The Nasdaq Stock Market recently amended its listing rules to loosen the test for compensation committee member independence. The old rule, which implements the SEC’s Rule 10C-1 under the Exchange Act, prohibited members from receiving any consulting, advisory or other compensation from the listed company.
The new version of Nasdaq Listing Rule 5605(d)(2)(A) removes this bright line prohibition, requiring only that any compensation received from the company (or its parent or subsidiaries) be considered by the board of directors when determining compensation committee member independence. This change makes Nasdaq’s rule consistent with the mandate of Rule 10C-1 and, not incidentally, with NYSE listing standards.
Obviously, this is good news for companies that might otherwise have difficulty filling compensation committee slots. This issue can be particularly problematic for companies with
directors designated by institutional shareholders that receive management or other fees from the company (for example, private equity controlling shareholders) or
directors who may have received fees from the company in the past.
Note, however, that compensation committee members of Nasdaq-listed companies must continue to meet the objective independence standards applicable to all independent directors.
Companies must comply with the new rule by the earlier of their first annual meeting after January 15, 2014 or October 31, 2014. Until then, companies must continue to comply with the old rule.
Each company must certify to Nasdaq, no later than thirty days after the rule becomes effective for that company, that it has complied with the amended listing rule. A certification form will be available at Nasdaq’s Listing Center at https://listingcenter.nasdaqomx.com/.
While this rule change should make things easier in the long run, in the short run Nasdaq-listed companies will need to
review their compensation committee charters, corporate governance guidelines and D&O questionnaires for possible wording changes related to the new standards,
consider whether any changes are required in the board’s annual independence determination process, and
modify proxy statement disclosures as necessary.