On January 28, 2016, the NASDAQ Stock Market LLC proposed a change to its Listing Rules that, if implemented, would require NASDAQ-listed companies to publicly disclose so-called “golden leash” arrangements. “Golden leash” arrangements are agreements made by activist stockholders to pay a director or director nominee in connection with his or her service on, or candidacy for, a company’s board of directors, usually in connection with a proxy fight. In a typical arrangement, a director or nominee would be entitled to receive certain compensation directly from the relevant activist stockholder if the company’s stock price performs in a certain manner over a specific time period.
The proposed rule requires Securities and Exchange Commission approval and may be found here.
Activists that utilize this type of compensation arrangement argue that it is necessary to attract high-quality director candidates and that it aligns the relevant director’s interests with those of stockholders. Opponents of this type of arrangement argue that it may lead to conflicts of interest among directors, that it casts doubt on a director’s ability to satisfy his or her fiduciary duties and that it leads to a focus on short-term results as opposed to long-term value creation.
Currently, there is no specific provision under the US securities laws that requires disclosure of this type of compensation arrangement, and NASDAQ believes that enhancing transparency around this type of arrangement will both alleviate some of the concerns that opponents may have and also benefit investors by making available information that may be relevant for purposes of their investment and voting decisions.
The proposed rule would require NASDAQ-listed companies to publicly disclose on their website or in their annual meeting proxy statement (or, if they do not file proxy statements, their Annual Report on Form 10-K or 20-F) all agreements between any director or nominee for director and any person or entity (other than the listed company) that provide for compensation or other payment in connection that the person’s candidacy or service as a director. The proposed rule is meant to be interpreted broadly, and accordingly would apply to payments for items such as a candidate’s health insurance premiums. At a minimum, the proposed rule would require disclosure of the parties to, and the material terms of, the agreement or arrangement. However, disclosure of agreements or arrangements that relate only to the reimbursement of expenses incurred in connection with a nominee’s candidacy for director, or that existed before the nominee’s candidacy (including as a result of an employment relationship) and that have otherwise been publicly disclosed in a proxy statement or annual report, would not need to be disclosed. It would not be a violation of the proposed rule if a listed company failed to make a particular required disclosure, as long as the company undertakes reasonable efforts to identify all relevant agreements and arrangements, including by asking each director or nominee in a manner designed to allow timely disclosure, and promptly makes any previously-unknown required disclosures by filing a Form 8-K or 6-K, where required by SEC rules, or by issuing a press release. If a listed company is deemed deficient with respect to the proposed rule, it would need to provide a plan to regain compliance sufficient to satisfy NASDAQ’s staff that it has adopted processes and procedures designed to identify and disclose relevant agreements and arrangements in the future. If the listed company does not do so, it would be issued a delisting determination.