A Majority of Directors Must Be Independent

The NYSE requires a majority of Board members of a listed company to be independent directors. For a director to qualify as independent under NYSE standards, a company’s Board must affirmatively determine that the director has no material relationship with the listed company (including any parent or subsidiary in a consolidated group). The Board must consider the materiality of the director’s direct and indirect relationships as a partner, shareholder or officer of any organization with links to the company (including with its senior management). A material relationship can come in many forms, including commercial, industry-related, banking, consulting, legal, accounting, charitable, private or familial.

Listed companies must report determinations of director independence in their annual meeting proxy statements, together with a description of any direct and indirect transactions, relationships and arrangements between directors and the company considered by the Board in making its independence determinations. Some companies use various general categories of relationships to help determine director independence, and they disclose in the proxy statement whether a director had a relationship that fell into one of the categories without going into much additional detail. We discuss general categories of relationships relating to director independence in Chapter 2.

What Is Independence? The NYSE Describes What It Is Not

A director who has any of the following relationships is not independent under NYSE standards:

• Employment Relationship. A director who is or was within the past three years an employee of the listed company, or who has an immediate family member who is or was within the past three years an executive officer of the company, will not be independent. Employment as an interim chairman, CEO or other executive officer will not by itself disqualify the director from being considered independent following employment.
• Compensation in Excess of $120,000. A director who has, or whose immediate family member has, received more than $120,000 of direct compensation from the company in any 12-month period within the past three years, other than Board and committee fees and pension or other deferred compensation for prior service (provided the compensation is not contingent on continued service), will not be independent. Compensation that a director receives for past service as an interim chairman, CEO or other executive officer and compensation that an immediate family member receives for service as a nonexecutive employee of the company do not necessarily disqualify the director from being considered independent.
• Relationships with the Company’s Internal or Outside Auditor. Any of the following auditor relationships will make a director not independent:
  • Being a current partner or employee of the company’s internal or outside auditor;
  • Having an immediate family member who is a current partner of the company’s internal or outside auditor;
  • Having an immediate family member who is a current employee of the company’s internal or outside auditor and personally works on the listed company’s audit; or
  • Having been, or having an immediate family member who was, a partner or employee of the company’s internal or outside auditor personally working on the company’s audit within the past three years.

• Interlocking Directorate. A director will not be independent if the director or an immediate family member is or was within the past three years employed as an executive officer of another company (including a charitable organization) at the same time that a current executive officer of the company served on the other company’s Compensation
• Significant Business Relationship. A director will not be independent if the director is a current employee or an immediate family member is a current executive officer of another company that made payments to or received payments from the listed company that exceeded, in any of the past three fiscal years, the greater of $1 million or 2% of the other company’s consolidated gross revenues in the last completed fiscal year.

Executive Sessions

Listed companies are required to schedule “regular” executive sessions in which non- management directors meet without management participation. Non-management directors exclude company executive officers, but include other directors who may not be independent because of a material relationship or other reason. A listed company may satisfy this requirement by holding regular executive sessions of only its independent directors. However, if a company regularly holds meetings of all non- management directors (and if that group includes any non-independent directors), then it should also hold an executive session of only independent directors at least once a year. We provide practical tips for organizing executive director sessions in Chapter 2.

The non-management (or independent, as the case may be) directors should either appoint a single presiding director for all executive sessions or rotate the presiding director position following a set procedure. Listed companies that have either an independent chair or a lead independent director usually name this person as the presiding director. Companies are required to publicly disclose the presiding director’s name or the procedure used to select the presiding director for executive sessions, as well as a method for all interested parties (not just shareholders) to communicate directly with the presiding director or with the non-management (or independent) directors as a group.

Audit Committee

Composition and Independence. NYSE listing standards generally require that listed companies have an Audit Committee that consists of at least three independent directors and meets SEC requirements. All Audit Committee members must meet two somewhat overlapping independence standards, one established by Sarbanes-Oxley and the other by the NYSE:

• Sarbanes-Oxley Criteria. An Audit Committee member cannot receive any payment from the company other than for Board or committee service and cannot be an affiliated person of the company or any of its subsidiaries. (We discuss these Sarbanes-Oxley independence requirements in detail in Chapter 2.)
• NYSE Criteria. An Audit Committee member must be independent under NYSE director independence standards and also must fulfill the Sarbanes-Oxley criteria for Audit Committee independence.

Financial Literacy and Expertise. Each member of the Audit Committee must be, or within a reasonable period of time following appointment must become, financially literate. In addition, at least one member must have accounting or related financial management expertise. The NYSE does not provide detailed definitions for these concepts; a listed company’s Board is expected to use its business judgment in interpreting these requirements. For example, the Board can presume that a person who meets the SEC’s Audit Committee financial expert standard has the requisite financial expertise to meet this NYSE standard. (We discuss the SEC’s Audit Committee financial expert standard in Chapter 2.)

Effectiveness Evaluation of Director’s Service on Multiple Audit Committees. Does an Audit Committee member serve on more than three public company Audit Committees? If so, the Board must decide whether these commitments impair the director’s ability to serve as an effective Audit Committee member, and the listed company must publicly disclose the determination. (Many companies’ corporate governance guidelines specifically restrict a director from simultaneously serving on more than three public company Audit Committees.)

Audit Committee Charter. The NYSE requires a listed company to have a written Audit Committee charter that addresses:

• Purpose. The core role of an Audit Committee is to help the Board fulfill its duty of overseeing the company’s financial compliance and reporting. Performance of this role is detailed in the Audit Committee report within the annual proxy statement. The Audit Committee’s oversight functions cover:
  • The integrity of the company’s financial statements;
  • The company’s legal and regulatory compliance;
  • The independent auditor’s qualifications and independence;
  • The performance of both the internal audit function and the independent auditor; and
  • The preparation of disclosures related to Audit Committee interactions with senior management, the Board and the independent auditors.

• Duties and Responsibilities. These include, among others (some of which are discussed in Chapter 2):
  • Review and Evaluation of the Independent Auditor. Annually reviewing and evaluating the independent auditor’s performance (including that of the lead partner, and the need for rotation of auditor personnel and potentially the independent auditor), qualifications, independence and internal control procedures. 
  • Review of Financial Statements and Earnings Releases. Reviewing and meeting to discuss quarterly and annual financial statements and disclosures, including MD&A, with management and the independent auditor.  Reviewing and discussing earnings releases or guidance to analysts and rating agencies. (The NYSE does not specifically require a pre-release review, instead permitting general guidance regarding releases. However, most Audit Committees, or key members, do preview earnings releases and guidance prior to public release.)
  • Oversight of Risk Exposure Policies. Discussing the company’s process for setting policies to govern risk assessment and management, including guidelines, policies and major financial risk exposure.
  • Holding Executive Sessions. Holding separate and periodic meetings with management, the internal auditor and the independent auditor.
  • Review of the Audit Process. Reviewing audit-related problems or difficulties (and management’s responses) with the independent auditor.
  • Hiring Policies. Setting clear hiring policies for employees or former employees of the independent auditor.
  • Informing the Board. Regularly reporting to the Board on financial statements, compliance with laws and regulations, audit procedures and performance of the independent and internal auditor.
  • Annual Self-Evaluation. The Audit Committee must annually assess its performance.

Internal Audit Function. The NYSE requires each listed company to have an internal audit function. A company may outsource this function to a third party other than its independent auditor. The Audit Committee is generally responsible for oversight of the internal auditor.

Compensation Committee

Composition and Independence. NYSE listing standards generally require that listed companies have a Compensation Committee composed entirely of independent directors, but do not prescribe a minimum number of members. In addition, when determining the independence of a director who will serve on the Compensation Committee, the Board must specifically consider all relevant factors regarding whether the director has a relationship to the listed company that is material to the director’s ability to be independent from management with regard to Compensation Committee service, including:

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

Compensation Committee Charter. The NYSE requires a listed company to have a written Compensation Committee charter that addresses:

• Purpose and Responsibilities. Each Compensation Committee must at least oversee:
  • CEO Goals, Performance and Compensation. The Compensation Committee reviews and approves corporate goals and objectives relevant to the CEO’s compensation, evaluates the CEO’s performance in light of those goals and objectives, and determines and sets the CEO’s compensation level based on its evaluation (either as a committee or with other independent directors as directed by the Board).
  • Non-CEO Executive The Compensation Committee recommends to the Board non-CEO executive compensation and incentive compensation plans and equity-based plans that are subject to Board approval (although the Board may delegate this authority to the Compensation Committee).
  • Prepare Disclosure. The Compensation Committee oversees the preparation of the Compensation Committee report, the CD&A and other related disclosure. (We discuss other duties and responsibilities of the Compensation Committee in Chapter 2.)
• Annual Self-Evaluation. The Compensation Committee must annually assess its performance.
• Advisors. The Compensation Committee must have the ability to retain or obtain the advice of a compensation consultant, independent legal counsel or other advisor, following an independence assessment of the advisor.

Nominating & Governance Committee

NYSE listing standards generally require that listed companies have a Nominating & Governance Committee composed entirely of independent directors. A minimum number of members is not prescribed. The Nominating & Governance Committee must have a written charter that addresses:

• Purpose and Responsibilities. The Nominating & Governance Committee’s principal function is to oversee corporate governance, including, at a minimum:
  • Identifying qualified director candidates consistent with criteria approved by the Board;
  • Selecting, or recommending that the Board select, director nominees for the annual shareholders’ meeting;
  • Developing and recommending to the Board a set of corporate governance guidelines; and
  • Overseeing the evaluation of the Board and (We discuss other duties and responsibilities of the Nominating & Governance Committee in Chapter 2.)
• Annual Self-Evaluation. The Nominating & Governance Committee must annually assess its performance.

Corporate Governance Guidelines

The corporate governance guidelines required of each listed company allow the Board and senior management to publicly set out the key tenets of their company’s governance values.

Accessible on the corporate governance page of an NYSE company’s website, the guidelines should address:

• Director independence standards, qualifications, tenure, resignation, succession, responsibilities and compensation;
• Director access to management and independent advisors;
• Director orientation and continuing education;
• Management succession (including selection, review and contingency policies); and
• Annual evaluation of Board and committee functioning and performance.

The NYSE calls for website posting of a listed company’s corporate governance guidelines, code of business conduct and ethics and core committee charters. A listed company must disclose the availability of these materials and the website on which the materials are located in its annual proxy statement (and other SEC filings). Companies use website postings both as a way to publicly communicate the “tone at the top” from the CEO and the Board and as a ready reference for employees, directors and shareholders.

Code of Business Conduct and Ethics

Paired with the corporate governance guidelines is the NYSE-required code of business conduct and ethics – a practical set of ethical requirements for a listed company’s officers, directors and employees. Only the Board or a committee can waive violations of the code by directors or executive officers, and the company must disclose any of these waivers to its shareholders within four business days of the waiver.

An NYSE-compliant code of business conduct and ethics will address, at a minimum:

• Conflicts of interest, corporate opportunities and fair dealing;
• Confidentiality and protection and proper use of company assets;
• Compliance with laws, rules and regulations (including insider trading laws); and
• Proactive reporting of any illegal or unethical behavior (with protections against retaliation).

In reviewing a code of business conduct and ethics, the Board should consider whether the code provides for sufficiently practical and general compliance standards and procedures, so that the Board or a committee is not put in a position of regularly considering waivers.

CEO’s Certification of Compliance with Corporate Governance Standards and Company’s Annual Written Affirmation Regarding Ongoing NYSE Obligations

A listed company’s CEO must annually certify to the NYSE that he or she is unaware of any (not only material) violation of the NYSE’s corporate governance standards, or detail any known violation. On an ongoing basis, the CEO must promptly notify the NYSE in writing if any executive officer of the company becomes aware of any noncompliance with the NYSE’s corporate governance standards, even if the noncompliance is not material. In addition, a listed company must file a separate annual written affirmation regarding ongoing NYSE obligations, and may have to provide interim affirmations if various triggering events occur.

NYSE May Issue Public Reprimand Letters

The NYSE may issue a public reprimand letter to a listed company that it determines has violated any NYSE listing standard. For companies that repeatedly or flagrantly violate NYSE standards, the reprimand could lead to trading suspension or delisting.

Website Requirements

Listed companies are required to have and maintain a publicly accessible website. To the extent that the NYSE requires a listed company to make documents available on or through its website, such website must clearly indicate in the English language the location of such documents on the website. Any such documents must be available in printable versions in the English language.

Equity Compensation Plans

Shareholders must approve any new equity compensation plan (or arrangement), whether or not officers and directors can participate in the plan. Shareholders must also approve any material revision to an existing plan.

For purposes of the NYSE requirements, an equity- compensation plan is a plan or other arrangement that may provide equity securities (newly issued or treasury) of the listed company to any employee, director or other service provider as compensation for services.

The NYSE’s definition of material revision is general, but specifically includes:

• Materially increasing the number of shares available under a plan;
• Expanding the types of awards available under a plan;
• Materially expanding the class of persons eligible to participate in a plan;
• Materially extending a plan’s term;
• Materially changing the method of determining the exercise price of options under a plan;
• Repricing options, including where a plan does not permit repricing or changing a plan to permit repricing or lowering the exercise price after grant; and security. 
• Cancelling options as part of an exchange when the exercise price exceeds the fair market value of the underlying

Limited exemptions from the NYSE’s shareholder approval requirements regarding plan approval include dividend reinvestment or other plans offered to all shareholders, some issuances in connection with mergers and acquisitions, 401(k) and stock purchase plans or similar tax-qualified and parallel nonqualified plans, and equity grants made as a material inducement to a person being newly hired.

If a grant, plan or amendment is exempt from the NYSE’s shareholder approval requirements, the Compensation Committee (or a majority of the independent directors) must approve the grant, plan or amendment. In addition, the company must notify the NYSE in writing of the use of an exemption and, for any hiring inducement grant, issue a press release to disclose the material terms of the grant.

20% Stock Issuance

In most cases, shareholders must approve a listed company’s new issuance of common stock (or securities convertible into, or exercisable for, common stock) in any transaction (or series of related transactions) that could equal or exceed 20% of the outstanding common stock or 20% of the outstanding voting power before the new issuance. However, a public offering for cash (even if over these 20% limits) generally does not require shareholder approval, nor does a private sale of common stock for cash at a price at or above the common stock’s minimum price unless the sale is related to the acquisition of the stock or assets of another company and the related issuance of common stock (and any other issuances of common stock relating to the acquisition) could exceed the 20% limits. The NYSE defines “minimum price” as the lower of (1) the official closing price of the listed company’s common stock immediately prior to the signing of the binding agreement to issue the additional common stock; or (2) the average official closing price of the listed company’s common stock for the five trading days immediately prior to the signing of the binding agreement.

Issuances with Related Parties

In a non-cash transaction or in a cash transaction at a price less than the minimum price (see above), the NYSE generally requires shareholder approval prior to the issuance of common stock (or securities convertible into, or exercisable for, common stock) of over 1% of the outstanding preissuance common stock or voting power to directors, officers or substantial securities holders. In addition, prior shareholder approval is required if the common stock issuance is related to an acquisition of a company or assets where a related party has a 5% or greater (or related parties collectively have a 10% or greater) direct or indirect interest in the company or assets or the consideration to be paid in the acquisition, and the related issuance of common stock (and any other issuances of common stock relating to the acquisition) could exceed 5% of the outstanding preissuance common stock or voting power.

Issuances in Change-of-Control Transactions

The NYSE generally requires shareholder approval prior to an issuance of securities that would result in a change of control of the listed company.

With this advance review requirement, a company must carefully implement procedures to identify potential related party transactions and approve them before they occur.

The NYSE reviews proxy statements and other public filings disclosing related party transactions, and where such situations continue for several years, the NYSE may remind the listed company of its obligation, on a continuing basis, to evaluate each related party transaction and determine whether it should be permitted to continue.

• Staggered Boards. If a listed company has a staggered Board, it may be divided into no more than three classes, with each class being approximately the same in number and serving approximately equal terms of no more than three years. (We discuss staggered Boards in Chapter 2.)
• Quorum for Shareholders’ Meetings. Generally, a listed company will be expected to have a quorum requirement of a majority of outstanding shares for any meeting of shareholders. Nevertheless, the NYSE may permit quorum provisions of reasonably less than a majority of outstanding shares of common stock if the company agrees to make general proxy solicitations for shareholders’ meetings.

• Noncompliance with corporate governance standards;
• The listing of additional shares (including potentially through exercise or conversion of nonlisted securities) or a new class of securities;
• Cash dividends or distributions, or stock splits or stock dividends;
• Redemption, retirement or cancellation of a listed security (15 days’ advance notice prior to redemption date required);
• A material disposition of assets;
• Rights offerings or changes relating to existing shareholders;
• A change in corporate name (20 days’ advance notice of the date set for mailing of shareholders’ proxy materials dealing with the matter if required);
• A change relating to the nature of the business;
• A change in directors or executive officers;
• Record date notice (ten days’ advance notice prior to the record date required);
• The failure to pay interest on a listed security;
• A change in auditor; and
• A change in transfer agent, trustee, fiscal agent or registrar for listed securities (five business days’ advance notice required).

Material news consists of news or information that might reasonably be expected to have a material effect – favorable or unfavorable – on the market of a listed company’s securities, including information that might affect the value of the company’s securities or influence an investor’s decision to trade in the company’s securities. Events such as earnings announcements, dividend declarations, mergers and acquisitions, tender offers, major management changes, and significant new products or contracts may all qualify as material news.

Chapter 5 provides a more detailed list of factors that will help in deciding when news or information merits public release.

Exceptions to Required Public Disclosure

The NYSE permits a listed company to refrain from publicly announcing even material news, if necessary, as long as the company can maintain its confidentiality while still keeping all investors on equal footing and allowing no unfair information advantage. However, a company must take extreme care to keep the information confidential and to remind persons who possess the knowledge of their obligation to refrain from trading on insider information.

If a decision is made not to disclose material news, a listed company’s IRO and general counsel’s office should closely monitor the price and trading patterns in the company’s securities and be prepared to make a public announcement if it becomes clear that the information has leaked to outsiders. If the NYSE detects unusual or suspicious trading activity in a company’s securities, the NYSE may contact the company, require that the company make the information public immediately or possibly halt trading in the company’s securities until the public has time to absorb the information.

Procedures for Public Disclosure of Material News

The NYSE outlines the following steps a listed company should take when publicly releasing material news (including responding to rumors):

• If the announcement is to be made between 7:00 a.m. and 4:00 p.m. Eastern time (4:00 a.m. and 1:00 p.m. Pacific time), the company must telephone the NYSE’s MarketWatch Group at least ten minutes prior to public announcement and inform the NYSE of the substance and method of distribution of the announcement. (When the announcement is in written form, the company must also provide a copy of the text to the NYSE via specified web-based means at least ten minutes prior to release of the announcement.) If the announcement is to be made after the close of trading, the NYSE requires that a company wait to make the announcement until the earlier of publication of the day’s official NYSE closing price or five minutes (and recommends a company wait 15 minutes) after the official close of trading (except when publicly disclosing material information that was nonintentionally disclosed in order to comply with Regulation FD);

• Broadly disseminate the news by a Regulation FD– compliant method (or combination of methods), and if the information should be immediately publicized, then by the fastest available means. According to the NYSE, this typically requires that the company either (i) include the news in a Form 8-K or other SEC filing or (ii) issue the news in a press release to the major newswire services, including, at a minimum, Dow Jones & Company, Inc., Reuters Economic Services and Bloomberg Business News;
• Prepare an internal question-and-answer script and have someone at the company ready to respond to questions about the material news; and
• Promptly send to the company’s NYSE representative via email any press release that may significantly impact trading.

Trading Halts or Delays

The NYSE requires advance notice of potentially material news in part to determine whether the news would justify a trading halt or delay in the listed company’s securities. Companies generally may avoid temporary trading halts or delays related to the release of new material news by fully disseminating the information to the public well before trading begins. If the company believes that it may request a trading halt in connection with the announcement of material news, the company should coordinate closely with the NYSE. Whenever the NYSE decides to halt or delay trading due to pending material news, it will make an announcement to the market to that effect. Once the company releases the material news, the NYSE will monitor the situation and commence trading pursuant to its normal trading procedures. If the pending material news is not released within a reasonable time after the halt, the NYSE will monitor the situation and may reopen trading (often within 30 minutes of the trading halt or delay) and signal that material news is still pending. In addition, when the NYSE believes it is necessary to request from a company information relating to material news, the NYSE may halt trading until it has received and evaluated the information.

• Listing Standards Violation. If a company falls below the quantitative continued listing standards or fails to comply with other qualitative listing standards, such as maintaining an Audit Committee that conforms with listing requirements, the NYSE will notify the company, generally within ten business days of knowledge, and provide it with an opportunity to present the NYSE with a plan describing action the company has taken, is taking or will take that would bring it into conformity with continued listing standards within 18 months. Such a plan would include quarterly financial projections, details related to any strategic initiatives the company plans to complete and market performance support. For domestic companies, the company must contact the NYSE within ten days of receipt of notice to confirm that it received the notice, discuss any of the company’s financial data that the NYSE may be unaware of, and indicate whether it intends to present a plan. The company then has 45 days from receipt of notice to submit its plan to the NYSE. If the company fails to respond to the notice, fails to comply with certain standards (including regarding financial statements) or fails to present a plan, or if the NYSE does not accept the plan that the company presents, suspension and delisting procedures will commence. The company must file a Form 8-K discussing its failure to meet applicable listing standards and if it does not, the NYSE will issue a press release. At all times, however, the NYSE may suspend trading and apply to the SEC to delist a company’s securities if the NYSE deems it necessary for the protection of investors.
• Failure to File SEC Reports. If a company fails to file certain reports as required by the SEC, the NYSE will notify the company, and the company must contact the NYSE within five days of the date of notice to discuss the status of the delinquent report. In addition, the company is required to issue a press release discussing the filing delinquency and the anticipated date that the filing delinquency will be cured; otherwise, the NYSE will do so. If the company does not cure the filing delinquency within six months (or another appropriate period of time as determined by the NYSE), suspension and delisting procedures will commence (or the NYSE could provide another six-month cure period at its discretion).

When a company receives notice from the NYSE of any of the circumstances described above, a Form 8-K filing may be required. Companies in these circumstances should discuss with counsel how to best engage with the NYSE to avoid penalties, including potential trading suspension and securities delisting.