United States: NASDAQ Amends Compensation Committee Independence Requirements

The NASDAQ Stock Market (NASDAQ) recently amended its listing rules on compensation committee independence1 that were adopted earlier this year to implement Rule 10C-1 of the Securities Exchange Act of 1934.2 Specifically, NASDAQ is amending Listing Rule 5605(d)(2)(A) and IM-5605-6 to eliminate the bright-line prohibition on the receipt of compensatory fees by compensation committee members from the listed company and its subsidiaries.

The bright-line prohibition will be replaced by a requirement that a board of directors consider the source of a director's compensation, including the receipt of compensatory fees from the company and its subsidiaries, when affirmatively determining independence for compensation committee membership. The amendments align NASDAQ's compensation committee independence listing rule with Rule 10C-1, which does not require a prohibition on the receipt of compensatory fees, and the compensation committee listing standards of the New York Stock Exchange and NYSE MKT.

The amendments are immediately effective. However, the compliance deadline for companies with NASDAQ-listed equity securities that are subject to the compensation committee listing rules3 is the same as for the current compensation committee independence requirements – the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.

Amendments

NASDAQ indicated that over the past few months it has received feedback from listed companies and others that the compensatory fee prohibition creates a burden on listed companies, especially in industries such as energy and banking where it is common to have directors who conduct a de minimis amount of business with the issuer and would be ineligible to serve on a listed company's compensation committee. According to NASDAQ, listed companies and their representatives have indicated that this additional burden could influence a company's choice of listing venue. As a result of this feedback, NASDAQ determined to remove the compensatory fee prohibition.

The following chart compares the current compensation committee independence rule and the amendments.

For purposes of the amended compensation committee independence tests, "company" includes any parent or subsidiary of the listed company, including entities the company controls and consolidates with its financial statements as filed with the SEC (but not if the entity is included solely as an investment in the company's financial statements).

Even under the amended rule, a compensation committee member may not receive unlimited fees from a company as the member must continue to be an "independent director." NASDAQ Listing Rule 5605(a)(2) defines "independent director," in part, to exclude any director who (1) accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the prior three years or (2) is a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more. As a result, boards must consider, based on the company's and the director's unique circumstances, whether the receipt of any fees (including those for board or committee service), even if below the caps, would impair the director's ability to make independent judgments about the company's executive compensation.

Next Steps

Conduct compensation committee independence determinations. NASDAQ-listed companies that are subject to the compensation committee listing rules should:

  • update their director and officer questionnaires to reflect the amendments;
  • review their compensation committee members to ensure they satisfy the amended compensation committee independence standards to determine whether any changes are needed due to a member not being deemed independent; and
  • ensure that by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, all compensation committee members satisfy the amended compensation committee independence standards.

Revise compensation committee charters as necessary. NASDAQ-listed companies subject to the compensation committee listing rules must revise, if necessary, by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, their compensation committee charter and other relevant governance documents to reflect the amendments. Many listed companies amended their compensation committee charters to comply with Listing Rule 5605(d)(1) and may need to further amend the charters in response to the rule amendments. Those companies should ensure that they comply with Regulation S-K Item 407(e)(2) and Instruction 2 to Item 407 by (1) posting the revised charter on their website and disclosing in their 2014 proxy statement that a current copy of the charter is available on the website and the website address or (2) including the revised charter as an appendix to their 2014 proxy statement.

Listed companies that adopted or will adopt a formal compensation committee charter for the first time in response to NASDAQ's new compensation committee listing rules should remember to (1) post the charter on their website and disclose in their 2014 proxy statement that a current copy of the charter is available on the website and the website address or (2) include the charter as an appendix to their 2014 proxy statement.

Prepare and file compensation committee compliance certificate. As part of their 2014 proxy planning checklist, NASDAQ-listed companies subject to the compensation committee listing rules should include the requirement to file with NASDAQ a Compensation Committee Certification within 30 days after the earlier of the company's first annual meeting after January 15, 2014, or October 31, 2014. NASDAQ previously provided a form of Compensation Committee Certification in Exhibit 3 to this compensation committee rule filing. However, companies should wait until NASDAQ releases a final form before attempting to complete the certification as NASDAQ will need to update the form based on the rule amendments. The actual form will be available in January 2014 through NASDAQ's Listing Center website.

Based on the sample certification form noted above, asset-backed and other passive issuers, cooperatives, limited partnerships (including MLPs) and management investment companies registered under the Investment Company Act of 1940 are exempt from NASDAQ's compensation committee listing rules and are not required to submit the certification. However, smaller reporting companies, foreign private issuers and controlled companies would need to complete and file the certification even though they are exempt from some or all of the compensation committee listing rules. Similarly, listed companies relying on the "exceptional and limited circumstances" exception or a phase-in schedule (for example, IPO issuers) must complete and file the certification.

Footnotes

1. The NASDAQ Stock Market LLC, Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend the Listing Rules on Compensation Committee Composition, Release No. 34-71037 (Dec. 11, 2013), 78 Fed. Reg. 76179 (Dec. 16, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-12-16/pdf/2013-29802.pdf. The text of the rule amendments can be found here.

2. For more information, please see our client alert dated February 22, 2013, SEC Approves NYSE, NYSE MKT and NASDAQ Compensation Committee Listing Standards.

3. The compensation committee listing rules do not apply to the following issuers: (a) asset-backed issuers and other passive issuers; (b) cooperatives; (c) limited partnerships (for example, MLPs); (d) management investment companies registered under the Investment Company Act of 1940; and (e) controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another company). Smaller reporting companies are exempt from many of the compensation committee listing rules. Foreign private issuers that follow their home country practice are exempt provided that they comply with the disclosure requirements in Listing Rule 5615(a)(3).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Kilpatrick Townsend & Stockton LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Kilpatrick Townsend & Stockton LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions