Recently, the Nasdaq Stock Market LLC (“Nasdaq”) adopted a new rule requiring each Nasdaq-listed company to disclose the material terms of all agreements or arrangements between any director or nominee for director on the company’s board and any third party relating to compensation or other payment in connection with that person’s candidacy or service as a director.1 In addition, Nasdaq has also made changes to the existing rule permitting foreign private issuers (“FPIs”) to follow their home country practice in lieu of certain corporate governance requirements of Nasdaq to allow FPIs to follow home country practice with regard to the required disclosure of third-party payments to directors under the new rule.
In order to provide shareholders with information and sufficient time to help them make meaningful voting decisions, the disclosure of third-party compensation agreements or arrangements must be made continuously accessible on or through the Company's website (or through the website by hyperlinking to another website) or in the proxy or information statement for the next shareholders’ meeting at which directors are elected. A Company posting the requisite disclosure on or through its website must make it publicly available no later than the date on which the Company files a proxy or information statement in connection with such shareholders’ meeting. Listed companies that do not file proxy or information statements are required to disclose the information in, or post it to their website no later than, their next annual report on Form 10-K or Form 20-F. A Company must make the required disclosure at least annually until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement.
If a Company discovers an agreement or arrangement that should have been disclosed pursuant to the proposed rule but was not disclosed, the company must promptly make the required disclosure by filing a Form 8-K or Form 6-K, where required by the rules of the Securities and Exchange Commission (“SEC”), or by issuing a press release. Such remedial disclosure, regardless of its timing, will not satisfy the annual disclosure requirements under the new rule. If a company undertakes reasonable efforts to identify all such agreements or arrangements, including asking each director or nominee in a manner designed to allow timely disclosure, and makes the required remedial disclosure promptly if it discovers an agreement or arrangement that should have been disclosed but was not, then the company will not be considered deficient with respect to the rule.
According to the release, the new rule is intended to be construed broadly and the disclosure requirement covers non-cash compensation and other forms of payment obligations, such as indemnification arrangements. However, a company does not need to make these new disclosures with regard to agreements or arrangements that: (i) relate only to reimbursement of expenses in connection with candidacy as a director; (ii) existed prior to the nominee’s candidacy (including as an employee of the third party) and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or information statement or annual report (such as in the director or nominee’s biography); or (iii) have been disclosed under Item 5(b) of Schedule 14A of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or Item 5.02(d)(2) of Form 8-K in the current fiscal year. The new rule further clarifies that newly entered into agreements or arrangements need not be disclosed at the time they are entered into, as long as they are disclosed prior to the next shareholders’ meeting at which directors are to be elected. In addition, for publicly disclosed agreements and arrangements that existed prior to the nominee’s candidacy, where the director or nominee’s remuneration is thereafter materially increased specifically in connection with such person’s candidacy or service as a director of the Company, only the difference between the new and previous level of compensation or other payment obligation needs be disclosed.
Nasdaq has also made changes to the existing rule permitting FPIs to follow their home country practice in lieu of certain corporate governance requirements of Nasdaq. As a result of these changes, the required disclosure of third-party payments to directors under the new rule will be included among the provisions that permit a FPI to follow home country practice. In order to take advantage of this revised rule, a FPI is required to: (i) submit to Nasdaq a written statement from independent counsel in its home country certifying that the company’s practices are not prohibited by the home country’s laws and (ii) disclose in its annual filings with the SEC that it does not adhere to the requirements of the new rule and briefly state the home country practice it follows in lieu of these requirements.
Nasdaq believes that these new disclosures will be meaningful to shareholders and relevant to their investment and voting decisions. In response to concerns that existing SEC rules may, in some circumstances, already apply to third-party director payments, Nasdaq has stated that it believes that the nature, scope and timing of the SEC’s disclosure requirements may not always mirror the new Nasdaq disclosure requirements. However, due to the potential overlap with existing SEC disclosure rules, it is possible that Nasdaq-listed issuers may not face significant additional disclosure requirements. In addition, an issuer’s existing D&O questionnaire likely captures much of the required information, which means that issuers may not have to undertake significant efforts to collect the required information.
In response to the new rule, Nasdaq-listed issuers should review their form D&O questionnaires and update them as necessary to ensure that all of the information required by the rule is captured. Nasdaqlisted issuers should also consider whether they will make the disclosures required by the new rule on their websites or in their proxy or information statements. Since some of the disclosure requirements of the new rule may already be required by SEC disclosure requirements, it may be easier for an issuer to comply with the new rule by supplementing existing disclosure in its proxy or information statement (or Form 10-K or Form 20-F, if the issuer does not file proxy or information statements), rather than providing the required information in a separate disclosure on or through its website.