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Nasdaq’s Director “Golden Leash” Disclosure Rule

July 25, 2016

Download: NASDAQ’S Director “Golden Leash” Disclosure Rule (PDF, 253.10 K)

On July 1, 2016, the SEC approved a new Nasdaq rule 5250(b)(3), effective July 31, 2016, requiring listed companies to publicly disclose compensation or other payments by third parties to directors or director nominees in connection with that person’s candidacy for or service as a director. This note briefly highlights the disclosure obligations and practical impact for companies under this rule.

By Jarrett Hoffman and Julian Landau-Sabella

The new rule requires Nasdaq-listed companies to disclose the material terms of all arrangements between their directors or nominees for director, and any person or entity other than the company relating to compensation or other payment made in connection with that person’s candidacy for, or service as, a director. The rule reflects both concerns about director conflicts of interest and a regulatory focus on ensuring director compliance with fiduciary duties. As such, the rule broadly construes the “compensation” and any “other payment” that companies must disclose. These terms, for example, include non-cash compensation and other payment obligations, including health insurance premiums and indemnification.

Importantly, companies need not disclose compensatory arrangements that:

(i) existed prior to a nominee’s candidacy, and the relationship at issue has already been disclosed in a definitive proxy statement, an information statement or an annual report; except that if a director or nominee’s compensation is materially increased in connection with the candidacy or service as a director, then only the increase in compensation need be disclosed under the rule;

(ii) relate only to reimbursement of expenses incurred in connection with candidacy as a director, whether or not publicly disclosed; or

(iii) are disclosed under either Item 5(b) of Schedule 14A of the Securities Exchange Act of 1934 (regarding information in proxy statements) or pursuant to Item 5.02(d)(2) of Form 8-K in the current fiscal year.

Note that foreign private issuers may follow their home country practices in lieu of the rule.

When and How to Disclose

Companies must initially disclose the required information either on the company’s website (which can be through a hyperlink to another website that is continuously accessible) or in the definitive proxy or information statement for the next shareholders’ meeting (at which directors are elected) after the effective date. If the company does not file proxy or information statements, then it must make the disclosure in its Form 10-k or Form 20-F. Under either method, the disclosure must be made no later than the date on which such materials are filed. Following initial disclosure, companies must disclose at least annually until the earlier of the director’s resignation or one year following the termination of the compensatory arrangement. Significantly, companies need not make disclosure as soon as new, relevant compensatory arrangements arise, but must disclose them for the next shareholders' meeting at which directors are elected.

Cure for Undisclosed Arrangements

If a company discovers a compensatory arrangement that it should have disclosed under the rule, but did not, the company must promptly make the disclosure by filing a Form 8-K or 6-K, when SEC rules require, or by issuing a press release. A company will not be deemed deficient with respect to the disclosure requirement if the company had undertaken prior reasonable efforts to identify all relevant compensatory arrangements. Reasonable efforts include inquiring - sufficiently in advance to enable timely disclosure - with each director or nominee about any relevant compensatory arrangements requiring disclosure.  However, the company’s remedial disclosure will not satisfy the ongoing requirement of the rule to make annual disclosures, regardless of its timing.  Otherwise, if the company is considered deficient, it must file a plan to satisfy Nasdaq staff that it has adopted processes and procedures to identify and disclose the arrangements covered by the rule.

Practical Considerations

To systematically and efficiently comply with the rule, companies should consider revising their D&O questionnaires to include a question about the existence of compensatory arrangements. The questionnaire should collect those arrangements’ parties and material terms in order to facilitate proper disclosure. If director nominees have already submitted their questionnaires for the first shareholders' meeting following July 31, 2016, then the company should reach out to such directors to inquire about potential third-party compensation, and disclose accordingly.

For more information, contact:

Jarrett Hoffman
Partner, New York
212 754 4345

Julian Landau-Sabella
Associate, New York
212 754 4475

Related Lawyer: Jarrett R. Hoffman

Related Practice: Corporate

Download: NASDAQ’S Director “Golden Leash” Disclosure Rule (PDF, 253.10 K)