SEC Approves Nasdaq “Golden Leash” Disclosure Rule

By Heyward Armstrong, Amy Batten and Gerald Roach

On July 1, 2016, the Securities and Exchange Commission approved Nasdaq’s proposal for a “golden leash” disclosure rule (Rule 5250(b)(3)) requiring listed companies to publicly disclose benefits given by investors or other third parties to directors or director nominees in connection with their candidacy or service as a director. Because these arrangements often involve the compensation of a director by a third party if the public company achieves certain stock or financial performance criteria, the rule is designed to address concerns that these arrangements may promote short-term growth at the expense of long-term value, result in conflicts of interest and negatively impact the ability of a director to exercise his or her fiduciary duties to the company and all of its shareholders. 

Rule Summary

Effective August 1, 2016, Nasdaq-listed companies must publicly disclose all agreements and arrangements between any director or nominee and any third party that relate to compensation or other payments in connection with candidacy or service as a director. Nasdaq intends for the terms “compensation” and “other payments” to be construed broadly and for these terms to capture cash compensation and other payment obligations, such as indemnification and health insurance premiums. The required disclosure can be accomplished on or through the company’s website or in proxy or information statements for shareholders’ meetings where directors are elected. (Companies that do not file proxy or information statements can make this disclosure via Form 10-K or Form 20-F.) At a minimum, the disclosure must name all of the parties to, and specify the material terms of, each agreement or arrangement.  

Requirements and Sanctions

A company listed on Nasdaq on the effective date of the rule, or that initially lists on Nasdaq afterwards, must disclose relevant agreements no later than the date of its next proxy or information statement (or Form 10-K or Form 20-F for companies that do not file proxy or information statements) and annually thereafter until the earlier of the director's resignation or one year following the termination of the agreement or arrangement. A company will not be considered deficient in its compliance with the rule if it has made reasonable efforts to identify all such arrangements, promptly makes remedial disclosures when additional arrangements are identified and complies with the annual disclosure requirements thereafter. If a company is deemed deficient, it will have 45 days to submit a plan for identifying and disclosing such agreements in the future that is sufficient to satisfy Nasdaq staff. Failure to do so may result in a delisting determination.

Exceptions

The rule does not require disclosure of agreements and arrangements:

• that relate only to reimbursement of expenses incurred due to a candidacy for director;
• if they existed prior to the nominee’s candidacy, and the nominee’s relationship with the third party has been publicly disclosed in a proxy or information statement or annual report (such as the director's or nominee’s biography). If the third party increases a nominee’s or director’s compensation in connection with his or her candidacy or service, only the increase in the amount of compensation needs to be disclosed, rather than the full amount;
• that have been disclosed under Item 5(b) of Schedule 14A of the Securities Exchange Act or Item 5.02(d)(2) of Form 8-K in the current fiscal year. While these disclosures satisfy the initial disclosure requirement of the rule, the arrangement is still subject to the annual disclosure requirement; or
• that involve directors of foreign private issuers that comply with Nasdaq Rule 5615 and are thereby allowed to follow home country practice.

Practical Recommendations

The new rule takes effect August 1, 2016. From that date forward, the required disclosures must be made on or before the filing date of the first proxy or information statement that a Nasdaq-listed company files in connection with a shareholders’ meeting where directors are elected. If the listed company does not file proxy or information statements, the cutoff date is the filing of the first Form 10-K or Form 20-F after August 1. Nasdaq-listed companies should be aware of these deadlines when gathering information regarding arrangements subject to the rule. Companies listed on the New York Stock Exchange (NYSE) are not required to comply with this new requirement, and to date the NYSE has not publicly announced an intention to impose such a requirement.

If a listed company later discovers an agreement or arrangement that it should have disclosed under the new rule, it must promptly make the appropriate disclosures by filing a Form 8-K or Form 6-K (as applicable) or by issuing a press release. Remedial disclosures may not be made via the company’s website.

Listed companies that seek to make their disclosures via their websites should coordinate with their web development teams to update their websites by the deadline. Listed companies should also review and, if necessary, revise their D&O questionnaires to ensure that they capture all arrangements subject to the new rule. Although many of the disclosure requirements of the new rule are already covered by Regulation S-K Item 402, certain arrangements that may have been structured to avoid disclosure under existing SEC rules will now need to be disclosed under Nasdaq’s new rule (e.g., arrangements that trigger payment in the year of the shareholder meeting but not in the previous year covered by the director compensation table in the company’s proxy statement). D&O questionnaires should be drafted broadly to elicit disclosure by the director of all arrangements potentially subject to the new rule.

Companies should also review their advance notice bylaws and, if applicable, proxy access bylaws to ensure they are current, including that they require shareholders that propose director nominees to provide complete information regarding all arrangements subject to the new rule. If a director is nominated by a shareholder pursuant to the company's proxy access rights, the company should review the nominating shareholder's Schedule 14N to inform the company's compliance with the rule. However, disclosure of an arrangement by the nominating shareholder in a Schedule 14N does not satisfy the requirements of the new rule, and the listed company must still make independent disclosure by the means prescribed in the rule.

Directors and third parties who are considering golden leash arrangements should take care to fully disclose all such arrangements. Shareholders that are considering implementing such arrangements for directors they nominate to public company boards should confirm that the disclosure of such arrangements would not harm them or the nominee.

If you have any questions about the golden leash disclosure rule or if you would like to learn more about the issues covered in this alert, please contact your Smith Anderson lawyer.

Special thanks to Smith Anderson Summer Associate Ed Powell, contributing writer.