The New York Stock Exchange (NYSE) submitted amended and restated listing standards proposals relating to director independence to the Securities and Exchange Commission (SEC) on March 12, 2003. The amended and restated proposals:

    • provide more specificity as to previously proposed categories of relationships that automatically disqualify a director from being deemed independent under NYSE listing standards;
    • change the previously proposed automatic bar to independence for directors and immediate family with former employment relationships with the listed company to a presumption of non-independence that can be overcome by a board finding of independence;
    • establish a new category of relationships, defined by reference to the amount of business done between the listed company and another company with which a director or immediate family member is associated, that would automatically disqualify a director from being deemed independent under NYSE listing standards; and
    • modify the original transition provisions from 24 months to 18 months but implement additional phase-in provisions that require companies to look back only to the effective date of the new rules (rather than five years) in applying NYSE's disqualifying relationship categories.

Note, the proposals do leave the basic test for director independence unchanged, i.e., to be independent, the board of directors must affirmatively determine that a director has no material relationship with the listed company.


The SEC had requested that NYSE excerpt its proposals relating to director independence from NYSE's full set of Corporate Governance Proposals, originally submitted to the SEC on August 16, 2002. In response to this request, and to address comments previously received by NYSE on its original independence proposals, NYSE submitted amended and restated proposals regarding director independence to the SEC. This process enables the SEC to address the director independence proposals separately from the remainder of the NYSE Corporate Governance Proposals.

NYSE does not believe that the SEC intends to approve new standards relating to director independence before it approves other NYSE Corporate Governance Proposals. Instead, NYSE expects that all the NYSE Corporate Governance Proposals will be approved as a group at one specific time, although certain of the listing standards will have different transition periods or effective dates than others. By breaking out the director independence proposals separately, those proposals will be published for public comment earlier than they otherwise would have been, and the public should therefore have a longer period to comment on the proposed independence standards.

Effectiveness of New Director Independence Standards

The SEC has not yet set an expected date for approval of the proposed director independence standards or the NYSE Corporate Governance Proposals generally.

However, NYSE has proposed shortening the period by which listed companies must comply with the director independence requirements from 24 months after SEC approval to 18 months after SEC approval. Companies listing with NYSE in connection with their initial public offerings or in connection with a transfer from another market (without similar director independence requirements) will have 24 months to comply. In addition, if a director of a company with a classified board who is not independent would not normally stand for re-election at the first annual meeting after the 18- (or 24-) month transition period, the company may delay any change in that director position for an additional year.

Although the amended and restated independence proposal contemplates a shorter phase-in period, it also effectively shortens the five-year "look back" period for the various independence disqualifiers discussed below. In particular, for the first five years after the effective date of the new independence rule, rather than looking back a full five years when analyzing a director's independence, a company needs to only look back to the effective date of the new rule to determine whether the existence of a particular relationship disqualifies that director from being independent. For example, if a director was a chief executive officer of a company that accounted for greater than 2% of the listed company's consolidated gross revenues for the year prior to the effective date of the new rule, there would be no automatic independence disqualification of the director unless such business relationship extended past the effective date of the listing standard.

Changes to Director Independence Standards

Basic Test for Director Independence Unchanged

The amended and restated director independence proposals would not change the basic test for director independence. For a director to qualify as "independent," a listed company's board of directors would still need to 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)." In addition, a NYSE-listed company would have to disclose in its proxy statement the basis for a board's determination that a relationship between a director and the company is not material. Alternatively, the board could adopt categorical standards to assist it in making determinations regarding independence (as long as such standards do not conflict with NYSE's per se disqualifying relationships discussed below) and state generally in the proxy statement that a member meets the categorical standards, instead of reviewing each relationship individually. For example, a board of directors might determine categorically that a relationship with a charity on which one of the listed company's directors is a trustee would not be deemed a material relationship for purposes of NYSE listing standards if the company did not provide more than a certain percentage or dollar amount of the annual contributions to the charity.

Changes to the Five-Year Director Independence Disqualifiers

The amended and restated proposals differ from the previous proposals with regard to the categories of relationships with the listed company that would specifically "disqualify" a director from being independent. We describe below the disqualifying categories as defined in the amended and restated proposals (headings are not part of the NYSE definitions):

    • Direct Compensatory Relationship: A director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is presumed not to be independent until five years after the director ceases to receive more than $100,000 per year in such compensation.

    • Independent Auditor Relationship: A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former auditor of the listed company is not independent until five years after the end of either the affiliation or the auditing relationship.

    • Interlocking Directorate: A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company's present executives serve on that company's compensation committee is not independent until five years after the end of such service or the employment relationship.

    • Significant Business Relationship: A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of another company (i) that accounts for at least 2% or $1 million, whichever is greater, of the listed company's consolidated gross revenues or (ii) for which the listed company accounts for at least 2% or $1 million, whichever is greater, of that other company's consolidated gross revenues, in each case, is not independent until five years after falling below such threshold.

These newly proposed disqualifying categories contain two significant changes from those previously proposed. The most significant is the addition of the category of disqualifying relationships described in the last bullet point above. The practical effect is that a number of individuals who are employed by companies that do business with the applicable listed company would not be able to be deemed independent directors for purposes of NYSE listing standards, even if the business done is ordinary course and not necessarily material to either company.

The other significant change affects the first disqualifying category. In the original NYSE proposal, disqualification under this category was based on an employment relationship (i.e., no former employee would be deemed to be independent for a five-year period starting at end of employment). Under the new NYSE proposals, this category bases disqualification more generally on receipt of direct compensation of more than $100,000 per year from the listed company (e.g., employment for less than $100,000 per year would not be included, but an employment or other relationship involving compensation exceeding $100,000 would be included). In contrast to the original NYSE proposal, the newly proposed category would include consulting relationships that exceed $100,000 per year.

However, the new NYSE proposals relating to the first disqualifying category do include an escape hatch. If a director has a direct compensatory relationship of greater than $100,000 a year and is therefore presumed not to be "independent," the board could negate this presumption if the board determines (and no independent director dissents) that, based on the relevant facts and circumstances, the applicable compensatory relationship is not material. If the board makes such a determination, the facts and circumstances regarding the determination would have to be specifically explained in the listed company's proxy statement. Note that each of the remaining disqualifying categories is a per se bar to a finding of independence; in other words, the existence of any relationships in these other categories automatically disqualifies the director from being independent, and the board cannot overcome the disqualification.

Companies should remember that even if a relationship does not specifically fall within the four disqualifying categories described above, the board of directors would still need to determine, either through consideration of the specific relationship or by use of adopted categorical standards, that the relationship is not material.

Text of Amended and Restated NYSE Proposals

This Update is intended only as a summary of NYSE's amended and restated proposals relating to director independence.  You can find discussion of other recent laws and regulations of interest on our website.


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