Nasdaq recently amended its rules regarding compensation committee independence, bringing them more in line with the corresponding rules of the New York Stock Exchange.
In accordance with Rule 10C-1 under the Securities and Exchange Act of 1934, Nasdaq previously adopted listing standards establishing independence requirements for compensation committee members,1 but in one key aspect the Nasdaq compensation committee independence test was more stringent than required. As originally adopted by Nasdaq, compensation committee members were prohibited from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or any of its subsidiaries.
As amended, Nasdaq Rule 5605(d)(2)(A) now only requires that the board of directors consider all factors specifically relevant to determining whether a director has a relationship to the company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member. Factors to be considered expressly include the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company. However, the receipt of such compensatory fees does not automatically bar a director from serving as a compensation committee member. The Nasdaq rules continue to require the board of directors to consider the affiliate status of a director who is to serve on the compensation committee.2
Each Nasdaq company must comply with the compensation committee composition aspects of the amended rules by its first annual meeting after January 15, 2014, or October 31, 2014, whichever is earlier. Companies must certify their compliance with Nasdaq’s compensation committee rules not later than 30 days after the date of such annual meeting. The certification is to be filed electronically on the specified form by logging in to Nasdaq’s online listing center. The new certification form may be previewed on Nasdaq’s website.
Nasdaq companies should review their compensation committee charters. To the extent that their charters track the older version of the Nasdaq compensation committee listing rules—thereby disqualifying directors from serving on compensation committees as a result of receiving consulting fees—companies should consider amending their charters to take advantage of the greater flexibility added by the new amendments.
Nasdaq companies should add the compensation committee compliance certification to their corporate calendars for 2014.
If you have any questions about the amended Nasdaq compensation committee listing standards or certification requirement, please contact the author of this Legal Update, Laura D. Richman, at +1 312 701 7304, or any other member of our Corporate & Securities practice.
1 For further information see our Legal Update dated January 30, 2013, titled “SEC Approves Compensation Committee Listing Standards.”
2 For the complete text of the Nasdaq rule change, see http://www.sec.gov/rules/sro/nasdaq/2013/34-71037-ex5.pdf.