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 or arrangements 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. As we previously reported here, the Securities and Exchange Commission rejected NASDAQ’s original rule proposal.
On March 15, 2016, NASDAQ made certain revisions and clarifications to its previously-proposed rule, and submitted a new revised rule to the SEC for approval. The newly-proposed rule may be found here. If the newly-proposed rule is approved by the SEC, it will become effective on June 30, 2016.
The newly-proposed rule is substantively similar to the previously-proposed rule. Specifically, the newly-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 and arrangements 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 person’s candidacy or service as a director. At a minimum, the proposed rule would require disclosure of the parties to, and the material terms of, the agreement or arrangement. The newly-proposed rule is meant to be interpreted broadly, and accordingly would apply to payments for items such as a candidate’s health insurance premiums. The newly-proposed rule would apply to agreements or arrangements irrespective of whether the right to nominate the applicable director or nominee legally belongs to the third party making the payment.
A NASDAQ-listed company’s obligations under the newly-proposed rule would be continuous, and would terminate at the earlier of the resignation of the applicable director and one year following the termination of the arrangement.
There would be a number of exceptions to the newly-proposed rule. Specifically:
- Agreements or arrangements that existed before the nominee’s candidacy (including as a result of an employment relationship), and that are otherwise publicly disclosed in a proxy statement or annual report, would not need to be disclosed. An example of an agreement or arrangement that would fall under this exception would be a director or nominee that is employed by a private equity fund whose employees are expected to, and who routinely, serve on the boards of directors of the fund’s portfolio companies and whose remuneration is not materially affected by that service. However, if that director’s or nominee’s remuneration is materially increased in connection with that person’s candidacy or service as a director, the difference between the new and previous level of compensation would need to be disclosed under the newly-proposed rule.
- Agreements or arrangements that relate only to the reimbursement of expenses incurred in connection with candidacy as a director would not need to be disclosed, regardless of whether or not that reimbursement arrangement has otherwise been publicly disclosed.
- SEC rules subject persons soliciting proxies in opposition to a company’s proxy solicitation to certain disclosure requirements. Where an agreement or arrangement for a director or nominee is disclosed pursuant to those disclosure requirements, a company would be relieved from the initial disclosure requirements of NASDAQ’s newly-proposed rule, but that agreement or arrangement would remain subject to the continuous disclosure requirements of the newly-proposed rule on an annual basis.
- If a company provides disclosure under SEC rules, including under the requirement in Item 5.02(d)(2) of Form 8-K to provide “a brief description of any arrangement or understanding between [a] new director and any other persons, naming such persons, pursuant to which such director was selected as a director,” it would not be required to make a separate disclosure under NASDAQ’s newly-proposed rule as long as the existing disclosure identifies the material terms of the agreement or arrangement and the applicable SEC disclosure document (such as a Form 8-K) is posted on the company’s website. However, that agreement or arrangement would still be subject to the continuous disclosure requirements of the newly-proposed rule on an annual basis.
- Pursuant to other NASDAQ Listing Rules, a foreign private issuer could follow its home country practice in lieu of the requirements of the newly-proposed rule.
It would not be a violation of the newly-proposed rule if a NASDAQ-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 required disclosures that it discovers should have been made 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 newly-proposed rule, it would have 45 days to submit 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.