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On August 26, 2024, the U.S. Securities and Exchange Commission (the “SEC”) issued an order approving a proposed rule change (the “New Rules”) submitted by The Nasdaq Stock Market LLC (“Nasdaq”) on May 8, 2024 to amend Nasdaq Listing Rules 5605, 5615, and 5810 regarding certain Nasdaq corporate governance requirements.
Modifications to Phase-In Schedules
Current Nasdaq Listing Rules provide companies seeking to list on Nasdaq with “phase-in” schedules for compliance with certain Nasdaq corporate governance requirements.
The New Rules update the phase-in schedules for compliance with the various requirements according to the manner in which the company is seeking to list on Nasdaq. The New Rules also provide that a company that demonstrates compliance with a requirement during the phase-in period but subsequently falls out of compliance with that requirement will not be considered deficient with the requirement until the end of the phase-in period.
Initial Public Offerings
Under the New Rules, companies seeking to list in connection with an initial public offering (“IPO”) must have:
- Compensation and nominations committees consisting of at least one independent director no later than the earlier of (i) the date of the closing of the IPO or (ii) five business days from the date the company’s securities first trade on Nasdaq (the “Listing Date”);
- A compensation committee consisting of (i) at least one member by the Listing Date and (ii) at least members within one year of the Listing Date; and
- An audit committee consisting of (i) one member by the Listing Date, (ii) at least two members within 90 days of the Listing Date, and (iii) at least three members within one year of the Listing Date.
Companies Transferring from Another National Securities Exchange
Current Nasdaq Listing Rules allow companies transferring from other markets with substantially similar corporate governance requirements to Nasdaq, such as the New York Stock Exchange, the balance of any grace period afforded by the other market to comply with Nasdaq Listing Rules. The Nasdaq Listing Rules also provide that companies listing from other markets that do not have substantially similar corporate governance requirements to Nasdaq shall have one year from the Listing Date to comply with Nasdaq Listing Rules.
The New Rules specify that the above transition periods will only apply to companies that transfer securities that are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from another national securities exchange to Nasdaq. The phase-in periods for such companies will remain the same.
Companies Listing in Connection with a Carve-out or Spin-off Transaction
Under the New Rules, companies listing on Nasdaq in connection with a carve-out of spin-off transaction must have:
- An audit committee consisting of (i) at least one independent member before the Listing Date, (ii) a majority of members that satisfy all Nasdaq requirements within 90 days of the effective date of the company’s registration statement; and (iii) all members that satisfy all Nasdaq requirements within one year of the effective date of the company’s registration statement;
- A board of directors with a majority of members being independent within twelve months of the Listing Date;
- Nomination and compensation committees consisting of (i) at least one independent director by the closing date of the carve-out or spin-off transaction, (ii) a majority of independent directors within 90 days of the Listing Date, and (iii) a fully independent committee within one year of the Listing Date; and
- A compensation committee with (i) at least one member by the date the transaction closes and (ii) at least two members within one year of the Listing Date.
Companies Ceasing to Qualify as a Foreign Private Issuer
Nasdaq currently allows foreign private issuers to be exempt from certain corporate governance requirements that apply to domestic companies and instead use their home country practices. Pursuant to Rule 3b-4 (“Rule 3b-4”) of the Exchange Act, companies must test their status as a “foreign private issuer” on an annual basis at the end of their most recently completed second quarter (the “Determination Date”).
The New Rules now allow companies ceasing to be foreign private issuers under Rule 3b-4 a period of six months from the Determination Date (the “Transition Period”) to comply with most Nasdaq corporate governance requirements for domestic companies. Specifically, within six months of the Determination Date, the Company must have, among other requirements:
- A board of directors where the majority of the members are independent under Nasdaq Listing Rules;
- A compensation committee consisting of at least two members, each of whom must be independent;
- An audit committee consisting of at least three members, each of whom must be independent.
During the Transition Period, companies ceasing to be foreign private issuers must still have an audit committee consisting of only independent directors.
Other Companies
The New Rules also specify new phase-in periods for companies emerging from bankruptcy, companies listing securities previously registered under Section 12(g) of the Exchange Act, and companies ceasing to be a controlled company. For more information about requirements for these companies, please consult the New Rules and the SEC’s order approving the New Rules.
Unavailability of Cure Period Following the Expiration of Phase-In Periods
The New Rules also codify Nasdaq’s current position that a company relying on phase-in periods will not be eligible for a period in which to cure any deficiencies immediately following the expiration of the phase-in period, unless the company complied with the Nasdaq Listing Rules (i) related to the composition of the company’s audit and compensation committees and (ii) requiring a majority of the board of directors to be independent during the phase-in period but fell out of compliance with the requirements before the end of the phase in-period.
The New Rules also codify Nasdaq’s current position that if a company demonstrated compliance with the applicable requirement during the phase-in period but fell out of compliance before the end of the phase-in period, the applicable cure period will be computed based on the event that caused the failure to comply instead of the end of the phase-in period. In these circumstances, the company would not be considered deficient with the requirement until the end of the phase-in period.
The New Rules also provide that if a company fails to meet the compensation committee composition requirements due to one vacancy or because one member ceases to be independent due to circumstances beyond the member’s reasonable control, the Nasdaq Listing Qualifications Department will promptly notify the company and inform it that it has until the earlier of (i) its next annual meeting of shareholders or (ii) one year from the occurrence of the event that caused the failure to comply with this requirement to cure the deficiency. If the Company’s next annual meeting of shareholders is held sooner than 180 days after the event that caused the deficiency, then the company will have 180 days from the event that caused the deficiency to cure it.
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If you have questions or would like additional information, please contact our Corporate and Securities Attorneys or the primary EGS attorney with whom you work.
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