board discloses the nature of the relationship and reasons for such determination. Such service is limited to two years. Exceptions: Same as Nasdaq but for reference to "immediate family member" rather than Nasdaq's use of "family member." -13-

16 STRENGTHENING THE ROLE OF INDEPENDENT DIRECTORS IN COMPENSATION AND NOMINATION DECISIONS (cont'd) No comparable exception. Independent director oversight is not required where the right to nominate a director legally belongs to a third party. Require that listed companies have a compensation committee with a written charter. The charter must address (i) the committee's purpose and responsibilities (as more particularly specified in the rule), and (ii) an annual performance evaluation of the committee. Require that the compensation committee be composed entirely of independent directors. Require that the compensation committee review and approve the corporate goals and objectives relevant to CEO compensation, evaluate the CEO's performance in light of those goals and objectives, and, either as a committee or together with other independent directors, determine and approve the CEO's compensation level based on the evaluation. Require that the compensation committee make recommendations to the board with respect to non- CEO compensation, incentive-compensation plans and equity-based plans. Listed companies are not required to have a compensation committee. If a company has a compensation committee, it may be composed of independent or non-independent directors, provided that, approval of compensation complies with the rules set forth below. Require determination, or recommendation to the board for determination, of CEO compensation either by (i) a compensation committee comprised solely of independent directors (subject to the exception set forth below) or (ii) a majority of the independent directors meeting in executive session. The CEO may not be present during voting or deliberations. Require determination, or recommendation to the board for determination, of compensation of all other executive officers by (i) a compensation committee comprised solely of independent directors (subject to the exception set forth below) or (ii) a majority of the independent directors. -14-

17 STRENGTHENING THE ROLE OF INDEPENDENT DIRECTORS IN COMPENSATION AND NOMINATION DECISIONS (cont'd) Exception: If the compensation committee is comprised of at least three members, then one nonindependent director may serve on the compensation committee, provided that (i) the director is not an officer or employee, or a family member of such person, (ii) the board, under exceptional and limited circumstances, determines that membership on the committee is required by the best interests of the company and its shareholders, and (iii) the board discloses the nature of the relationship and the reasons for that determination. Such service is limited to two years. Exception: Same as Nasdaq exception but for reference to "immediate family member" rather than Nasdaq's use of "family member." -15-

18 ADOPTION AND DISCLOSURE OF CORPORATE GOVERNANCE GUIDELINES Require that listed companies adopt and disclose corporate governance guidelines to address: Director qualification standards; Director responsibilities; Director access to management and, as necessary and appropriate, independent advisors; Director compensation; Director orientation and continuing education; Management succession; and Annual performance evaluation of the board. No comparable provision, except that listed companies are encouraged to develop and implement continuing education programs for all directors and orientation and training programs for new directors. Require that the company's website include its corporate governance guidelines and the charters of its most important committees (including at least the audit, compensation and nominating committees). Require that the company's annual report on Form 10-K state that the foregoing information is available on the company's website and in print form to any shareholder who requests it. -16-

19 CODES OF CONDUCT Require all companies to have a code of conduct applicable to directors, officers and employees which must include those elements necessary to meet the code of ethics requirements, as defined by the Sarbanes-Oxley Act and SEC rules. In particular, this includes standards as are reasonably necessary to promote (i) honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in periodic reports filed with the SEC by the company and in other public communication, (iii) compliance with applicable laws, rules and regulations, (iv) prompt reporting of violations of the code, and (v) accountability for adherence to the code. Require all companies to have a code of conduct and ethics for directors, officers and employees that addresses: Conflicts of interest; Corporate opportunities; Confidentiality; Fair dealing; Protection and proper use of company assets; Compliance with laws, rules and regulations (including insider trading laws); and Encouraging the reporting of any illegal or unethical behavior. (Note other requirements of the Sarbanes-Oxley Act and SEC rules described in the next column would also be applicable to the extent they are not covered by the above list.) Require that any waiver of the code for directors or executive officers be promptly disclosed to shareholders. Require that waivers of the code for directors, executives or officers may be granted only by the board or a board committee. Require the company to place its code of conduct on its website, and require that the company state in its annual report on Form 10-K that the code of conduct is available on its website and in print form to any shareholder who requests it. Same as NYSE. Require that waivers of the code of conduct for directors or executive officers may only be granted by the company's board of directors. Require the code of conduct to be publicly available. (Note: SEC rules require either (i) the filing of the code as an exhibit to the 10-K, (ii) posting of the text of the code on the company's website and disclosure in the company's annual report that the code is available on the internet, or (iii) state in its 10-K that a copy of the code of conduct is available without charge upon request.) -17-

20 CODES OF CONDUCT (cont'd) Require the code of conduct to contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Require the code of conduct to contain compliance standards and procedures that will facilitate the effective operation of the code and prompt and consistent action against violations of the code. (Note such enforcement mechanisms may be required by the general terms of the Sarbanes Oxley Act referred to above under the heading "Nasdaq.") -18-

21 APPROVAL BY SHAREHOLDERS OF ISSUANCE OF SHARES AND OPTIONS Shareholder approval required for all equitycompensation plans (see definition below) and any material revision thereto, except: Shareholder approval for the adoption of stock option or purchase plans pursuant to which stock may be acquired by officers, directors, employees or consultants, except: Employment inducement awards. Inducement grants to new employees or directors if such grants are approved by the listed company's independent compensation committee or a majority of the company's independent directors. Any plan (and material revisions thereto) intended to meet the requirements of Section 401(a) or 423 of the Internal Revenue Code, or any "parallel excess plan" as defined in the rules. Tax-qualified, non-discriminatory plans (e.g., plans that meet the requirements of Sections 401(a) or 423 of the Internal Revenue Code) or parallel nonqualified plans, provided such plans are approved by the listed company's independent compensation committee or a majority of the company's independent directors, or plans that merely provide a convenient way to purchase shares on the open market or from the company at fair market value. Shares available under plans acquired in an acquisition or merger may be used for posttransaction grants without further shareholder approval where the party that is not the listed company following the transaction has shares available for grant under pre-existing plans that were previously approved by shareholders, and (i) the number of shares available for grants is appropriately adjusted to reflect the transaction; (ii) the time during which such shares are available for grant is not extended beyond the period when they would otherwise have been available for grant; and (iii) such post-transaction grants are not made to persons who were employed by the post-transaction listed company immediately before the merger or acquisition was consummated. Same as NYSE. Same as NYSE. -19-

22 APPROVAL BY SHAREHOLDERS OF ISSUANCE OF SHARES AND OPTIONS (cont'd) Conversion, replacement or adjustment of Same as NYSE Same as NYSE. outstanding options or other equity compensation awards in connection with an acquisition or merger. An "equity-compensation plan" is a plan or arrangement that provides for the delivery of equity securities of the listed company to any employee, director or other service provider as compensation for services. For the purpose of this rule, "equitycompensation plans" do not include any plan that is made available to shareholders, generally, or that merely allow employees, directors or other service providers to elect to buy shares on the open market or from the company for their current fair market value. A plan that does not contain a provision that specifically permits repricing of options will be considered to prohibit repricing of options. Thus, any actual repricing of options will be considered a material revision of a plan. No comparable definition. Warrants or rights issued generally to all security holders of the company or stock purchase plans available on equal terms to all security holders of the company. A change to a plan to permit repricing of options will be considered a material revision of a plan. No comparable definition. Same as NYSE. -20-

23 OTHER REQUIREMENTS Enable NYSE to issue a public reprimand letter to any listed company that violates a NYSE listing standard (although suspension of trading and delisting remain the ultimate penalties for companies that repeatedly and flagrantly violate NYSE listing standards). AMEX may issue a "Warning Letter" to a company with respect to a minor violation of AMEX's corporate governance or shareholder protection requirements. Require annual CEO certification to NYSE that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. Require CEO to notify NYSE promptly after any executive officer becomes aware of any material non-compliance with any applicable provision of the NYSE corporate governance listing standards. Require each listed company to have an internal audit function. (This function may be outsourced to a firm other than the independent auditor.) Require that a going concern qualification in an audit opinion be disclosed through the issuance of a press release. Same as NYSE, except notice need not be by CEO. Listed companies with classified boards may not have more than three classes of directors. Each class should be approximately equal in size and the tenure of directors terms of office should not exceed three years. -21-