Issuers who would not otherwise meet the NASDAQ independence rules may now breathe (a small) sigh of relief. On May 30, the SEC published notice of NASDAQ’s proposed change to Listing Rule 5605.
Generally, Rule 5605 requires issuers to maintain an “independent” audit, compensation, and nominating committees. There is an exception to the independence rules that allows one nonindependent director to serve on one of these key committees under “exceptional and limited circumstances” for up to two years.
Generally, this exception is rarely used — in the two-year period ended December 31, 2011, only 37 issuers used the exception – and is usually used only by the smallest of the listed issuers.
Under the current exception, if a director would not be considered independent because either the Board determined that the director had a relationship that interfered with the director’s independent judgment or if the director failed one of NASDAQ’s objective tests such as being employed by the company or one of its affiliates or accepting certain payments from the company in excess of $120,000 in a year, then the director could serve in an “exceptional and limited circumstance” provided that the company did not employ a family member of that director.
Under the proposed new rules, the director would be permitted to serve provided that the employed family member was not an executive officer.
While the exception does not impact a tremendous amount of companies, it does have a disproportionate benefit to smaller issuers, particularly companies with large shareholders who may be deemed affiliates of the issuer. The expected impact will be small, but I welcome any relief for smaller issuers especially given the tremendous burden placed on smaller issuers over the past 10 years.