USA Law and Practice Contributed by: Matt Hurd, Melissa Sawyer and Scott Crofton, Sullivan & Cromwell LLP
Federal Securities Laws For public companies, the Securities Act of 1933 and the Securities Exchange Act of 1934 (Exchange Act), as amended by the Sarbanes- Oxley Act of 2002 (SOX) and the Dodd-Frank Act of 2010 (Dodd-Frank), establish certain rules and disclosure requirements pertaining to corporate governance. Historically, the federal securities laws indirectly regulated the corporate govern - ance of public companies through a disclosure regime. However, SOX and Dodd-Frank added substantive corporate governance rules, such as independence requirements for audit committee members. Proxy Advisory Firms Proxy advisory firms, such as Institutional Share - holder Services (ISS) and Glass Lewis & Co (Glass Lewis), issue guidelines to advise stock - holders of public companies on how to vote their shares on corporate governance matters. Passive institutional investors often vote on cor - porate governance matters in accordance with such guidelines, as well as their investors’ pub - lished voting policies. Given the trend towards shares being held passively, these guidelines and policies play a significant role in the gov - ernance of public companies. 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares The USA has two primary national stock exchanges: the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq). US companies with publicly traded shares are generally required to follow the corporate gov - ernance rules and disclosure requirements set forth in the applicable stock exchange rules and the federal securities laws. These requirements are mandatory, although the stock exchanges provide exemptions for certain companies, such
as those with a controlling stockholder, limited partnerships, companies in bankruptcy, small - er reporting companies, registered investment companies, and foreign private issuers. Director Independence The NYSE and Nasdaq require a majority of a listed company’s board of directors to be com - posed of independent directors, and boards are required to make the affirmative determination as to whether each director qualifies as independ - ent under the applicable exchange’s definition of independence. The NYSE definition of inde - pendence requires that a director has no mate - rial relationship with the company. Nasdaq’s definition of independence turns on whether the director has a relationship that would interfere with the exercise of the independent judgement of the director in carrying out their responsibili - ties. Although these determinations generally require an assessment of all relevant facts and circumstances, each of the stock exchanges also includes bright-line tests that, if satisfied, disqualify a director from being independent. These tests relate to: • whether the director or an immediate family member has been employed by or received compensation above a certain threshold from the listed company; • whether the director or an immediate family member is employed by another company that makes or receives payments above a certain threshold from the listed company; • whether the director or an immediate family member is employed by the listed company’s auditor; and • whether the director or an immediate family member is employed by another company where any of the listed company’s executive
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