Compensation Committee and Adviser Implementation Begins July 1, 2013

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group, and David L. Caplan is a partner and global co-head of the firm’s mergers and acquisitions practice. This post is based on a Davis Polk client memorandum.

As discussed in our previous memo, in January 2013, the SEC approved amendments to the NYSE and Nasdaq listing standards relating to compensation committees and their advisers. Unless they have already done so, companies should begin implementing the new requirements with respect to compensation committees and their advisers that take effect on July 1, 2013. Compensation committee action is required in order to comply with these requirements.

Companies should note that, while the new rules require compensation committees to consider the independence of their advisers, the rules do not require that such advisers be independent, nor is any aspect of the mandated independence review required to be disclosed publicly (other than proxy disclosure concerning compensation consultants to a company or its compensation committee).

Companies should also note that this independent assessment applies only to advisers; there will be a separate independence assessment of directors required later, as noted below.

  • In order to comply with the requirement to take into consideration the independence of advisers to the compensation committee before selecting or receiving advice from such adviser by July 1, 2013, companies should (unless they have done so already in connection with their proxy disclosure):
    • identify any advisers to the compensation committee, whether or not directly engaged by the compensation committee;
    • gather the necessary data in order to evaluate the independence of advisers (whose independence should be evaluated annually thereafter);
    • conduct such independence evaluations as specified in the relevant listing rules; and
    • conduct independence evaluations prior to selecting any new advisers.
  • Companies listed on the NYSE should review their existing compensation committee charters by July 1, 2013 and update them as necessary to comply with the new rules.
    • Revised charters should:
      • authorize the compensation committee, in its sole discretion, to engage its own advisers directly;
      • specify that the compensation committee, where it has engaged its own advisers, is to be directly responsible for the appointment, compensation and oversight of the work of any such adviser;
      • direct the company to provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to any such advisers retained by the compensation committee; and
      • require the compensation committee to engage any such adviser directly, or receive advice from any other adviser, only after taking into account the factors specified in the relevant listing standards.
  • Companies listed on Nasdaq are required to give their compensation committees the authority and responsibilities enumerated above by the same date, but may consider updating their charters at the same time.
  • If they have not already done so, companies listed on Nasdaq should review their charters by the earlier of October 31, 2014 or their first annual meeting after January 15, 2014 and update them as necessary to also include the following (in addition to the provisions related to compensation committee advisers noted above):
    • the scope of responsibility of the compensation committee and how it is carried out;
    • the compensation committee’s responsibility for determining, or recommending to the board for determination, the compensation of the CEO and all other executive officers; and
    • that the CEO may not be present during voting or deliberations on his or her compensation.

By the earlier of October 31, 2014 or their first annual meeting after January 15, 2014:

  • Companies should have the board evaluate all compensation committee members to ensure that they meet the new member independence requirements.

Nasdaq-listed companies must certify to Nasdaq compliance with the listing standards within 30 days after the final implementation deadline applicable to the company.

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