NASDAQ Amends Listing Standards to Remove Prohibition on Receipt of Compensatory Fees by Compensation Committee Members

by Goodwin
Contact

On November 26, 2013, the NASDAQ Stock Market (“Nasdaq”) filed an amendment to its listing standards that eliminates the prohibition on the receipt of compensatory fees by compensation committee members. Nasdaq listing standards relating to compensation committee independence will therefore be in line with current New York Stock Exchange (“NYSE”) listing standards that require boards of directors to consider all relevant factors, including the sources of compensation of a director, when making director independence determinations for compensation committee members. The Nasdaq amendments also make changes in the Nasdaq interpretive statements concerning the compensation and affiliation requirements for compensation committee members.

Earlier this year, as required by the Dodd-Frank Act and Section 10C-1 of the Securities Exchange Act of 1934, both Nasdaq and the NYSE amended their listing standards concerning the independence of compensation committee members and the engagement and independence of compensation advisers, as summarized in Goodwin Procter’s Alert here. Listed companies are required to comply with the Nasdaq and NYSE rules concerning the independence of compensation committee members by the earlier of (i) their first annual meeting held after January 15, 2014 or (ii) October 31, 2014.

Compensation Committee Independence

As amended, the Nasdaq listing standards require boards of directors of Nasdaq-listed companies, when making independence determinations for compensation committee members, to consider “all factors specifically relevant to determining whether a director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a compensation committee member,” including, but not limited to:

  • the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company to the director; and
  • whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

When considering the sources of a director’s compensation for this purpose, Nasdaq has amended its interpretative guidance to state that the board of directors should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about the company’s executive compensation.

With respect to a director’s affiliation with the company, Nasdaq has amended its interpretive guidance to state that the board should also consider whether an affiliate relationship places a compensation committee member under the direct or indirect control of the company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his or her ability to make independent judgments about the company’s executive compensation.

The amendments do not change the existing Nasdaq requirement that compensation committee members must meet Nasdaq independence standards for independent directors as defined under Nasdaq Listing Rule 5605(a)(2). That definition excludes any director who: (1) accepted any compensation from the company in excess of $120,000 during any period of twelve consecutive months within the prior three years (excluding compensation for board and committee service and other specified items) or (2) is a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed the greater of 5% of the recipient’s consolidated gross revenues for that year, or $200,000.

Finally, the Nasdaq amendments include interpretive guidance that clarifies that any reference to the “company” includes any parent or subsidiary of a listed company. The term “parent or subsidiary” is intended to cover entities that a company controls and consolidates with the company’s financial statements as filed with the Securities and Exchange Commission, unless the company reflects an entity solely as an investment in its financial statements.

The amendments to the Nasdaq listing standards relating to compensation committee independence do not impact the ability of listed companies (i) to cure noncompliance with the compensation committee composition requirements in certain circumstances, or (ii) to have a non-independent director serve on the compensation committee under exceptional and limited circumstances.

General Exemptions

There are no changes to the current exemptions for (i) controlled companies, (ii) foreign private issuers and (iii) certain other listed companies from the Nasdaq listing standards relating to compensation committee independence.

Smaller reporting companies continue to be generally exempt from the new compensation committee independence requirements, though, as noted in prior Goodwin Procter Alerts, Nasdaq listing standards require smaller reporting companies to have a formal compensation committee of at least two members who satisfy Nasdaq director independence requirements.

Action Companies Should Be Taking Now

  • Review Compensation Committee Charter.  Nasdaq has previously informally advised that compensation committee charters will satisfy Nasdaq listing standards if the charter refers to the independence standards required by Nasdaq rules, rather than including the full text of the applicable Nasdaq rules.  If a company’s compensation committee charter restates the text of the Nasdaq rules, the company should amend the charter either to refer to the Nasdaq rules, as currently in effect and as amended from time to time in the future, or to reflect the amended text of the Nasdaq rules.
  • Revise Director Independence Questionnaires.  The company should confirm that questionnaires for directors who will serve on the compensation committee reflect the amended Nasdaq listing standards.
  • Prepare for Independence Determinations by the Board of Directors.  Nasdaq rules require boards of directors to consider information that goes beyond responses to questions typically included in questionnaires provided to non-employee directors.  The information provided to the Board of Directors in connection with independence determinations for directors selected to serve as compensation committee members should include all reasonably available information that is required to support independence determinations under Nasdaq rules.  For example, questionnaires may not solicit information about compensation paid to a director by the company – because that information is readily available to the company in its records – but the company should ensure that this information will be provided to the board of directors for its consideration.
  • Make Independence Determination on a Timely Basis.  The amendments do not change the existing Nasdaq compliance deadline for the compensation committee independence requirements referred to above:  Nasdaq companies must comply with these rules by the earlier of their first annual meeting after January 15, 2014 or October 31, 2014.  Companies should plan for Board review of the relevant information with sufficient time in advance of the deadline to make any necessary changes to the composition of the committee.
  • File Nasdaq Compliance Certification When Due.  Nasdaq will provide a certification form that must be submitted within 30 days after the applicable compliance deadline described above.  Nasdaq will make this certification form available on the Nasdaq OMX Listing Center no later than January 15, 2014.  Companies should ensure that this form is submitted to Nasdaq before the expiration of the 30-day filing period.

Effective Date

The Nasdaq amendments became effective immediately pursuant to SEC rules, although the amendments are subject to a 21-day comment period from December 16, 2013, the date of publication in the Federal Register. Nasdaq companies must comply with the amended rules by the earlier of their first annual meeting after January 15, 2014 or October 31, 2014.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:

Goodwin
Contact
more
less

Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.