United States: Nasdaq Requires Disclosure Of Third-Party Payments To Directors

Issuers listed on Nasdaq on or after August 1, 2016 must publicly disclose the material terms of all agreements and arrangements involving third-party compensation or other payments received by any director or director nominee in connection with his or her service as a director or director candidacy, respectively (commonly referred to as "golden leash" arrangements). This disclosure is required by new Nasdaq Listing Rule 5250(b)(3), which can be found 1

Disclosure of golden leash arrangements must be made either on or through an issuer's website or in the issuer's definitive proxy or information statement for a shareholders' meeting where directors are elected (or in its Form 10-K or Form 20-F, if the issuer does not file proxy or information statements). An issuer's initial golden leash arrangement disclosure must be made by the filing date of the definitive proxy or information statement for the issuer's next shareholders' meeting where directors are elected (or by the filing date of the issuer's next Form 10-K or Form 20-F, if it does not file proxy or information statements). Once disclosed, information regarding a golden leash arrangement must continue to be disclosed annually until the earlier of (1) the resignation of the director party to such arrangement or (2) one year following the termination of the arrangement.

The NYSE has yet to propose a similar disclosure requirement. As a result, disclosure of third-party director compensation arrangements will differ based on which exchange an issuer is listed, unless NYSE-listed issuers decide to voluntarily make disclosures similar to those required by the new Nasdaq rule.

Despite acknowledging concerns raised by some opponents of the rule that existing SEC rules may, in some circumstances, apply to third-party director payments,2 Nasdaq believes that the nature, scope and timing of the SEC's disclosure requirements may not always mirror the new Nasdaq disclosure requirements. The SEC also acknowledged the potential overlap, but still approved the rule.

Nasdaq-listed issuers should familiarize themselves with, and prepare for, the new disclosure requirements. Due to the potential overlap with existing SEC disclosure rules, Nasdaq-listed issuers may not face significant additional disclosures, depending on the facts and circumstances surrounding their director's and nominee's third-party compensation arrangements and agreements. Moreover, as an issuer's existing D&O questionnaire (and advance notice bylaw, if an issuer has adopted such a bylaw) likely captures much of the required information, issuers may not have to undertake significant efforts to collect the required information.

The remainder of this client alert summarizes the new Nasdaq disclosure rule and offers practical considerations for Nasdaq-listed issuers to consider in light of the new rule.

"Golden Leash" Disclosure Rule

All Nasdaq-listed issuers are subject to the rule, except foreign private issuers under certain circumstances. Unlike other Nasdaq rules that exempt certain issuers, such as controlled companies and partnerships (for example, MLPs), the new rule applies to all Nasdaq-listed issuers. However, a foreign private issuer may follow home country practice instead of the rule's requirements by utilizing the process described in Nasdaq Listing Rule 5615(a)(3).

"Compensation" and "other payments" are to be broadly construed. The terms are not limited to only cash payments, but also apply to arrangements that provide for non-cash compensation and other payment obligations, such as health insurance premiums or indemnification.

Certain arrangements are exempt from disclosure. An issuer is not required to disclose arrangements:

  • relating only to the reimbursement of expenses incurred in running for director, whether or not the reimbursement arrangement has been publicly disclosed;
  • existing before the nominee's candidacy (including as an employee of the third party) where the nominee's relationship with the third party has been publicly disclosed in an annual report or proxy or information statement (for example, in a director's or nominee's biography), provided that a material increase in the amount of a director's or a nominee's remuneration must be disclosed if it specifically relates to his or her candidacy for, or service as, director; or
  • disclosed in the current fiscal year under Item 5(b) of Schedule 14A or Item 5.02(d)(2) of Form 8-K (although the issuer must make annual disclosure of such arrangements under the rule in future years).

Issuers with proxy access bylaws should note that because the rule does not exempt disclosures made on Schedule 14N, any golden leash disclosure included in a Schedule 14N filed by a nominating shareholder must also be disclosed by the issuer in accordance with the rule.

Real-time disclosure of new arrangements not required. Issuers do not need to disclose new arrangements as they are entered into, provided that such information is included in the issuer's next annual disclosure made pursuant to the rule.

Website disclosure must be continuously accessible. An issuer electing to make the disclosure available on its website or through it by hyperlinking to another website must ensure that the disclosure is continuously accessible. An issuer must promptly restore an inaccessible website or inoperable hyperlink containing the disclosure or make other disclosure in accordance with the rule.

Safe harbor for failure to disclose arrangements. An issuer that fails to provide timely disclosure of a golden leash arrangement will not be considered deficient in its disclosure requirements, if:

  • it has undertaken reasonable efforts to identify all arrangements required to be disclosed under the rule, including by asking each director or nominee in a manner designed to allow timely disclosure (for example, D&O questionnaires); and
  • upon discovery of the failure to disclose such arrangement, it promptly makes the required disclosure in a Form 8-K or 6-K, where required by SEC rules, or in a press release.

Remedial disclosure in a Form 8-K, Form 6-K or press release, regardless of its timing, does not satisfy the rule's ongoing annual disclosure requirements.

An issuer that is deficient in its disclosure requirements must submit to Nasdaq, within 45 days, a plan to regain compliance that satisfies the Nasdaq staff that the issuer has adopted processes and procedures to identify and disclose the required arrangements in the future. Failure to submit such a plan or to assure the Nasdaq staff of future compliance will result in a delisting determination, which determination may be appealed.

Practical Considerations

In response to the new rule, Nasdaq-listed issuers should consider the following:

Review D&O questionnaires. Issuers should review their D&O questionnaires and update them as necessary to ensure that all of the information required by the rule is captured and that the issuer can rely on the rule's safe harbor, in the event of an inadvertent failure to disclose a required arrangement.

Consider where to disclose. As a portion of the disclosure required by the rule is already required by SEC disclosure requirements, it may be easier for an issuer to satisfy the rule by supplementing existing disclosure in its proxy or information statement (or Form 10-K, if the issuer does not file proxy or information statements), rather than providing the required disclosure on or through its website.


1 In addition to adopting this rule, Nasdaq has indicated that it is surveying interested parties about whether to propose additional requirements surrounding directors and director nominees that receive third-party payments, including whether such directors and director nominees should be prohibited from being considered independent under Nasdaq rules or prohibited from serving on the board altogether. Nasdaq has not made any decision about whether to propose such additional requirements, but if it does, any proposal would be part of a separate rule filing.

2 For example, Items 401(a) and 402(k) of Regulation S-K, Item 5.02(d) of Form 8-K and Item 5(b) of Schedule 14A.

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.

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