NYSE Proposes to Loosen Independence Tests for Certain Directors of Spin-off Companies | Practical Law

NYSE Proposes to Loosen Independence Tests for Certain Directors of Spin-off Companies | Practical Law

The NYSE proposed to loosen its independence tests for certain directors of spin-off companies.

NYSE Proposes to Loosen Independence Tests for Certain Directors of Spin-off Companies

by Practical Law Corporate & Securities
Published on 02 Apr 2014 • USA (National/Federal)
The NYSE proposed to loosen its independence tests for certain directors of spin-off companies.
Update: The NYSE has withdrawn this proposed rule change.
On April 1, 2014, the NYSE issued a proposed rule change that would loosen independence tests for certain directors of companies that have been the subject of a spin-off transaction (spincos). The proposal clarifies that, in certain limited circumstances, a director may be deemed independent of a spinco regardless of the fact that the director or his employer had a relationship with the former parent of the spinco.
Section 303A.02(b) of the NYSE's Listed Company Manual currently sets out bright line tests excluding a director from being deemed independent if (subject to a three year look-back period) he:
  • Is an employee of a listed company.
  • Has received direct compensation from a listed company.
  • Is an employee of a company that does business with the listed company.
Under the proposed rule change, the NYSE would not apply the bright line independence tests in Section 303A.02(b) to a director of a spinco whose employer had a relationship with the former parent company that impaired the director's independence with respect to the consolidated entity, if both:
  • The director's employer had no relationship during the applicable look-back period with any of the businesses spun off into the spinco.
  • None of the senior executives of the spinco were senior executives of the former parent or any business unit of the former parent that had a business relationship with the director's employer during the applicable period.
Instead, the NYSE would evaluate the director's independence from the spinco under the general materiality test set out in Section 303A.02(a) of the Listed Company Manual.
The proposed rule change would also amend the NYSE's FAQs to:
  • Reflect this new interpretation.
  • Reflect that the logic behind this interpretation would apply to other Section 303A.02(b) bright line independence tests.
To learn more about the corporate governance standards of the NYSE, see Comparative Corporate Governance Standards Chart: NYSE vs. NASDAQ.