When the New York Stock Exchange announced plans to merge with Archipelago and become a publicly traded company, observers hailed it as “the most sweeping change” in the Big Board’s 212-year history. Nasdaq quickly followed suit with its own pact with Instinet, as both exchanges moved even deeper into the electronic trading age.
How will these transactions affect the companies that list on the exchange? Not much, experts say. While the NYSE recently proposed a number of clarifications to its governance standards, most attorneys say this amounts to tinkering and tightening of existing requirements rather than wholesale changes.
Brown
“For the average listed company, it will not have a big bit of a difference,” says David E. Brown Jr., partner in the Washington, D.C., office heading corporate governance for Alston & Bird.
Still, this is a good time to take a fresh look at the governance and compliance requirements of the two major exchanges and to gauge which one is tougher on its listed companies.
Nozick
Most securities experts say the two exchanges expect essentially the same governance efforts from listed companies—although the NYSE may soon take the lead, since several of its requirements were only recently proposed, and could yet be amended. “The NYSE and Nasdaq are substantively similar in their qualitative governance requirements,” says Paul Nozick, a corporate lawyer at Alston & Bird who compiled a matrix comparing the exchanges’ requirements (available from box at right). Says Robert Bostrom, partner with Winston & Strawn: “There is nothing dramatically different.”
Here are some of the key requirements and the ways in which the exchanges differ; however, readers should remember that these are not definitive requirements. The Securities and Exchange Commission has its own set of obligations that may not be included below; the Web posting requirements of the exchanges, for example, don’t include the SEC’s requirement that companies post beneficial ownership reports.
Corporate Governance Guidelines
NYSE companies must adopt corporate governance guidelines that, according to Alston & Bird’s analysis, must address the following: director qualification standards; director responsibilities; director access to management and, as appropriate, independent advisers; director compensation; director orientation and continuing education; management succession and annual performance evaluation of the board.
In addition, under NYSE’s recent proposal, a printable version of the corporate governance guidelines would be required on corporate Web sites.
Krus
Nasdaq companies have no requirement regarding corporate governance guidelines, “but a lot do anyway,” Brown says. Adds Cynthia Krus, partner with Sutherland Asbill & Brennan: “It’s a good thing. It enables the board to think about its constituencies.”
Maintenance Of Publicly Accessible Web site
The NYSE recently proposed that companies maintain a Web site, which must include a printable version of the charters of its compensation, nominating and audit committees, as well as its corporate governance guidelines and code of business conduct and ethics, according to Alston & Bird’s analysis. Nasdaq has no related requirement.
Key Committees
NYSE companies must have a nominating and corporate governance committee as well as a compensation committee composed entirely of independent directors; Nasdaq permits these committees to be comprised of a majority of independent directors. Nasdaq companies then must explain why shareholder interests are served by having a non-independent director on these committees. “This provides a little more leeway,” Brown says. “But does anyone want to take advantage of the leeway? Probably not.”
Charter
The NYSE—but not Nasdaq—requires companies to have charters for their various committees. “Having a charter is good,” Krus says. “It gives independent directors guidelines of their responsibilities and duties.” Alston & Bird’s Brown adds that “99 percent of Nasdaq companies comply with the New York Stock Exchange requirement.” In addition, one of the NYSE’s recent proposals would require companies to post the charters of their committees on their Web sites.
Certification
Each NYSE listed company is now required to submit an annual affirmation within 30 days of its shareholders’ meeting stating that the company complies with NYSE’s governance rules. Interim affirmations must be submitted after any change occurs to the board of directors, the audit committee, the compensation committee or the nominating and corporate governance committee of the company.
In addition, chief executives must certify to the NYSE each year that they are not aware of any violation of NYSE corporate governance listing standards, and must promptly notify the NYSE after any executive discovers any non-compliance with any corporate governance listing standard.
Nasdaq, in contrast, has no ongoing annual certification requirement. However, Alston & Bird points out that the exchange circulated a one-time “Corporate Governance Certification Form” to be filed by listed companies last year.
Of course, under Sarbanes-Oxley, CEOs and CFOs must file both Section 302 and Section 906 certifications with their periodic reports.
Report Material Violations
Silverman
One of the Big Board’s recent proposals calls on executive officers to report any noncompliance with NYSE governance standards, rather than material noncompliance. “In the grand scheme, [this change] is not a big deal,” Les Silverman, a partner at Cleary Gottlieb, contends.
Majority Independent Directors
Both exchanges require that a majority of directors be independent, and Nasdaq requires companies to identify the independent directors. In addition, Nasdaq says if a company that fails to comply with this requirement due to one vacancy, or one director ceases to be independent due to circumstances beyond his or her reasonable control, the company must regain compliance by its next annual meeting or one year from the occurrence of the event that caused the lapse, whichever comes first.
The NYSE also says that for a director to be “independent,” the board must determine that the director has no material relationship with the listed company, according to Alston & Bird. Nasdaq requires a company’s board to declare that a director is independent by determining that the director has no relationships that would interfere with the exercise of independent judgment.
The NYSE did recently propose that for each independent director, companies would have to disclose either that the director has no relationships with the listed company (other than being a director and/or a shareholder) or has only immaterial relationships with the listed company.
If an immaterial relationship exists, the company must disclose that relationship along why the board determined that the relationship doesn’t preclude independence. Or, in lieu of disclosing specific immaterial relationships, a board can deem certain relationships to be “categorically immaterial,” and disclose the types of relationships it has determined to be categorically immaterial.
Those moves, says Cleary Gottlieb’s Les Silverman, show that “the New York Stock Exchange is moving to greater transparency and more clarity.”
Directors And Family Ties
For a director to be deemed “independent,” the board must determine that the director has no material relationship with the listed company. Each of the exchanges has several tests.
For example, the NYSE defines director independence based on financial ties to other companies: if a director works for a business that has done more than $1 million (or 2 percent in gross revenues) in transactions with the listed company in any of the last three fiscal years, the director is not independent. These rules also apply when any member of the director’s family is chief executive officer of such a business.
Nasdaq sets much the same standard, but family members can also be partners, controlling shareholders or executive officers of second companies, and the financial threshold is $200,000 or 5 percent of gross revenues.
Which exchange is tougher on this issue? On one hand, the Big Board appears to have the higher absolute threshold ($1 million) but a lower percentage (2 percent versus 5 percent). “It’s hard to know who is stricter [on this one],” Silverman admits.
Director Education
Neither exchange has a requirement, although NYSE companies are required to adopt corporate governance guidelines that address director education.
So are these differences enough to influence a company decision for listing its stock? No, experts say. “My advice,” says Brown, “is to select an exchange based on other reasons, not on governance niceties. Today’s differences are not material enough to make a difference where you go list. If there are any differences, in two years they will disappear.”
A chart of the key exchange requirements, compiled by Alston & Bird, can be found in the box above, right.
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