Effective August 1, 2016, new NASDAQ Listing Rule 5250(b)(3) requires NASDAQ-listed companies to disclose the material terms of any agreements or arrangements between directors and director nominees that provide for compensation or other remuneration by a third party in connection with that person’s service or candidacy as a director. The rule was approved by the Securities and Exchange Commission on July 1, 2016. The complete text of Listing Rule 5250 is available here, and the SEC order approving the rule is available here.

I. Timing and Location of Disclosure

The addition of paragraph (b)(3) to Listing Rule 5250 requires disclosure of third-party compensation to directors and nominees no later than the date on which the listed company files or furnishes its proxy or information statement in connection with the company’s next meeting of shareholders at which directors are elected. Listed companies that do not file proxy or information statements are required to disclose the information as of the filing of the company’s next annual report on Form 10-K or Form 20-F. The disclosure requirement is also satisfied if the information is made available on the company’s website (or through the website by hyperlinking to another website, provided the other website is continuously accessible). The rule 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 for the next shareholders’ meeting at which directors are to be elected. The rule further requires the disclosure to be made at least annually until the earlier of (i) the resignation of the director, and (ii) the date that is one year after the termination of the compensatory arrangement or agreement.

Listed companies that later discover an agreement or arrangement that should have been disclosed must promptly make the required disclosure on Form 8-K or 6-K, where required by SEC rules, or by issuing a press release. Such remedial disclosure does not, however, satisfy the company’s annual disclosure requirements. A company will not be considered deficient if it has undertaken reasonable efforts to identify all required agreements or arrangements, including asking each director or nominee in a manner designed to allow timely disclosure and if it makes the required remedial disclosure promptly. If a company is determined to be deficient, it must submit a plan to the NASDAQ staff within 45 calendar days, which demonstrates that the company has adopted processes and procedures designed to identify and disclose relevant agreements or arrangements.

II. Content of Disclosure

Paragraph (b)(3) requires disclosure of any and all agreements and arrangements between any director or nominee for director and any person or entity other than the listed company (i.e., any third-party person) that relates to compensation or other payment or remuneration in connection with the director’s service as director or the nominee’s candidacy for director. The 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. The rule does not, however, require disclosure of any reimbursement of expenses in connection with candidacy as a director or additional disclosure of information otherwise disclosed during the current fiscal year pursuant to an SEC disclosure requirement (such as Item 5(b) of Schedule 14A under the Securities Exchange Act of 1934 or Item 5.02(d)(2) of Form 8-K). The rule similarly does not require disclosure with respect to any such arrangements or agreements that preceded the candidacy of the nominee, if the relationship between the third party and the nominee is publicly disclosed elsewhere in a proxy, information statement or annual report, unless the director or nominee’s remuneration is thereafter materially increased specifically in connection with such person’s candidacy or service; in such case, only the difference between the new and previous level of compensation or other payment obligation needs to be disclosed. Any such other disclosures do not, however, relieve the listed company from the annual disclosure requirement.

Foreign private issuers are permitted to follow home country practice provided they comply with the conditions set forth in NASDAQ Rule 5615, which requires the issuer to (i) submit a written statement to NASDAQ from independent counsel in its home country certifying that the company’s practices are not prohibited by the home country’s laws, and (ii) discloses in its annual filings with the SEC or, in certain circumstances on its website, that it does not follow the requirements of NASDAQ’s rule and briefly states the home country practice it follows instead.

Public companies should review their existing D&O Questionnaires to confirm that they elicit information required to be disclosed regarding third-party compensation arrangements.