A new requirement that Nasdaq-listed companies disclose certain payments made to directors by third parties is scheduled to go into effect on August 1, 2016. The new rule targets so-called “golden leash” payments made to public company directors by third parties, including hedge funds and other activist investors. Golden leash arrangements often involve payments tied to the achievement of benchmarks established by the third party, such as stock price targets. The new rule is intended to provide investors with information about arrangements that could create a conflict of interest or promote a focus on short-term results at the expense of long-term value creation.

New Nasdaq Rule 5250(b)(3) requires the disclosure of the material terms of any arrangements relating to compensation to a director or director nominee by a third party in connection with board service or candidacy. While some of this information is required to be disclosed under existing regulations, the new rule is broader in scope and will require the disclosure of certain arrangements that otherwise would not have been required. The rule includes exceptions for certain arrangements, including expense reimbursement and arrangements that existed prior to the nominee’s candidacy.

Companies can choose whether to provide the new disclosure in a proxy or information statement or through the company’s publicly-accessible website. A company’s initial disclosure must be provided no later than the date it files or furnishes its next definitive proxy or information statement in connection with a meeting of shareholders at which directors will be elected. Companies that do not file proxy or information statements must provide the new disclosure no later than the date the company files its next annual report on Form 10-K or Form 20-F. After the initial disclosure, companies must provide updated disclosure at least annually.

Because much of the information needed to comply with the new rule will have to be provided by directors and third parties, Nasdaq-listed companies should consider educating their boards of directors about the requirements of the new rule and the company’s plans for collecting the required information. Companies should also update their disclosure controls and director and officer questionnaires so that the necessary information is collected and disclosed in a timely manner. Other documents that should be reviewed in light of the new rule include advance notice bylaws and corporate governance guidelines.