The US Securities and Exchange Commission (SEC) recently approved a disclosure rule proposed by the NASDAQ Stock Market, LLC (Nasdaq) related to director compensation, an area historically regulated only by the SEC.
Nasdaq’s new rule requires Nasdaq-listed companies to publicly disclose the material terms of all agreements and arrangements between any director (or nominee for director) and any third party relating to compensation or other payments—including non-cash payments—in connection with the person’s candidacy or service as a director.
The SEC’s disclosure rules relating to director compensation do not explicitly call for the specific disclosures required under the new Nasdaq rule, although both the SEC and Nasdaq note that the new rule may overlap with existing SEC disclosure requirements, not limited to general principles of materiality, that could trigger disclosures of “golden leash arrangements.” One of Nasdaq’s reasons for the new rule was its concern about the potential lack of transparency when a third party (such as an activist shareholder) nominates a director to a company’s board, where such third party has compensation arrangements with the nominee that could be of interest to shareholders of the company. In its statement of purpose for the proposed rule change, Nasdaq stated its further belief that such undisclosed compensation arrangements potentially raise several concerns, such as conflicts of interest among directors and a focus on short-term results at the expense of long-term value creation.
The new rule (Nasdaq Rule 5250(b)(3)), which became effective on August 1, 2016, requires companies listed as of and after that date to annually disclose all golden leash arrangements no later than the date on which the company next files a proxy statement or annual report—meaning that the new rule will require calendar year end Nasdaq-listed companies to make required disclosures no later than in the 2017 proxy season. Once disclosed, the information must be continuously accessible, updated at least annually (until the earlier of the director’s resignation or one year following the termination of the agreement or arrangement) and promptly corrected, through public disclosure, if the company determines that prior disclosure was deficient. The new rule generally applies to all Nasdaq-listed companies other than foreign private issuers, which are permitted to follow home country practice instead, provided they submit certain certifications to Nasdaq and make related disclosures regarding the home country practice.
Nasdaq’s new rule is intended to be broadly applied and will extend to non-cash items, including healthcare coverage and indemnification rights. However, certain types of arrangements are excluded, including golden leash arrangements that provide only for expense reimbursement or that existed prior to the director’s candidacy, provided that the candidate’s relationship with the third party has otherwise been publicly disclosed.
One obvious question presents itself, given the requirement that the listed company must obtain and disclose information regarding a third party’s arrangements with its director (or nominee)—what happens if the company cannot timely obtain the required information? The new rule provides that the company will not be subject to penalty if it has taken reasonable efforts to obtain the relevant information, including directly asking the director (or nominee). Where a listed company is deficient in compliance with the rule, it must provide the Nasdaq staff with a plan to regain compliance. If it fails to do so, a deficient company could be subject to delisting.
There is no indication that the New York Stock Exchange or SEC will adopt a comparable golden leash disclosure rule. It is also not clear how and to what extent shareholder advisory firms such as Institutional Shareholder Services will use or assess this information once disclosed.
Given the August 1 effective date of the new rule, Nasdaq-listed companies should begin the process of inquiring into directors’ and nominees’ golden leash arrangements with third parties.