The SEC, on November 25, 2009, approved amendments to the corporate governance listing standards set forth in Section 303A of the NYSE Listed Company Manual. The amendments, proposed by the NYSE August 26, 2009, clarify certain of the current disclosure requirements, codify various interpretations made since the rules were originally adopted and eliminate several NYSE disclosure requirements that overlap with Item 407 of Regulation S-K (incorporating the Item 407 requirements in their place).
The rule changes take effect on January 1, 2010, and apply to proxy statements filed for annual meetings held after December 31, 2009.
While many listed companies may not be affected materially, companies should pay attention to the need to modify disclosure for future filings and to adjust certain internal corporate governance policies. Below is a summary of the more significant changes included in the amended rule.
Corporate Governance Amendments
Conforming to Regulation S-K. The amendments replace existing Section 303A requirements that are also addressed in Item 407 of Regulation S-K with a direct reference to compliance with Item 407. Since Item 407 requires duplicative or more specific disclosures than Section 303A, the NYSE believes the changes will facilitate compliance for listed companies. One result of the changes is that if a company’s disclosure is insufficient for the purposes of Item 407, that company will now also be deemed to be out of compliance with the NYSE’s listing rules. The NYSE’s independent director disclosure requirements in Section 303A.02(a), which allow the board of directors to use categorical standards for independence determinations, have been replaced with a requirement that listed companies comply with the SEC’s independence disclosure requirements in Item 407(a). Requirements in Sections 303A.05 and 303A.07 for compensation and audit committee charters to require production of compensation and audit committee reports have been replaced by a requirement to prepare the disclosure of Items 407(e)(5) (compensation committee report) and 407(d)(3)(i) (audit committee report).
Executive Sessions/Communication by Interested Parties. The amendments to Section 303A codify the NYSE’s view that holding regular executive sessions of independent directors satisfies the Section 303A.03 requirement that non-management directors meet at regularly scheduled sessions without management. The amendments also require that all interested parties, not only shareholders (as required by the original rules), be able to communicate their concerns directly to the director presiding over executive sessions, or the non-management or independent directors as a group.
Audit Committee Matters. As amended, Section 303A.06 will now require issuers to disclose reliance on certain exceptions from Exchange Act Rule 10A-3, as is already required by Rule 10A-3. Amended Section 303A.07 clarifies that if an audit committee member simultaneously serves on the audit committees of more than three public companies, then the board must determine that this service would not impair the ability of the member to serve effectively on the listed company’s audit committee and must disclose this determination regardless of whether the listed company has a policy limiting to three or fewer the number of public company audit committees on which its audit committee members may serve. The original language in Section 303A.07 had led to confusion that disclosure was only required if no policy was in place.
Code of Business Conduct and Ethics. Previously, Section 303A.10 required that a listed company disclose any waiver granted to an executive officer or director of its code of business conduct and ethics. The amended Section 303A.10 now specifies that the waiver must be disclosed to shareholders within four business days of such determination (as opposed to the guidance previously provided by the NYSE’s Frequently Asked Questions on Section 303A that the waiver must be disclosed to shareholders within two to three business days of the board’s determination) and that disclosure must be made by distributing a press release, providing website disclosure or by filing a current report on Form 8-K with the SEC. This is consistent with the four-business-day reporting requirement for waivers in Item 5.05 of Form 8-K.
Websites. The amendments include additions to Section 303A allowing companies to make certain disclosures on their websites that had been required in proxy statements or annual reports. These disclosures include:
- The identity of the director chosen to preside at executive sessions of nonmanagement or independent directors, or the procedure by which a presiding director is selected for each executive session.
- The method for interested parties to communicate directly with the presiding director or the non-management or independent directors as a group.
- Disclosure of certain contributions made to any tax-exempt organization in which any independent director serves as an executive officer.
- Any determination by a board of directors that the service of any audit committee member on more than three public company audit committees does not impair the ability of the audit committee member to serve effectively.
If a company elects to make these disclosures on its website, it must indicate that fact in its proxy statement or annual report and include the website address. While the NYSE has moved to permit companies to make these disclosures only on their websites, companies are still required by Item 407 of Regulation S-K to include some of the foregoing disclosures in their proxy statements or annual reports.
The amended rules also eliminate the requirement for companies to disclose that hard copies of the audit, compensation and nominating committee charters, corporate governance guidelines and code of business conduct and ethics will be made available in print upon request.
Notice of Non-Compliance and CEO Certification. Section 303A.12 has been amended to require that companies notify the NYSE after any executive officer becomes aware of any non-compliance with Section 303A. The rule previously required notice only of any material non-compliance. In addition, amended Section 303A.12 eliminates the requirement that companies disclose in their annual reports that they have filed the CEO certification required by Section 303A.12(a) and Section 302 of the Sarbanes-Oxley Act of 2002 in the previous year. Listed companies do, however, still need to file the Section 303A.12(a) certification with the NYSE and file the Section 302 certification with the SEC.
Controlled Companies. Under the existing rules, a “controlled company” is a listed company where an individual, group or another company holds more than 50 percent of the voting power. The amendments specify that voting power is determined for this purpose by the ability to elect directors. This corresponds to the NYSE’s view that a shareholder agreement relating only to the disposition of assets is not sufficient to qualify a company as a controlled company. Further, the amended rules replace the NYSE’s controlled company exemption disclosure requirements with a cross-reference to similar disclosure requirements of Regulation S-K; namely, that a controlled company utilizing an exemption must comply with the disclosure requirements in Instruction 1 to Item 407(a) of Regulation S-K to disclose the exemption and basis for its application.
Phase-in Requirements. The amended rules revise certain phase-in periods for compliance with the NYSE’s governance requirements relating to director independence and board committees for companies listing in connection with an initial public offering or that otherwise become subject to the NYSE listing standards. The changes apply to companies in the following situations:
- emerging from bankruptcy;
- transferring from another market;
- ceasing to be a controlled company; and
- ceasing to be a foreign private issuer.
Foreign Private Issuers. NYSE rules had required foreign private issuers to describe, either in their annual reports or on their websites, the significant corporate governance differences between the practices followed in their home countries and the NYSE requirements applicable to U.S. companies. The amendments now require those issuers who file a Form 20-F to include the description in that Form 20-F filing, as required by the SEC. Those issuers not required to file a Form 20-F may either include the statement of differences in the annual report they file with the SEC or make the statement available on their websites (providing the website address and a reference to the disclosures in their annual reports).
In addition, the amendments include other changes to:
- the “controlled company” exception to certain of the governance rules;
- the phase-in provisions for companies newly subject to the governance rules (e.g., as a result of an IPO, emergence from bankruptcy, transfer from another market or ceasing to be a foreign private issuer or controlled company); and
- the compliance requirements for foreign private issuers listed on the NYSE.