NYSE Listed Company Rules: 2013 Revisions and Developments

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By Sey-Hyo Lee and Katie Spencer

Sey-Hyo Lee is a partner at Chadbourne & Parke LLP, working in the corporate and securities compliance practice groups, among others. His practice includes representation of corporate clients in connection with mergers and acquisitions, spin-offs, divestitures, and public offerings and private placements of debt and equity securities. Mr. Lee regularly advises public company clients on securities law and corporate governance matters, including Securities and Exchange Commission filings and public disclosure matters, trading by insiders, board and board committee matters, and compliance with NYSE and Nasdaq corporate governance-related requirements. Katie Spencer is an associate at Chadbourne & Parke LLP, working in the corporate and securities compliance practice groups, among others. Her professional experience focuses on the representation of international clients in a variety of complex international corporate, capital markets and financing transactions.

In 2013, the New York Stock Exchange (the “NYSE”) implemented various amendments to the continued listing rules contained in its Listed Company Manual (the “Manual”). These amendments implement new independence standards for directors serving on the compensation committee and consultants to the compensation committee, extend the transition period 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.

This article highlights certain of the amendments relevant to listed companies, companies looking to list on the NYSE for the first time or transfer to the NYSE from another stock exchange, shareholders and other constituencies that are interested in executive compensation matters.


Effective July 1, 2013, the NYSE rules governing compensation committees were amended to comply with Rule 10C-1 under the Securities Exchange Act (as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act) and to make other related changes. Section 303A.02 of the Manual generally requires a two-part analysis of a director's independence.

The first part requires that the listed company's board of directors affirmatively determine that each director has no material relationship that would raise concerns about his or her independence from management. The second part analyzes the director's independence under certain “bright line tests” set forth in the Manual.

The amended rules add an additional requirement for directors serving on the compensation committee. In determining the independence of a director who will serve on the compensation committee, the board of directors must consider all factors specifically relevant to the question of whether a director has a relationship to the listed company that is material to his or her ability to be independent from management in connection with his or her compensation committee duties.

Those factors include, but are 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 a subsidiary. Listed companies should consider including or incorporating this new requirement in their compensation committee charters or corporate governance policies used to select compensation committee members.

In determining the independence of a director who will serve on the compensation committee, the board of directors must consider all factors specifically relevant to the question of whether a director has a relationship to the listed company that is material to his or her ability to be independent from management in connection with his or her compensation committee duties.

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 Jan. 15, 2014 or (ii) Oct. 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 non-compliance to the NYSE and that continue to have a committee with 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 entirely of 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 committee may retain advisors; that the 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 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 still may be engaged even if he or she is determined not to be independent as long as the compensation committee has considered the independence factors described above. Although many compensation committee charters already may have sufficiently broad authority to encompass the new Section 303A.05 requirements, listed companies should review their compensation committee charters and, if necessary, update them to reflect these changes.

Audit Committees

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 Aug. 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: (i) companies listing in connection with an initial public offering, (ii) a “carve-out” (an IPO of equity issued by a publicly traded company for an underlying interest in a portion of its existing business) or (iii) a “spin-off” (a distribution by a publicly traded company of all the outstanding common stock of a subsidiary to the parent company's shareholders and the spin-off company's listing).

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 it continue to have a role in overseeing the listed company's financial systems and internal controls, and be involved in overseeing the design and implementation of the internal audit function.

Shareholder 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 before listing any new or additional securities. In connection with the rule amendments, the NYSE noted that quorum requirements under state law, a company's bylaws and other Manual requirements should be sufficiently high to ensure the presence of 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 (i.e., the votes cast in favor of a proposal exceed those cast against, plus abstentions) in order to be approved.

Interested in This Topic?
For further analysis of compensation committees and the legal standards by which their actions are judged, see Steven D. Kittrell et al., Compensation Committees, Portfolio 73 in the Corporate Practice Series, available at Bloomberg BNA. Go to /compensation-committees-p6957/ for more information.

Listing Process

On Aug. 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 previously were included in various listing application materials. The revised listing process eliminates various requirements for information and documentation that is redundant to 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 already is available to the NYSE in the issuer's Securities and Exchange Commission 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, still is 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 still includes:

• 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 its securities may be suspended or delisted by the NYSE at any time for failure to comply with the Listing Agreement.

The NYSE also has eliminated the requirement for certain documentation that previously was part of the listing process, such as the transfer agent agreement, and incorporated any necessary requirements into the amended Manual rules or the revised forms of required listing application materials.

Listing Application Fee

Finally, effective Jan. 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 otherwise is 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 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.

Copyright 2014, The Bureau of National Affairs, Inc.

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