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 generally defined as 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. Although the Securities and Exchange Commission rejected NASDAQ’s original rule proposal, as we previously reported here, on March 15, 2016, NASDAQ made certain revisions and clarifications to the originally-proposed rule and resubmitted it to the SEC for approval.
On May 18, 2016, NASDAQ once again made certain amendments to the proposed rule. The proposed rule, as amended, may be found here. NASDAQ’s recent amendment filing with the SEC provides that the rule will become effective on June 30, 2016. However, the rule remains subject to SEC approval, and the SEC has designated July 4, 2016, as the date by which it must either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule.
The recently-proposed amended rule is substantively similar to NASDAQ’s two previous proposals. Specifically, the rule would require NASDAQ-listed companies to publicly disclose on their website or proxy statement for any shareholders’ meeting at which directors are elected (or, if they do not file proxy statements, their Annual Report on Form 10-K or 20-F) the material terms of, and the parties to, 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. A company would be able to make the required disclosure through its website by hyperlinking to another website, as long as that other website is continuously accessible. If that other website became inaccessible, or the hyperlink thereto became inoperable, the company would need to either promptly restore it or make other disclosure in accordance with the proposed rule. 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. The recently-filed amended rule also clarifies that indemnification obligations that a third party owes to the applicable director or nominee would require disclosure under the rule. The 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 company that is listed on NASDAQ at the time the proposed rule becomes effective, or that initially lists on NASDAQ thereafter, would be required to disclose all agreements and arrangements in accordance with the proposed rule by no later than the date on which it files a proxy statement in connection with the company’s next shareholders’ meeting at which directors are elected (or, if they do not file proxy statements, no later than when the company files its next Annual Report on Form 10-K or 20-F). Thereafter, the company would need to make the required disclosures at least annually until the earlier of the resignation of the applicable director and one year following the termination of the agreement or arrangement.
There would be a number of exceptions to the 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 or venture capital firm, or fund established by that firm, whose employees are expected to, and who routinely, serve on the boards of directors of the firm’s or 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 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 the proposed rule, but thereafter would remain subject to the proposed rule’s annual disclosure requirements.
- If a company provides disclosure 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 satisfy the initial disclosure requirements under the proposed rule. However, the applicable agreement or arrangement would still be subject to the annual disclosure requirements of the proposed rule.
- Pursuant to other NASDAQ Listing Rules, a foreign private issuer could follow its home country practice in lieu of the requirements of the proposed rule.
It would not be a violation of the proposed rule if a NASDAQ-listed company failed to make a particular required disclosure, as long as the company undertook 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 made 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 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.