Nasdaq requires listed companies to publicly disclose payments by third parties to directors and director nominees

The Nasdaq Stock Market LLC (Nasdaq) has adopted new rules that require Nasdaq-listed companies to disclose compensation or other payments made by third parties to directors and director nominees. The disclosure of such "golden leash arrangements" must be made on an annual basis either in the company's proxy or information statement for the next shareholders' meeting at which directors are elected or, alternatively, on or through the company's website.

The new disclosure requirement is aimed at helping investors evaluate potential director conflicts of interest, questions with respect to a director's ability to satisfy fiduciary duties and concerns that directors may focus on short-term results at the expense of long-term value creation. The rules apply to domestic US companies, whereas foreign private issuers are allowed to follow home country practice in lieu of the new requirements subject to certain conditions. The rules will become effective on August 1, 2016.1

Scope of disclosure required

Under the new Nasdaq rules, listed companies must disclose the material terms of all agreements and arrangements between any director or director nominee and any third party relating to compensation or other payments in connection with such person's candidacy or service as a director of the company.

Nasdaq's supplemental guidance states that the terms "compensation" and "other payment" as used in the rules are not limited to cash payments and are intended to be construed broadly to encompass non-cash payments, such as health insurance premiums or indemnification agreements.

The rules do not require disclosure of the following payments:

  • reimbursement of expenses in connection with candidacy as a director, whether or not such reimbursement arrangement has been publicly disclosed;
  • arrangements that existed prior to the nominee's candidacy, including as an employee of the other person or entity, provided that the nominee's relationship with such third party has been publicly disclosed in a proxy or information statement or annual report, for example in the director or nominee's biography (Nasdaq notes that this would typically include a director employed by a private equity or venture capital firm where employees are expected to serve on the boards of the fund's portfolio companies and their compensation is not materially affected by such service); and
  • arrangements that have already been disclosed in the current fiscal year under Item 5.02(d)(2) of Form 8-K (which requires "a brief description of any arrangement or understanding between the new director and any other persons, naming such persons, pursuant to which such director was selected as a director") or Item 5(b) of Schedule 14A (which requires among other things disclosure of certain arrangements or understandings of director nominees in contested solicitations) (this exception, however, does not relieve a company from its ongoing obligation to make annual disclosure).

If a director or nominee's remuneration falling under the second bullet above is thereafter materially increased specifically in connection with such person's candidacy or service as a director of a Nasdaq-listed company, Nasdaq's supplemental guidance states that the company must disclose only the difference between the new and previous level of compensation or other payment obligation.

Timing of disclosure

The new disclosure must be made no later than the date on which the company files or furnishes a proxy or information statement in connection with its next shareholders' meeting at which directors are elected. For companies that do not file proxy or information statements, disclosure is due not later than the date when the company files its next annual report on Form 10-K or Form 20-F. Disclosure is not required when the initial compensatory agreement or arrangement is made, so long as it is disclosed as part of the company's regular annual disclosure.

Nasdaq-listed companies are required to disclose golden leash arrangements at least annually until the earlier of:

  • the resignation of the director or
  • one year following the termination of the arrangement.

Methods of disclosure

The disclosure must be made in the proxy or information statement for the next shareholders' meeting at which directors are elected. As an alternative, companies are permitted to disclose required information on their website, either directly or through a hyperlink. In this case, the disclosure must be continuously accessible. Nasdaq's supplemental guidance states that if the website hosting the disclosure subsequently becomes inaccessible or the hyperlink becomes inoperable, the company must promptly restore it or make other disclosure in accordance with the rules.

Failure to disclose

If a company discovers an agreement or arrangement that should have been, but was not, disclosed as required as part of the company's regular annual disclosure, the company must promptly make the required disclosure by filing a current report on Form 8-K or Form 6-K or by issuing a press release.

The Nasdaq rules state that such remedial disclosure on Form 8-K or Form 6-K would not satisfy the annual disclosure requirement. On the other hand, Nasdaq has also provided that a company will not be considered deficient in complying with the rules if it has undertaken reasonable efforts to identify all golden leash arrangements, including making inquiries of each director or director nominee in a manner designed to allow timely disclosure, and makes the remedial disclosure in Form 8-K or Form 6-K promptly upon discovery of the omitted arrangement.

As with violations of other Nasdaq rules, when a listed company is considered deficient under this disclosure requirement it must submit to Nasdaq within 45 calendar days a plan to regain compliance. Such plan should be sufficient to satisfy Nasdaq staff that the company has adopted processes and procedures designed to identify and disclose relevant agreements and arrangements of directors and nominees and third parties.

Foreign private issuers

As with various other Nasdaq rules, foreign private issuers are allowed to follow their home country practice in lieu of the new disclosure requirements, subject to the following conditions:

  • each foreign private issuer that follows its home country practice in lieu of Nasdaq rules must disclose in its annual report on Form 20-F filed with the SEC each Nasdaq listing requirement that it does not follow and describe the home country practice it follows in lieu of such requirement. Foreign private issuers that are not required to file their annual reports with the SEC are allowed to make this disclosure on their websites only; and
  • a foreign private issuer that elects to follow home country practice in lieu of the Nasdaq disclosure requirement must submit to Nasdaq a written statement from an independent counsel in its home country certifying that the practices of such foreign private issuer are not prohibited under its home country laws. For currently listed foreign private issuers, the statement is required at the time the company seeks to adopt its first noncompliance practice. In the case of new listings, this statement is required at the time of listing.

Other existing disclosure requirements

While the new Nasdaq provision goes beyond the requirements of the New York Stock Exchange and the SEC, there are several existing SEC rules which already require disclosure which is similar in some respects, though not identical, to the disclosure required by Nasdaq:

  • Item 401(a) of Regulation S-K requires companies to brief ly describe any arrangement or understanding between each director or director nominee and any person other than the company pursuant to which he was or is to be selected as a director or nominee;
  • Item 5.02(d) of Form 8-K requires companies to provide a brief description of any arrangement or understanding between any new director (elected other than at a shareholders' meeting) and any other persons, pursuant to which such director was selected;
  • Item 402(k) of Regulation S-K requires companies to provide certain information concerning the compensation of directors for the last completed fiscal year; and
  • Item 5(b) of Schedule 14A requires among other things disclosure of certain arrangements or understandings of director nominees in contested solicitations.

Acknowledging the existence of these rules, the new Nasdaq requirement does not require repetitive disclosure of arrangements or agreements that have already been disclosed under Item 5.02(d) of Form 8-K or Item 5(b) of Schedule 14A.*