As we previously reported here, on January 28, 2016, the NASDAQ Stock Market LLC proposed a change to its listing rules that, if implemented, would have required 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 Securities and Exchange Commission has rejected NASDAQ’s previously-proposed rule. However, it is our understanding that the rejection was based on relatively technical grounds, and that NASDAQ intends to submit a new proposed rule relating to this issue in the near future. The new proposed rule is expected to be substantively similar to the previously-proposed rule, but would provide greater clarity regarding its scope than the previously-proposed rule.

Relatedly, on February 18, 2016, NASDAQ distributed a six-question survey to obtain the views of NASDAQ-listed companies, investors and other market participants regarding whether additional proposed rules relating to “golden leash” arrangements are appropriate. Specifically, the survey asks for market participants’ views as to whether NASDAQ should adopt listing rules that would prohibit directors who receive third-party payments from being considered independent directors or from even serving on the board of directors of a NASDAQ-listed company at all. The results of the survey will be reviewed by NASDAQ Staff and the NASDAQ Listing and Hearing Review Council, and could lead to proposed changes in NASDAQ’s listing rules. However, the distribution of the survey is not intended to suggest that NASDAQ has made any determination as to whether it should propose any additional rule changes. A copy of the survey may be found here. The deadline to respond to the survey is March 18, 2016.

The NASDAQ listing rules currently provide that, subject to certain exceptions, the majority of the board of directors of a NASDAQ-listed company must be independent and that each member of a NASDAQ-listed company’s audit, compensation and nominating committees must be independent. Accordingly, if NASDAQ were to eventually adopt listing rules that prohibited directors who receive third-party payments from being considered independent, it would essentially have the effect of both limiting the number of directors on the board that can receive such payments and prohibiting directors who receive such payments from serving on audit, compensation and nominating committees. 

We will provide further updates regarding NASDAQ’s proposed rules relating to “golden leash” arrangements as they become available.