Recently, NASDAQ proposed expanding an existing exception to its corporate governance rules to allow a non-independent director who is a family member of a non-executive employee of a listed company to serve on a listed company’s audit committee, compensation committee or nominating committee under exceptional and limited circumstances.

Generally, NASDAQ ’s rules prohibit a listed company from appointing non-independent directors to audit, compensation and nominating committees. A director is not independent if, in the opinion of the company’s board, the director has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Among other relationships, a director who is a family member of an individual who is, or any time during the past three years was, employed as an executive officer by the company is not independent; however, a director is not barred from being independent if he or she has a family member employed by the company, provided that the family member is not an executive officer of the company.

Under exceptional and limited circumstances and with proper disclosure1, a board may allow one nonindependent director to serve on the audit, compensation or nominating committee for up to two years (the Exception). The Exception, however, has not been available for a non-independent director who has a family member who is a non-executive employee of the listed company, even if the director is not independent for a reason unrelated to his or her relationship with the employed family member. Thus, even though a family relationship with a non-executive employee would not, by itself, preclude the director from being considered independent, the Exception is still not available for such a director.  

Recognizing the incongruity under the current rules, NASDAQ has proposed to revise its Listing Rules to permit a listed company to rely on the Exception for a director who has a family relationship with a non-executive employee where the company’s board has determined that the director’s membership on the relevant committee is in the best interests of the company and its stockholders. Nasdaq expects that a board would take into account the family relationship between the non-independent director and non-executive employee in determining the best interests of the company and its stockholders. However, if the proposed rules are approved by the SEC, the mere existence of a family relationship with a non-executive employee will no longer create an outright prohibition on the use of the Exception.