USA Law and Practice Contributed by: Lisa Fontenot, Jennifer Broder, Per Chilstrom and Lothar Determann, Baker McKenzie
3.3 Board Composition US companies face a mix of requirements and rec - ommendations regarding board composition, driven primarily by SEC disclosure rules, stock exchange independence and financial literacy (for audit commit - tee) standards, proxy advisory firm or investor voting guidelines and evolving investor expectations. SEC rules require public companies to disclose their directors’ backgrounds, qualifications and skills. Companies must also disclose whether the CEO and board chair roles are combined or separated, and the rationale for their structure. See 5.2 Corporate Gov- ernance Arrangement Disclosure for more detail. See 1.3 Companies With Publicly Traded Shares for a detailed discussion of the NYSE and Nasdaq board and committee composition requirements, and 3.5 Independence of Directors regarding independence. 3.4 Appointment and Removal of Directors/ Officers Directors are elected by shareholders and may be removed (generally only by shareholder majority vote) in accordance with state law and governing documents. Removal standards differ depending on whether the board is classified or non-classified. Under Delaware law, directors of non-classified boards may only be removed by shareholders (with or without cause), with no exceptions other than those in the statute. Under Delaware law, director vacancies can be filled by the shareholders or by board action, unless otherwise specified in the company’s certifi - cate of incorporation or bylaws. Director eligibility requirements are generally set by governing documents and applicable law, subject to additional criteria in some regulated industries. Officers are appointed and removed by the board, subject to contractual protections in the officer’s employment agreement. 3.5 Independence of Directors Stock exchange rules require public companies to determine director independence, and impose height - ened standards for audit and compensation commit - tee members. Under NYSE rules, no director qualifies
as independent unless the board of directors affirm - atively determines that the director has no material relationship with the listed company, either directly or as a partner, shareholder or officer of an organisa - tion that has a relationship with the company. Nasdaq rules are similar, providing that a director may not be considered independent if the director has a relation - ship which, in the opinion of the company’s board of directors, would interfere with the exercise of inde - pendent judgement in carrying out the responsibilities of a director. Each of the stock exchanges also includes explicit relationships and arrangements that disqualify a direc - tor from being independent, including directors or their immediate family members: • employed by or paid above certain amounts from the company; • employed by another company which makes/ receives payments above certain amounts from the company; • employed by the company’s auditor; or • employed by another company for which at least one of the listed company’s officers serves on that company’s compensation committee. The SEC and stock exchanges require each public company to have an audit committee composed entirely of independent directors, subject to certain exceptions, under Rule 10A-3 under the Exchange Act. Audit committee members must not accept any consulting, advisory or other compensatory fee from the listed company or its subsidiaries, nor be affili - ated with the listed company or its subsidiaries (other than by virtue of his or her director role). In addition, Nasdaq precludes a director who participated in the preparation of the financial statements of the com - pany or its subsidiaries in the past three years from serving on the audit committee. In determining the independence of compensation committee members, the board of directors must consider all factors specifically relevant to determin - ing whether the 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,
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