United States: SEC Approves Nasdaq Rule Requiring Public Disclosure Of Payments To Directors By Third Parties

In March 2016, the Nasdaq Stock Market LLC ("Nasdaq") proposed new rules regarding disclosure of third-party compensation of directors. This third-party compensation, which may not be publicly disclosed, arises when a party other than the issuer, such as an activist investor, compensates a person in connection with that person's candidacy for director or service as a director.

With the goal of enhancing transparency around such third-party compensation of directors, Nasdaq proposed Rule 5250(b)(3), which would require Nasdaq-listed companies to publicly disclose compensation or other payments by third parties to nominees for director or board members. On July 1, 2016, the Securities and Exchange Commission (SEC) approved this rule change, which will become effective on August 1, 2016.

WHAT DISCLOSURE IS REQUIRED?

New Rule 5250(b)(3) requires disclosure of the material terms of all agreements and arrangements between any director or nominee and any person or entity other than the company (a "Third Party") relating to compensation or other payment in connection with a nominee's candidacy for director or for a director's service as a director. At a minimum, the disclosure must identify the parties to the agreement or arrangement, as well as the material terms of the agreement or arrangement. The terms "compensation" and "other payment," as used in new Rule 5250(b)(3), are not intended to be limited to cash payments; rather, those terms are to be construed broadly and will apply to agreements and arrangements that provide for "non-cash compensation and other payment obligations, such as health insurance premiums or indemnification, made in connection with a person's candidacy or service as a director."

Nasdaq's proposal recognized the potential breadth of the new requirement, as well as the significant potential for overlap with existing SEC disclosure requirements (e.g., the disclosure required by Items 401(a) and 402(k) of Regulation S-K, Item 5(b) of Schedule 14A, and Item 5.02(d) of Form 8-K). Accordingly, Nasdaq provided in new Rule 5250(b)(3) that a listed company need not make disclosure of agreements and arrangements that:

  • relate only to reimbursement of expenses in connection with candidacy as a director;
  • existed prior to the nominee's candidacy (including as an employee of the other person or entity) and the nominee's relationship with the Third Party has been publicly disclosed, such as in the director's or nominee's biography in a definitive proxy or information statement or annual reportin this regard, if the nominee's or director's remuneration is thereafter materially increased in connection with such person's candidacy or service as a director of the company, the difference between the new and previous levels of compensation must be disclosed; or
  • have been disclosed under Item 5(b) of Schedule 14A (i.e., interests of certain persons in connection with a proxy contest) or Item 5.02(d)(2) of Form 8-K (i.e., interests of certain persons in connection with a proxy contest) in the current fiscal yearin this regard, this disclosure will not relieve a listed company of its Rule 5250(b)(3) obligation to make annual disclosure in future years.

WHEN AND WHERE MUST NASDAQ-LISTED COMPANIES MAKE THIS DISCLOSURE?

New Rule 5250(b)(3) will apply to companies that are listed at the time the rule becomes effective or companies that become listed after that effective date. As discussed below, the rule provides for special treatment of listed foreign private issuers.

The disclosure required by the new rule is to be provided either through SEC filings or the listed company's website, as follows (subject to the exceptions for previously disclosed information discussed above):

  • If the disclosure is to be made through SEC filingsThe initial required disclosure must be included in the company's definitive proxy statement or information statement for its next shareholders' meeting at which directors are elected after the effective date (or, if a listed company does not file proxy or information statements, in its next Form 10-K or Form 20-F).
  • If the disclosure is to be made through the listed company's websiteThe listed company may provide the required disclosure on its own website or through a website by hyperlinking to another "continuously accessible" website. A company posting the requisite disclosure on or through its website must make the initial required disclosure publicly available no later than the date on which the company files a proxy or information statement in connection with a shareholders' meeting at which directors are to be elected (or, if a listed company does not file proxy or information statements, no later than when the company files its next Form 10-K or Form 20-F).

After the initial disclosure discussed above, a listed company must make this disclosure at least annually until the earlier of (i) the resignation of the director or (ii) one year following termination of the agreement or arrangement. Under the new rule, listed companies are not required to make disclosure upon entry into subject agreements or arrangements; however, the required disclosure must be made for the next shareholders' meeting at which directors are elected.

Remedial Disclosure. Rule 5250(b)(3) further states that if a listed company discovers an agreement or arrangement that should have been disclosed pursuant to the rule but was not, the company must promptly make the required disclosure by filing a Form 8-K or Form 6-K, where required by SEC rules, or by issuing a press release.

Such remedial disclosure, regardless of its timing, will not satisfy the ongoing obligation under the rule to provide annual disclosure. However, a company will not be considered deficient under the rule if it (i) has undertaken reasonable efforts to identify all such agreements or arrangements, including asking each director or nominee in a manner designed to allow timely disclosure, and (ii) makes the required remedial disclosure promptly if it discovers an agreement or arrangement that should have been disclosed but was not. If a company is determined to be deficient, the company must submit a plan to Nasdaq demonstrating that it "has adopted processes and procedures designed to identify and disclose relevant agreements or arrangements."

HOW DOES THE DISCLOSURE REQUIREMENT APPLY TO LISTED FOREIGN PRIVATE ISSUERS?

The rule also amends Nasdaq Rule 5615(a)(3). This amendment permits foreign private issuers to follow their home country practice in lieu of the requirements of Rule 5250(b)(3), provided that the foreign private issuer (i) submits 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) discloses 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 states the home country practice it follows in lieu of the rule's requirements.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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