Nasdaq Adopts “Golden Leash” Compensation Disclosure Rules

The SEC has approved Nasdaq’s new listing rule 5250(b)(3), which requires companies listed on Nasdaq to publicly disclose certain compensation or other payments by third parties to directors or director nominees in connection with such person’s candidacy or service as a director, commonly known as “golden leash” compensation arrangements. The new rule will be effective on August 1, 2016 and requires a listed company to disclose these golden leash compensation arrangements either through the company’s website or its proxy or information statement in advance of the company’s annual shareholders’ meeting. The full text of the SEC’s approval of Rule 5250(b)(3) can be found here.

Golden leash compensation arrangements have become common in connection with director nominations by activist investors. Nasdaq proposed the new rule due to concerns that undisclosed compensation arrangements may lead to conflicts of interest among directors and call into question such directors’ ability to satisfy their fiduciary duties, as well as potentially promoting a focus on short-termism at the expense of long-term value creation. Nasdaq believes that increased transparency about golden leash compensation arrangements will address these concerns and provide information relevant to investment and voting decisions.   

What types of compensation arrangements must be disclosed?

Rule 5250(b)(3) requires a listed company to publicly disclose the material terms and parties to any arrangement between a director or director nominee and any entity or person outside of the company relating to any payment or other compensation in connection with such director’s or director nominee’s service on the company’s board, subject to certain exceptions. The terms “compensation” and “other payment” are to be interpreted broadly and cover cash, as well as non-cash compensation and other forms of payment obligations (e.g. health insurance premiums or indemnities).

The rule does not require disclosure of the following:

• The reimbursement of expenses in connection with a director’s or director nominee’s service or candidacy;
• If the compensation arrangement existed before a director’s candidacy, and the arrangement has otherwise been disclosed publicly in a proxy or information statement or annual report; and
• If the arrangement has already been disclosed in the company’s proxy statement or a Form 8-K in the current fiscal year (such disclosure pursuant to SEC rules, however, will not relieve a company of its ongoing, annual disclosure obligation for future years).

When does a company need to make these disclosures?

Initially, a listed company must disclose any golden leash compensation arrangements no later than the date that the company files its proxy or information statement in advance of the company’s first annual shareholders’ meeting after the effective date of the rule. After such initial disclosure, a company is required to make these disclosures at least annually in advance of the company’s annual meeting until the director is no longer a director or over a year has passed since the golden leash compensation arrangement was terminated. Companies are not required to disclose new arrangements (or material changes to existing arrangements) at the time they are entered into, so long as disclosure is made in the annual disclosure required by the new rule before the next annual meeting at which directors are elected.

Where must these disclosures be made?

A listed company must disclose any golden leash compensation arrangements either (1) on its website (or through its website by hyperlinking to a different website), or (2) in its proxy or information statement for any shareholders’ meeting at which directors are elected (or, if the company does not file a proxy or information statement, in its annual report on Form 10-K or Form 20-F). If disclosure is made using the company’s website, the disclosure must be continuously available.  

How are foreign private issuers treated under this new rule?

Listed foreign private issuers will be permitted to follow their home country practices in lieu of Rule 5250(b)(3) if they comply with the conditions set forth in amended Rule 5615. Amended Rule 5615 requires listed foreign private issuers to (1) submit a written statement to Nasdaq from independent counsel in its home country certifying that the company’s disclosure practices are not prohibited by the home country’s laws and (2) disclose in its SEC filings (or, in certain circumstances, on its website) that it does not follow the Rule 5250(b)(3) requirements and state briefly the home country practice it follows in lieu of such requirements.     

What if a company fails to make a timely disclosure?

If a company discovers a non-disclosed golden leash compensation arrangement, it must promptly disclose the arrangement either by filing a Form 8-K or Form 6-K, or by issuing a press release.

The new rule provides that a listed company will not be considered deficient for purposes of the Nasdaq deficiency notification rules if the company has made reasonable efforts to identify all relevant compensation arrangements, including asking each director or director nominee if such director or director nominee is party to any golden leash compensation arrangements in a manner designed to allow timely disclosure, and makes the required corrective disclosure promptly after discovery of the arrangement. Annual D&O questionnaires should be updated to include these questions.

If a company is deemed deficient, it must provide Nasdaq within 45 days of its deficiency determination with a remedial plan. If a company does not submit a remedial plan, it will receive a Staff Delisting Determination, which may be appealed to a Hearings Panel.

Has the NYSE proposed or adopted a similar “golden leash” disclosure rule for listed companies?

No. To date, the NYSE has not proposed or adopted a similar “golden leash” disclosure rule for companies listed on the NYSE.