Independent Majority on the Board of Directors of Foreign Private Issuers

Client Advisory

April 2005

NASDAQ has recently changed its rules regarding exemptions for foreign private issuers from the NASDAQ requirement to have an independent majority on the board or directors.

NASDAQ Rule 4350(c) requires that a majority of a board of directors of a NASDAQ listed company must be comprised of independent directors. A director is “independent” if he/she is not an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ rules include several, non-exclusive, examples of when a director cannot be deemed independent, for instance, if he/she (i) was employed during the past three years by the company or an affiliate of the company, (ii) accepted certain payments in excess of $60,000 during any of the last three fiscal years, (iii) stands in a certain family relation to an employee of the company or an affiliate, or (iv) is affiliated with an organization that received certain payments in excess of 5% of the consolidated revenues or $200,000 from the company, to name the most important examples. Generally, this rule will become applicable to foreign private issuers on July 31, 2005.

NASDAQ Rule 4350(a)(1) prior to its recent amendment stated that NASDAQ could provide exemptions from Rule 4350 to foreign private issuers if the independent director requirement was contrary to (i) the foreign private issuer’s home country law, or (ii) generally accepted business practices in the foreign private issuer’s home country, except that no exemption could be granted from mandated federal securities laws. There were two problems with this exemption rule. First, in our experience, almost no foreign law specifically prohibits an independent majority on the board of directors. Foreign laws are usually mute on this point. Second, since the first alternative was therefore almost never be available, foreign private issuers had to rely on the second alternative, which raised the question who could render a statement that an independent majority requirement was contrary to generally accepted business practices. Law firms were generally reluctant to make such statements and it was uncertain whose statements NASDAQ would accept in the alternative.

Effective as of March 3, 2005, NASDAQ, in an apparent acknowledgment of these issues, amended Rule 4350(a)(1). Pursuant to the revised rule, a foreign private issuer is no longer required to request an exemption and may basically follow home country practice in lieu of complying with Rule 4350 (with some exceptions, the most important of which is that foreign private issuers must comply with the SEC and NASDAQ audit committee independence rules). To comply with the changed rule, a foreign private issuer should provide NASDAQ with a letter from its home country counsel certifying that the issuer’s practices of having a Board of Directors not composed of an independent majority are not prohibited by home country law. [1]  This new rule lowered the threshold for an exemption substantially from a procedural and substantive point of view. First, the foreign private issuer does not have to apply for an exemption. Instead, it is exempted by simply submitting the necessary certification. Second, if home country law is mute on the board independence requirement, home country counsel should usually be willing to provide an opinion that under home country law the foreign private issuer’s practices do not violate home country law.

Questions regarding corporate governance requirements for foreign private issuers may be directed to Steven J. Glusband (212-238-8605;, Alan J. Bernstein (212-238-8795;, Peter Flägel (212-238-8649;, Sharon Rosen (212-238-8690;, or any other member of our corporate departments in our New York Office (212-732-3200).


[1] The revised rule does not even include such a requirement.  However, the NASDAQ Bulletin, dated February 11, 2005, NASDAQ Announces Changes to Listing Standards Affecting Foreign Issuers, stated that such a certification would be necessary.  We therefore recommend to follow this suggested practice.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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