Other NYSE/NASDAQ Developments

by Snell & Wilmer

Non-Executive Employment of Family Members No Longer Precludes Nomination of Non-Independent Directors under “Exceptional and Limited Circumstances”

Until recently, a director of a NASDAQ-listed company could serve as an independent member of the audit, compensation or nomination committee even if a family member of that director was a non-executive employee of the issuer, yet, at the same time, be precluded by the family member’s employment relationship from serving as a non-independent member of any of those committees under the exceptional-and-limited-circumstances exception (the “Exception”) to the NASDAQ committee composition rules.[6] On July 19, 2012, the SEC approved a proposal by NASDAQ to amend Rule 5605 to allow a director who is a family member of a non-executive employee of a listed company to serve on any of these committees under the Exception, provided the company’s board concludes that the director’s membership on the relevant committee is required by the best interest of the company and its shareholders.

NASDAQ proposed the amendment because it believed that the same family relationship should not preclude eligibility to use the Exception if it does not otherwise preclude independence, citing the distinction in the prior rule as being “incongruous.” The proposed rules regarding compensation committee member independence make no substantive changes to the Exception.

The Exception still requires that companies comply with the requirements set forth in the table below in order to use the Exception:

Audit Committee

Compensation and Nomination Committees

  • the director meets the criteria set forth in Section 10A(m)(3) under the Exchange Act and the rules thereunder;
  • the director is not an executive officere of the company;
  • the director is not an employee of the company;
  • the director is not a family member of an executive officer;
  • the board of directors made an affirmative determination that the appointment is in the best interests of the company and its shareholders;
  • the director does not serve longer than two years;
  • the director does not serve as the chair of the audit committee; and
  • the company makes the disclosures required by Instruction 1 to Item 407(d)(2) of Regulation S-K.f

e The definition of Executive Officer in the amended rule means “those officers covered in Rule 16a-1(f)” under the Securities Exchange Act of 1934.
f The foreign private issuer relying on the Exception must disclose in its next annual report (e.g., Form 20-F or 40-F) the nature of the relationship that makes the director not independent and the reasons for the determination.

  • the committee has at least three members;
  • the director is not an executive officer of the company;
  • the director is not an employee of the company;
  • the director is not a family member of an executive officer;
  • the board of directors made an affirmative determination that the appointment is in the best interests of the company and its shareholders;
  • the director does not serve longer than two years;
  • the company discloses the nature of the relationship and the reasons for the determination either on or through the company’s website or in the next proxy statement; and
  • the company makes the disclosures required by Instruction 1 to Item 407(a) of Regulation S-K.

Enhanced Disclosure for NASDAQ Delisting Notices

On December 3, 2012, the SEC approved NASDAQ’s enhanced delisting disclosure rules. The SEC noted in its approval that the new rules preserve the ability of investors to make informed trading decisions based on adequate disclosure to the public of listing deficiencies. Under the prior rules, companies were able to avoid this purpose through minimal disclosure.

In general, Rule 5810(b) requires that a company make a public announcement by filing a Form 8-K, where required by the SEC, or by issuing a press release, as promptly as possible, but not more than four business days following the receipt of the staff deficiency determination. Should a company fail to make the announcement in the allotted time, or include the enhanced disclosures, trading of its securities will be halted and NASDAQ will make a public announcement. If a company’s failure to make a public announcement is the only reason for halting trading, NASDAQ will ordinarily resume trading after it makes the public announcement.

Although a company is required to more fully disclose each concern identified a staff deficiency determination, it may want to take advantage of the opportunity the new rule affords the company to provide its own positions on the deficiencies raised. This opportunity for the company to tell its story to investors may help preserve shareholder confidence in the company. At the same time, the SEC warned that a company may not want to use this optional disclosure as a way to debate the issues through public announcements. Should a company’s disclosure be deemed by NASDAQ to be inaccurate or misleading, NASDAQ may issue a clarifying public announcement.

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.

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