The Consequences of the NYSE-Deutsche Combination on Listing Standards (SEC Review and German Ownership) (Part 7)
So given these circumstances, what will the SEC confront when it is asked to approve this transaction?
Foremost, it will need to examine the independence of the exchanges owned by NYSE Euronext and the independence of NYSE Regulation. So far, the Commission has indicated that no problems have arisen with for profit companies owning entities that perform regulatory functions. See Exchange Act Release No. 62032 (May 4, 2010) (“The Commission's experience to date with the issues raised by the ownership by a holding company of one or more SROs has not presented any concerns that have not been addressed, for example, by Commission approved measures at the holding company level that are designed to protect the independence of each SRO.”). Nonetheless, when the system was put in place in 2006, the approach involved prognostication. Five years of experience provide an opportunity to examine actual experience. The SEC should do this.
Second, the SEC will have to consider the role of the new holding company, a Dutch company and the configuration of the board of directors. The holding company, a Dutch company, will presumably stand in the place of NYSE Euronext with respect to its authority over NYSE Regulation. Directors of the Dutch holding company will presumably sit on the board of NYSE Regulation and the SROs. Directors of the Dutch holding company will presumably have some say in any changes to the regulatory finance agreements used to fund NYSE Regulation.
The new holding company will have a majority of directors appointed by Deutsche Borse and, presumably, have a majority of non-US Persons. When NYSE went public in 2006, this was not an issue. When it acquired Euronext in 2007, European ownership became significant. Euronext directors were guaranteed positions on the board. Nonetheless, it was clear that NYSE directors would be in the majority. See Exchange Act Release No. 55293 (Feb. 14, 2007) (“The proposed NYSE Euronext Bylaws provide that in any election of directors, the nominees who shall be elected to the NYSE Euronextboard of directors shall be nominees who receive the highest number of votes such that, immediately after such election: (1) U.S. Persons as of such election shall constitute at least half of, but no more than the smallest number of directors, that will constitute a majority of the directors on the NYSE Euronext board of directors; and (2) European Persons as of such election shall constitute the remainder of the directors on the NYSE Euronext board of directors.”).
In the current combination, however, Deutsche Borse will end up with 60% of the positions on the board. See Press Release from NYSE, Feb. 15, 2011 ("The Company will be lead by a one-tier board with 17 members - 15 directors plus the Chairman and CEO. Of the 15 directors, 9 shall be designated by Deutsche Borse and 6 by NYSE Euronext."). The chairman will be the CEO of Deutsche Borse and the CEO the CEO of NYSE Euronext. See Form F-4, at 103.
The arrangement will apparently continued for at least three years. See Form F-4, at 160 ("Each of the directors will be nominated by the Holdco board of directors for re-election to the Holdco board of directors pursuant to a binding nomination at each of the annual general meetings of shareholders occurring in 2012, 2013 and 2014, except that the Holdco group chairman and the Holdco group chief executive officer will each also be nominated by the board of directors pursuant to a binding nomination for re-election to the board of directors at the annual general meeting of shareholders occurring in 2015."). The same ratio applies on committees. See Id. at 261("Each of the committees mentioned above will consist of three Deutsche Börse directors and two NYSE Euronext directors until the date of Holdco’s annual general meeting of shareholders occurring in 2015.").
The SEC should, therefore, consider the impact of having a holding company board with a majority of directors designated by a foreign company on the regulatory mission. This ought to include whether such directors (and such boards) have a different regulatory philosophy than the NYSE Euronext board and what impact, if any, it could have on the regulatory mission. Perhaps this will not be a signficiant issue. A majority of the board of NYSE Regulation must consist of "US persons". See NYSE Regulation Bylaws, Article III, Section I ("A 'U.S. Person' shall mean, as of the date of his or her most recent election or appointment as a director any person whose domicile as of such date is and for the immediately preceding twenty-four (24) months shall have been the United States."). Thus, irrespective of the nationality of the board of the holding company, NYSE Regulation's board will always have a majority of US Persons.
Nonetheless, these issues ought to be considered by the SEC when asked to approve the combintation.