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The New York Stock Exchange Board of Directors, June 6, endorsed a Report by its Corporate Accountability and Listing Standards Committee proposing extensive changes to NYSE listing standards designed to promote responsible high quality corporate governance processes. The NYSE appointed the Corporate Accountability and Listing Standards Committee in February 2002 in response to an SEC request that the Exchange review its listing standards in light of the Enron failure. The report is available at http://www.nyse.com. The report contains many new listing standards relating to the role and qualification of directors, board committees (especially the audit committee), corporate governance guidelines and codes of conduct, shareholder approval requirements and disclosure requirements. Many of the listing standards reflect current best practices of major corporations and recommendations of groups such as The Business Roundtable, the American Society of Corporate Secretaries and the Council of Institutional Investors. The report also creates new enforcement mechanisms. Importantly, the report notes that new rules cannot substitute for the ethical performance by directors of their duties. The report reflects the committee’s desire to propose reforms that will “encourage and empower the many good and honest people that serve NYSE-listed companies and their shareholders as directors, officers and employees” while seeking to avoid proposals that “would deter good and responsible people from serving as directors.” The report also contains recommendations to the SEC and other policymakers as to matters consistent with its objectives. PROPOSED NEW LISTING STANDARDS The key reforms proposed in the report for listed companies (other than foreign private issuers) include: � Increasing the role and authority of independent directors � Independent directors must comprise a majority of a company’s board. (Previously only three independent directors were required.) � While a nonexecutive chairman or lead director is not required, boards must convene regular executive sessions in which the nonmanagement directors meet without management. The name of the director who will preside at such sessions must be publicly disclosed. � Companies must have an audit committee, a nominating/corporate governance committee and a compensation committee, each comprised solely of independent directors. (Previously only an audit committee was required.) � Audit committees must have sole responsibility for hiring and firing the company’s independent auditors, and for approving any significant nonaudit work by the auditors. � Tightening the definition of “independent” director and adding new audit committee qualification requirements � For a director to be deemed “independent,” the board must affirmatively determine that the director has no material relationship with the listed company. The basis for such determination must be disclosed in the company’s proxy statement. Ownership, or affiliation with the owner, of less than a controlling amount of stock of the company is not considered a per se bar to an independence finding. � In addition, there is a five-year “cooling-off” period for former employees of the listed company or of its independent auditor, for former employees of any company whose compensation committee includes an executive officer of the listed company, and for immediate family members of the foregoing. � The chair of the audit committee must have accounting or financial management experience. (Previously the rules required that one member, but not necessarily the chair, have this expertise.) � An audit committee member may not receive consulting or similar fees. Customary director’s fees (which may be any combination of cash and stock and may include customary additional amounts for committee service) must be the sole compensation an audit committee member receives from the listed company. Further, an audit committee member associated with a major shareholder (one owning 20 percent or more of the listed company’s equity) may not chair the audit committee or vote in audit committee proceedings. � Placing a focus on good corporate governance � Companies must adopt corporate governance guidelines, as well as charters for their audit, compensation and nominating/corporate governance committees, each having terms consistent with those specified in the listing standards. � Companies must adopt a code of business conduct and ethics consistent with the principles specified in the listing standards. Any waivers of the code for directors or executive officers may be made only by the board or a board committee, and must be promptly disclosed to shareholders. � Giving shareholders more opportunity to monitor and participate in governance � Shareholders must be given the opportunity to vote on all equity-based compensation plans and all material revisions to such plans (including for purposes of repricing existing options); brokers may only vote customer shares on proposals for such plans pursuant to customer instructions. � Companies must disclose their corporate governance guidelines, codes of business conduct and ethics, and key committee charters on their Web sites. � Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from NYSE rules for U.S. companies. � Establishing new control and enforcement mechanisms � Each listed company’s CEO must certify to the NYSE annually that the company has established and complied with procedures for verifying the accuracy and completeness of information provided to investors and that he or she has no reasonable cause to believe that the information provided to investors is not accurate and complete. The CEO must further certify to the NYSE that he or she has reviewed with the board those procedures and the company’s compliance with them. � CEOs must also certify to the NYSE annually that they are not aware of any company violations of NYSE rules. � Upon finding a violation of an Exchange rule, the NYSE may issue a public reprimand letter to the listed company and ultimately suspend or de-list the offending company. The report also urges listed companies to establish an orientation program for new board members, and declares a NYSE intention to develop a Directors Institute with leading authorities in corporate governance to provide continuing director education. POLICY RECOMMENDATIONS The report endorses a number of public policy initiatives, including recent SEC proposals to: (1) reform oversight of the accounting profession and revisit auditor independence rules, (2) require additional MD&A disclosure relating to critical accounting policies, (3) allow the SEC to administratively bar individuals who violate their duties from serving as directors or officers of publicly traded companies and (4) require CEOs to certify corporate disclosures (the report suggests that such CEO certification be enforced exclusively by the SEC “to avoid potentially pernicious private litigation”). The Committee further recommends that the SEC require public companies, in all their public or shareholder communications, to report complete GAAP-based financial information before any reference to “pro forma” or “adjusted” financial information, and to require reconciliation of all such information to GAAP. The report strongly recommends against taking any action to repeal or weaken the Private Securities Litigation Reform Act, imposing additional liability on directors under state or federal law or reducing protections currently available to directors through director and officer liability insurance and state law indemnification and exculpation provisions. The report also rejects mandating auditor rotation. FORMS OF GOVERNANCE GUIDELINES, COMMITTEE CHARTERS AND CODE OF ETHICS As noted above, the committee proposals focus NYSE-listed companies on governance matters through the required adoption and disclosure of corporate governance guidelines, key board committee charters and a code of business conduct and ethics. While the committee proposals specify topic areas that these documents must address, the proposals largely leave to the listed company’s board of directors the responsibility to determine the actual policy to be adopted by the company regarding each topic. In our view, if these documents are properly crafted and directors perform their duties thereunder in the reasonable exercise of their business judgment, director liability should not increase as a result of the new proposals. APPROVAL AND TRANSITION PROCESS With respect to the requirement that each listed company have a majority of independent directors on its board, the committee recommended that currently listed companies be required to comply within 24 months of the rule’s enactment. There are no exceptions for listed companies that are controlled by a person, parent company or group. Companies newly listing on the NYSE will be required to comply within two years of their listing. A company must publicly disclose when it becomes compliant with this requirement. After a period of public comment on the report, the NYSE Board is expected to act on the committee proposals on Aug. 1, 2002. At that time, the proposals would form the basis of a NYSE filing with the SEC to amend the NYSE Listed Company Manual. That filing would itself be subject to a period of public comment prior to any action being taken by the SEC. The committee noted that during this process it expects the NYSE to resolve technical issues, such as transition rules and exceptions for exchange-traded funds (ETFs), closed-end mutual funds and other special situations. Wachtell, Lipton, Rosen & Katz, www.wlrk.com, based in New York, is a business law firm specializing in mergers and acquisitions, corporate litigation and government investigations and proceedings.

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