United States: SEC Approves Nasdaq Rule Change To Require "Golden Leash" Disclosure

On July 1, 2016, the Securities and Exchange Commission (SEC) approved a rule change proposed by The Nasdaq Stock Market LLC (Nasdaq) to require Nasdaq-listed companies to publicly disclose compensation or other payments made by third parties to directors and director nominees in connection with that person's candidacy or service as a director. These so-called "golden leash" arrangements are most common in connection with board nominations by hedge fund activists. A typical golden leash arrangement consists of a director or director nominee being entitled to receive compensation from an activist shareholder based on achieving certain benchmarks, such as an increase in share price over a fixed term.

Summary of the Rule

New Nasdaq Rule 5250(b)(3), effective as of August 1, 2016, will require each Nasdaq-listed company to publicly disclose the parties to, and the material terms of, all agreements or arrangements between any director or director nominee and any person or entity other than the company relating to compensation or other payment in connection with that person's candidacy or service as a director. The disclosure requirement is not limited to cash payments, but, instead, is intended to be construed broadly; it also encompasses noncash compensation and other forms of payment obligation, such as indemnification and health insurance premiums. Disclosure may be made either on the company's website (directly or through a hyperlink to another website, provided that the other website is continuously accessible) or in its definitive proxy or information statement for the next shareholders' meeting at which directors are elected (or, if the company does not file proxy or information statements, in its Form 10-K or Form 20-F).

The rule will require each Nasdaq-listed company to disclose all such agreements and arrangements by no later than the date on which the company files its definitive proxy or information statement for the next shareholders' meeting at which directors are elected (or, if it does not file proxy or information statements, no later than when the company files its next Form 10-K or Form 20-F). Thereafter, the company must make the disclosure required by the rule at least annually until the earlier of the resignation of the applicable director or one year following the termination of the agreement or arrangement.

Exceptions

The rule provides that a company will not need to make disclosure of agreements and arrangements that:

  1. relate to only reimbursement of expenses in connection with candidacy as a director, whether or not such reimbursement arrangement has been publicly disclosed
  2. existed prior to the nominee's candidacy (including as an employee of the other person or entity), where the nominees' relationship with the third party has been publicly disclosed in a definitive proxy or information statement or annual report (such as in the director or nominee's biography)
  3. have been disclosed under Item 5(b) of Schedule 14A of the Securities Exchange Act of 1934, as amended (the Exchange Act), or Item 5.02(d)(2) of Form 8-K in the current fiscal year. However, the applicable agreement or arrangement would still be subject to the continuous disclosure requirements of the rule on an annual basis

Nasdaq provides that an example of an agreement or arrangement falling under the exception in clause (ii) for arrangements that existed prior to the nominee's candidacy is a director or director nominee being employed by a private equity or venture capital fund where employees are expected to serve, and routinely serve, on the boards of the fund's portfolio companies, and their remuneration is not materially affected by such service. However, if such a director or a director nominee's remuneration is materially increased in connection with such person's candidacy or service as a director of the company, the difference between the new and the previous level of compensation needs to be disclosed under the rule.

Deficient Disclosure

The rule states that, if a company discovers an agreement or arrangement that should have been disclosed pursuant to the proposed rule, but was not disclosed, then the company must promptly make the required disclosure by filing a Form 8-K or 6-K, where required by SEC rules, or by issuing a press release. However, such remedial disclosure, regardless of its timing, would not satisfy the annual disclosure requirements under the rule.

The rule further provides that, if a company undertakes reasonable efforts to identify all such agreements or arrangements, including asking each director or director nominee in a manner designed to allow timely disclosure, and the company makes the required remedial disclosure promptly once it discovers an agreement or arrangement that should have been disclosed, but was not, then the company will not be considered deficient with respect to the rule.

In cases where a company is considered deficient, in order to regain compliance, the company must provide a plan within 45 calendar days that is sufficient to satisfy Nasdaq staff that the company has adopted processes and procedures designed to identify and disclose relevant agreements and arrangements in the future. If the company does not do so, it will be issued a delisting determination.

Foreign Private Issuers

Nasdaq is also amending Rule 5615(a)(3), which permits foreign private issuers listed on Nasdaq to follow their home-country practice in lieu of certain corporate governance requirements of Nasdaq, provided that the issuer fulfills the conditions set forth in that rule. The required disclosure of third-party payments to directors will be included among the rule provisions where a foreign private issuer would be permitted to follow home-country practice. To meet the conditions of amended Rule 5615(a)(3), a foreign private issuer is required to, among other things, (i) submit to Nasdaq a written statement from an independent counsel in its home country certifying that the company's practices are not prohibited by the home country's laws and (ii) disclose in its annual filings with the SEC (or, in certain circumstances, on its website) that it does not follow the rule's requirements and briefly state the home-country practice that it follows in lieu of these requirements.

Rationale for the Rule

Nasdaq proposed the rule change due to its concern that investors may not have complete information regarding when third parties compensate directors in connection with that person's candidacy or service as a director. Nasdaq believes that these undisclosed compensation arrangements potentially raise several concerns, including that they may lead to conflicts of interest among directors and call into question the directors' ability to satisfy their fiduciary duties. These arrangements may also tend to promote a focus on short-term results at the expense of long-term value creation.

Nasdaq believes that enhancing transparency around third-party board compensation would help address these concerns and would benefit investors by making available information that is potentially relevant to investment and voting decisions. Nasdaq further believes that the disclosure would not create meaningful burdens on directors or those making these payments, nor on the companies required to make the disclosure. Apart from this this rule, Nasdaq noted in its proposal that it is surveying interested parties as to whether these third-party payments should prohibit directors from being considered independent under Nasdaq rules or disqualify these directors from serving on the board altogether. Nasdaq confirmed that no decision regarding whether to propose additional rules has been made at this time.

The SEC found that the rule change is consistent with the requirements of Section 6(b)(5) of the Exchange Act, which requires, among other things, that Nasdaq's rules be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to remove impediments to, and perfect the mechanism of, a free and open market and a national market system; and, in general, to protect investors and the public interest, and not be designed to permit, among other things, unfair discrimination between issuers.

The SEC stated that the development, implementation, and enforcement of standards governing the initial and continued listing of securities on an exchange are activities of critical importance to financial markets and the investing public. Listing requirements, among other things, serve as a means for an exchange to provide listed status only to companies that meet certain initial and continued quantitative and qualitative criteria that help to ensure that fair and orderly markets can be maintained once the company is listed. The SEC believes that the corporate governance standards embodied in the listing standards of national securities exchanges, in particular, play an important role in ensuring that exchange-listed companies observe good governance practices, including that listed companies provide adequate disclosure to allow investors to make informed investment and voting decisions. The SEC further stated that it has long encouraged exchanges to adopt and strengthen their corporate governance listing standards in order to, among other things, provide greater transparency into the governance processes of listed issuers and enhance investor confidence in the securities markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions