In 2013, the New York Stock Exchange (the “NYSE”) implemented various amendments to the rules contained in its Listed Company Manual (the “Manual”), which governs the requirements for continued listing on the NYSE. These amendments implement new rules governing compensation committee director and compensation consultant independence standards, extend the application of the transition period permitted for companies to comply with the NYSE’s audit function requirements, eliminate the shareholder meeting quorum requirements and streamline the listing application process and related documentation.
Compensation Committee and Compensation Consultant Independence
On July 1, 2013, the NYSE rules governing compensation committees were amended to comply with Rule 10C-1 under the Exchange Act (as required by the Dodd-Frank Act) and make other related changes. Section 303A.02 of the Manual requires a two part analysis of a director’s independence for directors generally. The first part analyzes the director’s independence under certain “bright line tests” set forth in the Manual. The second part requires that the listed company’s board of directors make an affirmative determination that each independent director has no material relationship that would raise concerns about its independence from management. The amended rules add an additional requirement for directors serving on the compensation committee. In considering whether the director has a relationship that is material to that director’s ability to be independent from management with respect to his or her compensation committee duties, the board of directors must consider all relevant factors, including, but not limited to, the source of the director’s compensation and whether the director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of the listed company.
The NYSE has implemented a transition period for compliance with the new standards, which requires listed companies to comply by the earlier of (i) their first annual meeting after January 15, 2014 or (ii) October 31, 2014. Companies listing on the NYSE for the first time on or after July 1, 2013 are required to comply with the new rules as of their listing date (unless otherwise subject to an exception). The revised rules also provide for a cure period for non-compliance, which may be relied upon by companies that provide prompt notice of such non-compliance to the NYSE and that continue to have a committee comprising a majority of independent members. The cure period allows a director who is not independent for reasons outside of his or her control to remain on the compensation committee until the earlier of (i) the next annual meeting or (ii) one year from the event that caused the member to no longer be independent.
Section 303A.05 of the Manual requires that each company have a compensation committee composed of entirely independent directors and have a written charter. Effective July 1, 2013, Section 303A.05 was revised to require that the compensation committee charter include certain additional rights and responsibilities, including that the compensation committee may retain advisors; that the compensation committee is responsible for the appointment, compensation and oversight of the work of any advisors; that the listed company must provide funding for any advisors; and that the compensation committee may select an advisor only after taking into account all factors relevant to the potential advisor’s independence, including, at a minimum, the six independence factors enumerated in Rule 10C-1. Under Rule 10C-1 and the NYSE rules, an advisor may still be engaged even if the advisor is deemed not to be independent as long as the compensation committee has considered the independence factors.
Section 303A.07 of the Manual requires all companies to maintain an internal audit function and to provide management and the audit committee with ongoing assessments of the company’s risk management processes and internal controls. On August 22, 2013, Section 303A.07 was amended to extend the one-year compliance transition period applicable to companies transferring to the NYSE from another national securities exchange to companies listing in connection with an IPO, a “carve-out” (an IPO of equity by a publicly traded company for an underlying interest in a portion of its existing business) or a “spin-off” (a distribution by a publicly traded company of all of the outstanding common stock of a subsidiary to the parent company’s shareholders and the listing of the spin-off company). The revised rules also amend several provisions of Section 303A.07 to clarify the duties of the audit committee during any transition period, which include that the audit committee will continue to have a role in overseeing the listed company’s financial systems and internal controls and will be involved in overseeing the design and implementation of the internal audit function.
Shareholder Meeting Quorum Requirements
On July 11, 2013, Section 312.07 of the Manual was amended to eliminate the requirement that a majority of all outstanding shares entitled to vote on a proposal must vote in order to constitute a quorum where shareholder approval is required as a prerequisite to listing any new or additional securities. In connection with the rule amendments, the NYSE noted that quorum requirements under state law, a company’s by-laws and other Manual requirements should be sufficiently high to ensure that there is a representative vote and that having additional quorum requirements for specific issues created confusion. The NYSE also stated that it eliminated the quorum requirement because it was impeding the ability of companies, especially those with large retail shareholder bases, to implement important proposals. The rules continue to require that a proposal receive a majority of votes cast (meaning that the votes cast in favor of a proposal must exceed those cast against a proposal plus abstentions) in order to be approved.
On August 15, 2013, the NYSE rules governing the listing process and related documentation were amended to (i) adopt updated listing application materials; (ii) remove the listing application materials from the Manual and post them on the NYSE’s website; and (iii) include in the Manual certain rules that were previously included in various forms of listing application materials. The revised listing process eliminates various requirements for information and documentation that is redundant to that contained in other NYSE rules, is unnecessary, no longer reflects practices in the securities markets or is available to the NYSE through other means.
Specifically, the NYSE amended Section 702.00 of the Manual to replace the previous text with a general outline of the listing process. The NYSE also revised the Listing Application to, among other things, remove certain information that is already available to the NYSE in the issuer’s SEC filings, including:
- a discussion of the issuer’s business;
- information related to affiliated companies;
- a description of the issuer’s physical property; and
- information related to the issuer’s management.
Information regarding the type of listing, a description of the shares being offered and certain general information regarding the issuer, including contact information, will continue to be required.
The NYSE also revised the Listing Agreement to remove requirements to provide certain information, including descriptions of:
- changes in the issuer’s business;
- changes in the issuer’s officers or directors; and
- dispositions of any property or stock in any subsidiary or controlled company
The revised Listing Agreement continues to include:
- a certification by the issuer that it understands and agrees to comply with NYSE rules;
- an agreement by the issuer to provide notice of any non-compliance with NYSE rules;
- an agreement by the issuer to maintain a transfer agent and registrar that satisfy the Manual requirements;
- an agreement by the issuer to comply with all federal securities laws and SEC rules; and
- an acknowledgment by the issuer that the issuer’s securities may be suspended or delisted by the NYSE at any time for failure to comply with the Listing Agreement.
The NYSE has also eliminated the requirement for certain documentation that was previously part of the listing process, such as the transfer agent agreement, and incorporated any necessary requirements into the amended rules in the Manual or the revised forms of required listing application materials.
Listing Application Fee
Effective January 1, 2013, the NYSE adopted a new flat listing fee of $25,000 (the “Initial Application Fee”). Subject to certain exceptions, the Initial Application Fee is payable by companies listing in connection with an IPO, a carve-out or a spin-off or if the company is otherwise a new SEC registrant. The Initial Application Fee is not charged to companies transferring from another national securities exchange or if the company’s securities are publicly traded in the “over-the-counter” market.
Section 902.03 of the Manual states that an issuer that pays an Initial Application Fee in connection with an application to list a security, but does not immediately list such security, is not required to pay an additional Initial Application Fee if it subsequently lists the security, as long as (i) the issuer has a registration statement regarding such security on file with the SEC, or (ii) if the issuer has withdrawn its registration statement, the issuer re-files a registration statement regarding such security within 12 months of the date of such withdrawal. In August 2013, Section 902.03 was amended to make similar accommodations for emerging growth companies and foreign private issuers that do not file publicly-available registration statements with the SEC.