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Capital Markets 2008/09 Cross-border

Cross-border

PLCCROSS-BORDER HANDBOOKS www.practicallaw.com/capitalmarketshandbook 9

Continuing obligations

Giles Elliott, Vica Irani, Alireza Odouli and Sebastian Orton, Jones Day

www.practicallaw.com/2-384-2686

This chapter compares the principal continuing obligations relating to disclosure, material transactions and corporate governance that apply to issuers with primary listings of equity securities on the UKLA’s Main Market in the UK or a principal market in the US. It does not include a detailed analysis on the less onerous obligations associated with a listing on a junior market or a secondary listing on a regulated market.

Different approaChes

The obligations, responsibilities and duties to which issuers and their directors are subject following an IPO vary considerably be-tween the EU and the US and, to a more limited extent, within the EU itself. However, the underlying principle of fair, accurate and timely disclosure is one that applies across the board.

Directive 2003/71/EC on the prospectus to be published when se-curities are offered to the public or admitted to trading (Prospec-tus Directive) (a maximum harmonisation directive implemented throughout the EU) has, to a large extent, standardised the process of obtaining a primary listing on a regulated market in the EU. In contrast, the continuing obligations imposed on issuers under the rules implemented within the EU in accordance with the Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (Market Abuse Directive) and the Directive 2004/109/EC on transparency requirements for securities admitted to trading on a regulated market and amending Directive 2001/34/EC (Trans-parency Directive), both minimum harmonisation directives, vary between member states. In addition, each jurisdiction remains subject to its own legislation regulating listed issuers, insider deal-ing and market abuse. However, given that many of the basic prin-ciples and rules flow from EU legislation, this chapter concentrates on the obligations in one EU jurisdiction, the UK, and compares those with the approach taken in the US.

the regulatory framework

uk

In the UK, all issuers admitted to the Official List with securities admitted to trading on the Main Market must comply with the continuing obligations that are imposed by:

The Financial Services and Markets Act 2000 (FSMA).

The Listing Rules, the Disclosure and Transparency Rules

and the Admission and Disclosure Standards of the London Stock Exchange.

Applicable corporate law.

In addition to specific continuing obligation requirements, is-suers must comply with six overriding listing principles (Listing Principles), designed to ensure that the spirit as well as the letter of the Listing Rules is adhered to. The Listing Principles require an issuer to, among other matters:

Take reasonable steps to enable its directors to understand their responsibilities.

Establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.

Treat shareholders equally.

Communicate information to holders and potential holders of their securities in such a way as to avoid the creation or continuation of a false market.

us

In the US, an issuer is subject to continuing obligations imposed by:

Federal securities laws, including the regulations and disclosure requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) and case law interpreting those laws.

The corporate statutes and court decisions of the state in which it is incorporated, including with respect to fiduciary duties and liabilities of directors.

Typically, the obligations apply to an issuer that has completed an initial public offering (IPO) registered with the Securities and Ex-change Commission (SEC) under the Securities Act of 1933, as amended (Securities Act). An issuer is also subject to the regula-tions and other guidance promulgated by the SEC, as well as the listing standards of the exchange on which the issuer’s securities are listed for trading, most notably the New York Stock Exchange (NYSE) and the Nasdaq National Market (NASDAQ).

© This chapter was first published in the PLC Cross-border Capital Markets Handbook 2008/09 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact [email protected], or visit www.practicallaw.com/capitalmarketshandbook.

Cross-border Capital Markets 2008/09

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10 PLCCROSS-BORDER HANDBOOKS www.practicallaw.com/capitalmarketshandbook

general obligation of DisClosure

uk

Following the implementation of the Transparency Directive and the Market Abuse Directive across the EU, most member states have published specific rules designed to promote prompt disclosure of relevant information to the market. In the UK, both directives were implemented through amendments to the FSMA and the publication of the Disclosure and Transparency Rules (DTRs). The DTRs provide that an issuer must notify a Regulatory Information Service (RIS) as soon as possible of any inside information that directly concerns the issuer unless the issuer is permitted to delay disclosure in specific circumstances. Inside information, for these purposes, constitutes information which is precise, is not generally available, relates to an issuer or its securities and would, if generally available, be likely to have a significant effect on the price of the issuer’s securities.

The starting point for determining whether unpublished informa-tion should be disclosed is to ask whether the information would be likely to be used by a reasonable investor as part of the basis of his investment decision and would, therefore, be likely to have a significant effect on the share price given the totality of the issuer’s activities and all other relevant circumstances. The regulators have deliberately avoided setting a specific materiality threshold (percent-age change or otherwise) that could be used to establish what con-stitutes a significant effect on an issuer’s price, as this varies from issuer to issuer.

us

The position is different in the US where, as a general rule and in the absence of insider trading or previous inaccurate disclosures, an issuer has no affirmative duty to disclose material information, apart from an obligation to make periodic filings under the Ex-change Act in the form of annual, quarterly and current reports, proxy statements and the like. As a practical matter, however, day-to-day circumstances impose an affirmative obligation of disclo-sure on an issuer, stemming largely from constant inquiries from the investment community for current information and an issuer’s motivation to keep the investment community apprised of current developments. Consequently, most issuers adopt an affirmative policy to disclose material information, subject to exceptions such as when it is necessary to keep the information confidential or when the issuer has a legitimate business reason for not disclosing it. In addition, Regulation FD (short for fair disclosure) requires that all material disclosures that are made, be made to the public and not selectively to groups such as professional analysts.

As with the UK, determining what constitutes material information is a matter of judgement. Under relevant case law and the general rule that has evolved under numerous court decisions, material information has been deemed to be information to which a reason-able investor would be likely to attach importance in determin-ing whether to purchase or sell an issuer’s securities. However, no comprehensive guidelines have ever been offered by the SEC to distinguish material from non-material information. At a minimum, the materiality standard requires an issuer’s management to evalu-ate the materiality of each potential disclosure issue on a case-by-case basis in light of all of the circumstances. Materiality must be determined in the context of an issuer’s business as a whole, taking into account both the immediate financial impact of an event and its significance for the issuer’s future results of operations.

Delaying DisClosure of material information

uk

Once a UK issuer has identified inside information, it must as-sess whether or not it should be disclosed or whether there is a genuine, permissible reason to delay disclosure. In the UK, an issuer may, at its own risk, delay the public disclosure of inside information so as not to prejudice its legitimate interests pro-vided that:

The delay is not likely to mislead the public.

Any person receiving the information before its public disclosure owes the issuer a duty of confidentiality (whether under law, regulations or contract).

The issuer is able to ensure the confidentiality of the infor-mation.

The FSA has made it clear that there are few circumstances that would justify delaying disclosure so as not to prejudice an is-suer’s legitimate interests. The most commonly used exemption relates to impending developments or negotiations in course, or related elements where the outcome or normal pattern of those negotiations would be likely to be affected by public disclosure. The DTRs recognise that if the financial viability of an issuer is in grave and imminent danger, public disclosure of inside infor-mation may be delayed for a limited period where such disclo-sure would seriously jeopardise the interests of existing potential shareholders by undermining the conclusion of specific negotia-tions designed to ensure the long term financial recovery of the issuer (although it should be noted that this does not allow an issuer to delay public disclosure of the fact that it is in financial difficulty or of its worsening financial condition and is limited to the fact or substance of the negotiations to deal with such a situation).

Where an issuer is permitted to delay public disclosure of inside information (for example for the reasons referred to above) it may only disclose that information on a selective basis to persons in the normal course of the exercise of their employment, profes-sion or duties provided that the recipients owe the issuer a duty of confidentiality. Persons to whom an issuer may be able to dis-close inside information on a selective basis include:

Advisers.

Negotiating counter parties.

Employer representatives or trade unions.

Major shareholders.

Lenders and credit rating agencies.

Statutory or regulatory authorities.

An issuer must also take precautions when disclosing information internally, in particular:

Effective arrangements must be established to deny access to inside information to persons other than those who re-quire it for the exercise of their functions within the issuer.



Cross-border


The issuer must also ensure that it (and persons acting on its behalf or on its account) draw up a list of those persons working for them who have access to inside information relat-ing directly or indirectly to the issuer whether on a regular or occasional basis. These insider lists must be maintained and kept updated and provided to the FSA on request.

Even where the delay of public disclosure is permitted, the re-quirement to make a public announcement of inside informa-tion may be accelerated if this is necessary to respond to market rumours or speculation. Accordingly, the wider the group of re-cipients of inside information, the greater the likelihood of a leak which would trigger full public disclosure of the information in question.

us

Again, the position in the US is different, in that the timing of disclosure of material information, outside an issuer’s periodic and current reporting obligations, is generally a matter of the is-suer’s business judgement. In this regard, most issuers promptly disclose material information as a matter of practice unless there is a legitimate business reason for delaying disclosure. Some con-siderations in determining whether a legitimate business reason exists for delaying disclosure include where:

An issuer is gathering and verifying the basis for and reli-ability of such information.

Disclosure would be premature and would require future revisions or clarifications.

Disclosure would have an anti-competitive effect.

Disclosure would likely adversely impact the ability to reach agreement on a pending transaction (for example, a merger). However, when price, terms and structure have been agreed upon, courts have ruled the information gener-ally becomes material.

In making these disclosure decisions, an issuer must consider NYSE and NASDAQ requirements calling for prompt public dis-closure of any material news that might affect the market for its securities. This obligation exists alongside those imposed by the SEC and federal securities laws, and results in an affirmative dis-closure obligation for companies listed on the NYSE or NASDAQ that may not otherwise exist. Material news includes information that might:

Reasonably be expected to have an impact, favourable or unfavourable, on the market for an issuer’s securities.

Affect the value of the issuer’s securities or influence an investor’s decision to trade in the issuer’s securities.

Categories of material news are very broad; generally, all signifi-cant events affecting the issuer, including its business, products, management and finances, presumably merit prompt public dis-closure.

Both the NYSE and NASDAQ permit a listed issuer to refrain from announcing material news if it is necessary and possible for the issuer to maintain its confidentiality, while still treating all inves-tors equally and allowing no unfair information advantage. How-

ever, the issuer must take extreme care to keep the information confidential, and to remind persons who possess the information of their obligation to refrain from trading on insider information.

affirmative DisClosure obligations

In addition to the general obligation of disclosure applicable to issuers in both the UK and the US, there are certain specific circumstances that impose an affirmative disclosure obligation in both jursidictions:

An issuer has an immediate duty of disclosure where it is aware that insiders possessing inside information are trading in the issuer’s securities, subject to certain technical exceptions.

In some circumstances, an issuer will have a duty to correct existing information in the marketplace that was inaccurate when published. This duty may arise where the previously existing information:

was published by the issuer;

is attributable to the issuer through express or tacit endorsement; or

was generated by a person or institution with whom the issuer has a special relationship.

An issuer generally is not required to rectify or correct rumours in the marketplace that are not attributable, directly or indirectly, to the issuer.

Moreover, the FSA has stated that there is no regulatory obligation to deny false rumours. Should, however, an issuer in the UK choose to make a denial, it should do so via an RIS, thereby ensuring the whole market is informed. Over the past few months, there have been several instances of issuers making reassuring statements to their media contacts rather than through an RIS and, in doing so, running the risk of a subsequent share price movement which may expose the issuer to investigation by the FSA.

In addition, if an issuer discloses material non-public information to a person who uses that information to deal in the issuer’s secu-rities (that is, someone who is not bound to keep it confidential by oral or written agreement or by terms of employment), the issuer may be exposed to liability, unless the issuer has previously pub-licly disclosed the information. In the context of an issuer’s dis-cussions with investment analysts, institutional investors or any other investors who may trade on material non-public information disclosed by the issuer during those discussions, the applicable regulations in both the US and the UK require the issuer to dis-close such information simultaneously to the investing public. If the issuer unintentionally discloses this information, it must promptly disclose it to the public.

perioDiC finanCial reporting

uk. The DTRs require an issuer to adhere to certain periodic fi-nancial reporting requirements within set timescales in respect of the publication of an annual financial report, the announcement of half-yearly results and, unless an issuer publishes quarterly financial reports, the release of two interim management state-ments each financial year.



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us. Similarly, an issuer subject to the Exchange Act must file annual, quarterly and current reports with the SEC. These reports regularly update and supplement the information that the issuer has made available to the public in previous Securities Act and Exchange Act filings. Issuers file the reports within a specified number of days after the end of each reporting period, or after certain material events. The reporting requirements are similar for US issuers and non-US issuers, although they are less burden-some for non-US issuers that qualify as foreign private issuers.

annual reporting requirements

uk. Issuers in the UK must publish an annual financial report not later than four months after the end of the financial year to which it relates. The report must remain publicly available for at least five years. An annual financial report must include:

The issuer’s audited financial statements prepared under the applicable accounting standards.

A management report.

An appropriate statement of assurance from persons respon-sible within the issuer.

The Disclosure and Transparency Rules include detailed require-ments for these reports and, in addition, the UK’s Combined Code on Corporate Governance (Combined Code) recommends that directors should explain their responsibility for preparing the accounts and should present a balanced and understandable as-sessment of an issuer’s position.

The Listing Rules impose further content requirements for an is-suer’s annual financial report such as particulars of related party transactions or arrangements. An issuer must also disclose de-tails of whether or not it complies with Combined Code or (in the case of a non-UK entity) the corporate governance regime of its country of incorporation and the significant ways in which its ac-tual corporate governance practice differs from the requirements set out in the Combined Code.

Additionally, throughout the EU, an issuer must publish an annual information update that refers to or contains all information which has been published or made available to the public over the previ-ous 12 months in one or more European member states and in oth-er countries in compliance with its obligations under community or national laws or rules relating to the issuer’s securities. The annual information update may refer to information rather than include that information but must indicate where that information can be obtained from. Issuers typically seek to comply with this obligation at the time of publication of their annual reports.

us. The annual report on Form 10-K is the most comprehensive periodic report filed with the SEC and includes much of the same information that is required in a registration statement filed for an IPO under the Securities Act. The primary focus of the annual report is on management’s discussion and analysis (MD&A) of the finan-cial condition and results of operations, as well as presentation of selected and full year-end audited financial information, including the independent auditor’s opinion, in compliance with Regulation S-X. Additionally, Form 10-K includes risk factor disclosure of cir-cumstances, trends or issues that may affect the issuer’s business, prospects, future operating results and financial condition.

The deadline for filing Form 10-K generally depends on the size of the issuer as measured by its public equity float, with accelerated deadlines for larger issuers who have previously been subject to the Exchange Act’s reporting requirements. The SEC recently adopted rule amendments that will accelerate the reporting deadline for an-nual reports filed on Form 20-F by foreign private issuers from six months to four months after the issuer’s fiscal year-end, following a three-year transition period. The new deadline will apply to fiscal years ending on or after 15 December 2011.

half-yearly reporting

uk. Issuers in the UK must publish a half-yearly report which must be made public within two months of the end of the period to which it relates. A half-yearly financial report must include:

A condensed set of financial statements.

An interim management report which must include:

an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements;

a description of the principal risks and uncertainties fac-ing the issuer in the next six months together with details of related party transactions.

A responsibility statement.

The report must indicate if it has been audited or reviewed by audi-tors and if so, the audit report or review must be reproduced in full.

us. US regulations do not impose any requirement for half-yearly reports and US issuers are simply required to comply with the quarterly reporting obligations described below.

Quarterly reporting

uk. Unless an issuer in the UK publishes quarterly financial re-ports, it must release an interim management statement during the first and second six-month period of the financial year. The statement must be released between ten weeks after the begin-ning and six weeks before the end of the relevant six-month pe-riod. It must explain any material events and transactions that have taken place since the start of the relevant period, and their impact on an issuer’s financial position, describing the financial position and performance of the issuer during that time.

us. Issuers file a quarterly report on Form 10-Q after the end of each of their first three fiscal quarters. The main portion of the quarterly report is an updated MD&A, together with unaudited interim financial statements in compliance with Regulation S-X. Additionally, Form 10-Q includes any updates to risk factors included in previous filings to reflect any material changes, as well as any changes in the issuer’s internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the issuer’s internal control over financial reporting.

As with Form 10-K, the deadline for filing Form 10-Q depends on which category an issuer falls under, with accelerated deadlines for larger issuers. Foreign private issuers are not required to file quarterly reports.



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Current report

Unlike the obligation on issuers in the UK to simply announce information on material events through an RIS as and when it arises, in the US, issuers must file a Form 8-K (a current report) between quarterly and annual reports to provide the public with information on recent material events. Form 8-K disclosure is mandatory if specified events occur. In addition, many issuers make optional filings on Form 8-K to ensure maximum public disclosure of material developments. Items giving rise to manda-tory disclosure include entry into or termination of, or material amendment to, material agreements, including compensation agreements, as well as significant acquisitions or dispositions.

Mandatory Form 8-Ks generally must be filed within four business days of the reported event, while an optional report should be filed promptly after the triggering event. Foreign private issuers submit current reports to the SEC on Form 6-K. Unlike Form 8-K, there are no specific substantive disclosures that are required by Form 6-K. Instead, foreign private issuers furnish under cover of Form 6-K whatever information that they:

Make or are required to make public under the law of the jurisdiction of their domicile or in which they are incorpo-rated or organised.

File or are required to file with a stock exchange on which their securities are traded and which was made public by that exchange.

Distribute or are required to distribute to their security holders.

These reports are required to be furnished promptly after the ma-terial contained in the report is made public.

liability for periodic financial reports

uk. A director is liable for any loss suffered by an issuer as a result of any untrue or misleading statement in, or omission from, the di-rectors’ report, directors’ remuneration report or a summary finan-cial statement, if the director knew or was reckless as to whether the statement was untrue or misleading or knew the omission to be dishonest concealment of a material fact (Companies Act 2006). Although, the directors’ liability in respect of these reports is to an issuer only, the Companies Act 2006 sets out a new derivative right of action which may be brought by any shareholder on behalf of an issuer. The action may be brought for acts or omissions involving negligence, default, breach of duty or breach of trust.

Under section 501 of the Companies Act 2006, a person also commits an offence if he knowingly or recklessly makes a materi-ally misleading, false or deceptive written or oral statement to an auditor that conveys or purports to covey any information or explanations which the auditor requires, or is entitled to require. A person committing such a criminal offence is liable for up to two years’ imprisonment or a fine or both.

Section 90A of the FSMA imposes a statutory liability regime for periodic financial information published by UK issuers. An issuer will be liable to pay compensation to a person who has acquired securities and suffered loss as a result of any untrue or mislead-ing statement in, or omission from:

The annual report.

The half-yearly report.

The interim management statement.

Any preliminary statement published in advance of the an-nual financial report.

An issuer will be liable if a person discharging managerial respon-sibilities for the publication:

Knew that the statement was wrong or misleading.

Was reckless as to whether it was wrong or misleading.

Knew any omission was a dishonest concealment of a mate-rial fact.

An issuer will only be liable to third parties although the directors concerned may be liable to an issuer (section 90A(5), FSMA).

us. Issuers and their officers and directors face potential per-sonal liability resulting from the failure to make required periodic reports or making materially misleading statements in them. Sec-tion 10(b) of the Exchange Act and related Rule 10b-5 make it unlawful for a person, in connection with the purchase or sale of a security, to make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make a statement made, in the light of the circumstances under which it was made, not misleading. This anti-fraud rule applies to vir-tually any statement by an issuer, officer or director, including statements in periodic reports and press releases. As a practical matter, an issuer and its officers and directors may face personal liability under Rule 10b-5 for making an intentional or reckless misrepresentation or omission that influences the price of the issuer’s stock. Issuers and individuals can be subject to SEC en-forcement actions or private civil actions, including class actions and derivative actions. Failing to comply with all securities laws requirements for periodic reporting may also cause an issuer to lose eligibility to use short-form Securities Act registration state-ments for future offers and sales of securities.

material transaCtions

uk

The Listing Rules contain detailed requirements as to the pro-vision of information and the need for obtaining shareholders’ approval when an issuer proposes to enter into certain transac-tions. The level of disclosure required, and the requirement for shareholders’ approval depends on:

The size of the transaction in relation to the size of an issuer.

The identity of the parties to the transaction.

All transactions of an issuer and its subsidiary undertakings are included, other than transactions of a revenue nature, or where finance is being raised by an issue of securities not involving the acquisition or disposal of any fixed assets.

The specific requirements depend on the percentage ratios of the acquisition or disposal compared to the company on a number of bases, encompassing asset value, profits, consideration and



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market capitalisation. In addition, industry-specific tests are en-couraged, where relevant, to support these bases. The acquisition or disposal is compared on all relevant grounds and is classified as:

Class 3, where the percentage ratio is less than 5%. Class 3 transactions require notification only of the terms to a RIS (and only where there is an issue of securities by the issuer).

Class 2, where the percentage ratio is less than 25%. Class 2 transactions require more detailed particulars to be included in the press announcement.

Class 1, where the percentage ratio is less than 100%. A Class 1 transaction requires an explanatory circular to be dispatched to shareholders and must be conditional on shareholder approval being obtained.

Reverse takeover, where the percentage ratio is 100% or more. On a reverse takeover, in addition to the Class 1 requirements, the issuer’s listing is usually suspended and the enlarged group then has to re-apply for listing.

The FSA can aggregate two or more transactions over a period of 12 months. The latest transaction will then be treated as incor-porating the earlier aggregated transactions for the purposes of determining the level of disclosure and consent required.

In addition, transactions between an issuer and certain categories of related parties that exceed 5% in any of the class tests require the approval of the independent shareholders before implementa-tion. The categories of related parties include:

A substantial shareholder, entitled at any time within the 12 months before the transaction to control 10% or more of the voting rights in an issuer.

Any person who is or was within the 12 months before the transaction a director or shadow director of an issuer or any subsidiary undertaking or holding company of an issuer.

A person exercising significant influence over an issuer.

Any associate of the above.

Where the percentage ratios are less than 5% but any of them exceed 0.25%, the issuer must:

Inform the FSA of the details of the transaction.

Provide confirmation from an independent adviser that the terms are fair and reasonable as far as the issuer’s share-holders are concerned.

Include details in its next annual accounts.

us

An issuer’s charter document and bye-laws may require share-holder approval in respect of material transactions, including su-per-majority voting requirements for certain transactions such as mergers or share exchanges.

While the federal securities laws do not impose any share-holder approval requirements in respect of material or related party transactions, they do mandate disclosure of these transac-tions. An issuer must report entry into, or termination or mate-rial amendment of, a material definitive agreement on Form 8-K, which must be filed within four business days of the reported event. The SEC defines a material definitive agreement as an agreement that provides for either:

Obligations that are material to and enforceable against the issuer.

Rights that are material to the issuer and enforceable by the issuer against one or more other parties to the agreement.

Issuers assess materiality in light of both quantitative and quali-tative factors.

In the area of related party transactions, SEC disclosure rules are aimed at providing better information about key financial relation-ships among issuers and certain related persons. The rules require a description of the issuer’s policies and procedures for the review, approval or ratification of transactions with related persons and the identification of any reported related person transactions that did not require review, approval or ratification or where the issuer’s policies and procedures were not followed. As with disclosure of compensation matters, the SEC rules rely on a principles-based materiality analysis.

Both the NYSE and NASDAQ generally require shareholder ap-proval before the issue of securities by an issuer that would result in a change of control of the issuer. In addition, both the NYSE and NASDAQ generally require shareholder approval for a new issue of common stock above a threshold of 20%. A public offer-ing generally does not require shareholder approval, nor does a private sale of common stock for cash at a price at or above the common stock’s book and market value.

Corporate governanCe

uk

The UK’s Combined Code seeks to promote good corporate gov-ernance as a whole, with emphasis on those aspects of corporate governance relating to the composition and balance of the board, directors’ remuneration, directors’ relations with shareholders, financial reporting and accountability.

In accordance with the UK’s comply or explain approach to cor-porate governance, the Listing Rules require UK incorporated is-suers to:

Explain their governance policies in light of the principles of the Combined Code.

Confirm whether or not they have complied with the Com-bined Code.

Non-UK issuers listed on the Main Market are required to dis-close whether it complies with the corporate governance regime in its home country and to explain the significant ways in which its actual corporate governance practices differ from those set out in the Combined Code.



Cross-border


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The governance policies and practices that an issuer adopts in the US are shaped primarily by both:

The rules of the exchange on which the issuer’s securities are listed. NYSE and Nasdaq rules include various require-ments for the composition of the board, specific duties that must be performed by board committees or independent directors and other governance matters.

SEC rules, which reflect the general focus on governance that has prevailed since the adoption of the Sarbanes-Oxley Act. Although SEC rules generally only require the disclo-sure of information about the issuer’s corporate governance practices, these rules effectively result in the adoption of some practices because issuers do not want to have to ex-plain, as SEC rules require, why the board has determined that a particular practice is not appropriate for the issuer.

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