When is a NYSE and NASDAQ Director independent? Independent Director Compliance

Both the Nasdaq Stock Exchange (Nasdaq) and the New York Stock Exchange (NYSE) impose a requirement that a majority of the board of directors of their listed companies be independent directors.  

Recent litigation, including SEC enforcement actions, demonstrates that officers and directors of listed companies should carefully consider this requirement. The determination of director independence is a fact-based analysis that can make compliance difficult. The specific facts of the relationship and other factors can disqualify an otherwise independent director from participating in board decisions. Complicating the analysis further, directors can be considered independent for one purpose but not another.  The status of independent directors must be reassessed based on a variety of events, which vary depending on the particular facts. 

In an October 2024 SEC action by the SEC’s Division of Enforcement, the SEC targeted a former Chief Executive Officer and director who failed to disclose a close personal friendship with another company executive. The SEC alleged that this lack of disclosure resulted in misleading proxy disclosures concerning his independence. The defendant in the case agreed to a five-year officer and director bar and a $175,000 civil penalty in the action.

Another highly publicized case involves a Delaware Chancery Court’s Tornetta decision, which invalidated Elon Musk’s compensation package for 2018. In that case, his lack of independence was a significant factor in the court’s determination that the compensation package was invalid.

NYSE and NASDAQ Requirements

NYSE and Nasdaq require that independent directors not hold management positions at the public company, its parents or subsidiaries. Additionally, former executives are not considered independent for 3 years after their departures. Other NYSE and Nasdaq rules require independent directors not to be significantly dependent on the company financially. The NYSE Listed Company Manual warns that boards making independence determinations should “broadly consider all relevant facts and circumstances” (Commentary to Section 303A.02(a)).

NYSE and Nasdaq define director independence as follows:

• NYSE. An independent director is one who the board of directors affirmatively determines has no material relationship with the company, either directly or as an officer, partner or stockholder of a company that has a relationship with the company (Section 303A.02(a)(i), NYSE Listed Company Manual). 
• Nasdaq. An independent director is one who is not an executive officer or an employee of the company and who does not have a relationship that, in the opinion of the board of directors, would interfere with exercising independent judgment in carrying out a director’s responsibilities (Rules 5005(a)(20) and 5605(a)(2), Nasdaq Listing Rules).

Both the NYSE and Nasdaq require boards of directors of public companies to affirmatively determine whether or not each director is independent. This determination of director independence requires, but is not limited to, evaluating whether the director has a relationship with the company or is an officer, partner or stockholder of a company that has a relationship with the company. The NYSE has indicated that material relationships may include, among others, legal, accounting, commercial, industrial, banking, consulting, charitable and family relationships.

Nasdaq and NYSE Rules for Independent Directors

Section 303A.02(b) of the NYSE Listed Company Manual and Nasdaq Rule 5605(a)(2) each preclude persons in certain categories from being independent:

• Directors who are employees of the company   
• Directors who received (or who have a family member who received) more than $120,000 in compensation from the company, with certain exceptions  
• Directors who are partners of the company’s outside auditor or have other relationships with the company’s outside auditor  
• Directors who have compensation committee interlocks 
• Directors affiliated with organizations that the company has made payments to, or received payments from, for property and services meeting the thresholds in the stock exchange rules  
• NYSE: The greater of $1 million or 2% of the other company’s consolidated gross revenues 
• Nasdaq: Exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more 

While the above tests provide some guidance, other facts may prevent a director from being deemed independent. Public company directors who meet all of the criteria set forth in Section 303A.02(b) of the NYSE Listed Company Manual or Nasdaq Rule 5605(a)(2) aren’t automatically independent. The public company’s board still must make an affirmative determination that each director has no material relationship with the company that would impair their independence.

The chart below sets forth the Director Independence Standards for NYSE and Nasdaq. A director of a public company listed on the NYSE or Nasdaq is not independent under the following circumstances:

For more information about NYSE and Nasdaq company independence and corporate governance matters, please contact or to speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com