NYSE Proposes New Global Market Capitalization Test for Listing Companies

On September 30, 2014, the SEC published an NYSE amendment, effective as of such publication, to adopt a new initial listing standard, and to eliminate all but one of the current NYSE initial listing standards, for US operating companies.

The amendment provides for a global market capitalization test to serve as a new initial listing standard for US operating companies. The global market capitalization test requires that a listing operating company have a minimum total global market capitalization of $200 million at the time of initial listing. A company that is already publicly traded at the time it applies to list on the NYSE must meet the $200 million global market capitalization requirement for at least 90 consecutive trading days immediately preceding the date on which it receives clearance to submit an application to list on the NYSE.

The amendment also eliminates four of the NYSE’s five current initial listing standards for US operating companies: (1) the valuation/revenue with cash flow test, (2) the pure valuation/revenue test, (3) the affiliated company test, and (4) the assets and equity test.

Despite the proposed global market capitalization test, companies listing must also meet both the existing distribution requirements of Section 102.01A, and the stock price and market value of publicly-held shares requirements of Section 102.01B, of the Listed Company Manual. In addition, companies listing under the proposed global market capitalization test must comply with all other applicable NYSE listing rules.

The notes relating to the amendment highlight that Nasdaq and Nasdaq Global Market have a competitive advantage over the NYSE under existing listing standards, particularly with respect to pre-revenue research and development companies. The amendment, and the implementation of the global market capitalization test, is the NYSE’s attempt to level the playing field.

When Do You Need to Start Complying With New NASDAQ and NYSE Compensation Committee Rules?

On January 11, 2013, the SEC approved proposed changes to the listing standards of the New York Stock Exchange LLC and NASDAQ Stock Market LLC related to compensation committees. Both exchanges created transition periods to comply with the new rules.

As of July 1, 2013, NASDAQ and NYSE listed companies will be required to comply with the new rules relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting such advisers. The requirement that such authority and responsibilities of the compensation committee be included in the compensation committee’s written charter does not apply until a later date (see below) for NASDAQ listed companies and such companies should consider under state corporate law whether to grant such specific responsibilities and authority through a charter, resolution or other board action. In contrast, NYSE listed companies will have to amend their existing charters as of July 1, 2013 to address these additional rights and responsibilities of the compensation committee related to compensation consultants, legal counsel, and other compensation advisers. To the extent a NASDAQ listed company does not have a compensation committee by July 1, 2013, these requirements will apply to the independent directors who determine, or recommend for the board’s determination, the compensation of the CEO and other executive officers of the company.

The remaining new rules, for example, compensation committee charter and independence standards for compensation committee members, will not have to be complied with by NASDAQ listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.

NYSE listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence.

NYSE Amends its Compensation Committee and Committee Adviser Independence Proposed Rules

Yesterday the NYSE filed an amendment to its proposed compensation committee and committee adviser independence rules.  According to the rule filing, the amendment corrects an error in the rule text under the heading “Transition Periods for Compensation Committee Requirements.”  According to the amended rule text, listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new director independence standards with respect to compensation committees.  The other proposed rules, including those related to compensation committee advisers, will become effective on July 1, 2013.

NYSE Proposes New Rules Related to Compensation Committee and Committee Adviser Independence

Earlier this week, the NYSE filed proposed rule changes with the SEC related to compensation committee independence and the hiring of compensation advisers.  The NYSE proposed such rules to comply with Exchange Act Rule 10C-1 adopted in June.  Rule 10C-1 requires national securities exchanges to adopt listing standards which effectuate the compensation committee and committee adviser independence requirements of Section 952 of the Dodd-Frank Act.   The NYSE’s proposed rules do not expand upon or vary much from the SEC rules.  The NYSE proposed to have its new listing standards effective on July 1, 2013; however, companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the such new standards.  Set forth below is a summary of the NYSE’s proposed rules:

 Compensation Committee Independence

The NYSE proposed rules do not establish any new bright line standards specific to compensation committee independence.  Instead, the NYSE proposed rules require that, in affirmatively determining the independence of any director who will serve on a compensation committee, a listed company’s board “consider all  factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to, the two factors explicitly enumerated in Rule 10C-1(b)(ii)”:

  • the source of the director’s compensation, including any consulting, advisory or other compensatory fee paid by the listed company to such director; and
  • whether the director has an affiliate relationship with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

The proposing release specifically provides that the NYSE does not believe that board compensation should be considered as part of the independence determination.  Further, commentary to the proposed NYSE rules provides that “the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation. Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service,. . . the board should consider whether the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his ability to make independent judgments about the listed company’s executive compensation.”

 Compensation Committee Adviser Independence

The NYSE proposed rules related to compensation committee advisers provide that prior to hiring a compensation adviser, the compensation committee must consider the six factors set forth in Rule 10C-1(b)(4).  The NYSE proposed rules do not add any factors for a compensation committee to consider prior to hiring an adviser, as the “Exchange believes that the list included in Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.”

The NYSE’s proposed new rules are subject to SEC review and comment.  We believe it is unlikely that the SEC will have many objections to the proposed rules, as they essentially mirror the SEC’s rules.  In light of the NYSE proposed rules, NYSE listed companies should be reviewing their compensation committee charters, the composition of the compensation committee and their relationships with the compensation advisers in order to identify whether any modifications or changes may be in order to comply with the coming NYSE standards.