In theory, a company could be delisted from a national stock exchange as a result of a chance meeting anywhere and a casual conversation, if a compensation committee member receives any legal advice from independent company counsel. Beginning on July 1, 2013, the listing standards of national securities exchanges and national securities associations mandated by Section 952 of the Dodd-Frank Act become effective. Under these standards, compensation committees of issuers listed on national securities exchanges will be required to consider specified independence factors prior to the committee’s retention of or obtaining advice from a compensation consultant, outside legal counsel or other advisor. If the compensation committee, or a committee member, chooses (or just happens) to discuss legal matters with the issuer’s current outside legal counsel, the exchange’s listing standards require the committee to have gone through the process of considering that firm’s independence prior to obtaining advice from such counsel; and neither the federal securities laws nor the exchanges’ listing standards afford a curative provision. Section 952, which codified Section 10C of the Securities Exchange Act of 1934, required the SEC to issue regulations, which became Rule 10C-1, mandating the national securities exchanges and national securities associations to adopt listing standards requiring the directors who serve on listed issuers’ compensation committee to be independent and empowering, with conditions, compensation committees to hire compensation consultants, outside legal counsel and other advisors. Under the new listing standards, retaining independent legal counsel is rather mundane – conduct an interview with the firm, consider the specified independence facts and determine to retain (or not). The SEC regulations and the exchanges’ listing standards simply require the committee to consider the independence factors; the committee can still choose to retain counsel that is not independent, as long as the committee had previously considered the factors. But what to do with current counsel? In view of the breadth of “obtaining the advice of independent legal counsel” and the downside risk of not conducting an interview, a compensation committee will be well served if it conducts the independence interview before July 1, 2013 to ensure that the issuer has fulfilled the requirements of Section 10C, Rule 10C-1 and the exchange’s listing standards to which the company is subject.
A second issue, which remains unresolved, is how often must a compensation committee conduct an independence interview with its outside legal counsel to be confident that the committee will conform to the spirit as well as the letter of the listing standards. Because the securities laws and the listing standards are silent and the law in this area has yet to be developed, it would be sound, conservative practice for the compensation committee to conduct that interview on a regular basis, such as annually in the beginning of January. Such a sound management practice will stand the committee and the company in good stead until such time as precise parameters have been developed.