August 4, 2006

Nasdaq Proposes to Amend “Director Independence” Definition

Last week, Nasdaq filed a proposal with the SEC to modify its definition of “independent director” with the result that the Nasdaq rules would be more consistent with the NYSE’s definition of independent director. This is different than the Nasdaq’s outstanding proposal to modify the independence cure period that I blogged about a month ago.

If adopted, the changes could result in sitting directors no longer meeting the revised Nasdaq independence requirements – so Nasdaq also proposed a 90-day transition period after rule approval for compliance with the new standards. The next step is for the SEC to publish the Nasdaq’s proposal for public comment – seems like 90 days for a transition could be a little short since an average director search takes nearly six months these days…

The Stock Market: 1950s Style!

For Friday fun, how about enjoying this cartoon from 1952 from the NYSE – “What Makes Us Tick.” This is a “cartoon promoting the stock market as the engine of America’s prosperity.” Thanks to Howard Dicker for pointing me to this antique video!

Delaware First

Here is a nice piece from Jim McRitchie’s ““: Delaware, the first state, is also the most important state for corporate governance, since more than half of America’s publicly traded businesses are incorporated there and must live by its statutes. Additionally, states that want to keep up, frequently adopt Delaware rules. The Delaware Court of Chancery produced a 180-page tome with the legal opinion it rendered last year in the Disney case.

An article entitled Delaware Rules in (8/1/06) gives us a glimpse of what Chancellor William B. Chandler III sees as questions the court will face in upcoming cases. For example, can shareholders adopt bylaws that trump board decisions? If they do, can the board then turnaround and negate their decision? “That issue has never been directly faced or answered in Delaware,” says Chandler, “but I think it’s inevitable that it will be decided.”

The author of the article, Roy Harris, believes that “what Chancery rulings say in the near future could establish standards that rival anything that Sarbanes-Oxley and the Securities and Exchange Commission have offered.” To back that up, he quotes Charles Elson. While the court must wait for cases to be brought before it — “ultimately the Delaware Chancery Court will have a significant role in changing governance,” he says. Elson adds, “Traditionally, the court’s view was that shareholders were not sophisticated and needed to be protected from their own foolishness,” he says. “Today what they need to be protected from is managerial overreaching.” Signs of new directions:

– director independence – Beth I. Z. Boland, a partner in the Boston law firm of Bingham McCutchen LLP, believes the court will now “look beyond quantifiable measures to go into soft issues” in determining who is independent.”

– liability – Chandler says, “my view is that our law doesn’t expect different standards to be applied to different directors based on their expertise, their skill, or their training.”

– directors are agents – Chandler argues that it “would be a strange thing to invoke your fiduciary duties as a sword to break a contract that you had made with shareholders.”

– compensation – “The board is ultimately going to have to decide compensation for executives,” Chandler says, “but could shareholders adopt bylaws that place limitations or constraints in either the scope or magnitude of that compensation, or on the procedures that boards must follow before it awards compensation to a particular executive?”

Charles Elson provides insight into the way the Court of Chancery works. “Delaware doesn’t get its jollies holding people liable,” he says. “Its message is that ‘the next time I see this conduct, I’m likely to rule differently.’ It’s a delayed impact that defines the parameters of behavior.” Good discussion of the issues plus one sentence summaries of two decades of important cases.