On July 1, 2016, the Securities and Exchange Commission approved a change to the NASDAQ Stock Market LLC’s Listing Rules that will require NASDAQ-listed companies to publicly disclose so-called “golden leash” arrangements. “Golden leash” arrangements are generally defined as agreements or arrangements made by activist shareholders 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 shareholder if the company’s stock price performs in a certain manner over a specific time period. The final rule relating to this change will become effective August 1, 2016, and may be found here.
On June 30, 2016, prior to SEC approval of the rule, NASDAQ made certain amendments to its most recently proposed version of the rule, which we previously reported on here. The final rule that was approved by the SEC is substantively similar to NASDAQ’s previously-proposed versions of the rule. Specifically, the final rule will require NASDAQ-listed companies to publicly disclose on their website or definitive proxy or information statement for any shareholders’ meeting at which directors are elected (or, if they do not file proxy or information 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) relating to compensation or other payment in connection with that person’s candidacy or service as a director. A company will 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 final rule.
The terms “compensation” and “other payment” as used in the final rule are meant to be construed broadly, and accordingly will apply to non-cash compensation and other payment obligations, such as health insurance premiums and indemnification obligations. The final rule applies 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 final rule becomes effective, or that initially lists on NASDAQ thereafter, will be required to disclose all agreements and arrangements in accordance with the final rule by no later than the date on which it files a definitive proxy or information statement in connection with the company’s next shareholders’ meeting at which directors are elected (or, if it does not file proxy or information statements, no later than when the company files its next Annual Report on Form 10-K or 20-F). Thereafter, the company will 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 are a number of exceptions to the final rule. Specifically:
- Agreements or arrangements that existed before the nominee’s candidacy (including as a result of an employment relationship), where the nominee’s relationship with the applicable third party has been publicly disclosed in a definitive proxy or information statement or annual report (for example, in a director’s biographical summary) will 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 will need to be disclosed under the final rule.
- Agreements or arrangements that relate only to the reimbursement of expenses incurred in connection with candidacy as a director will 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 will be relieved from the initial disclosure requirements of the final rule, but thereafter will remain subject to the final 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 will not be required to satisfy the initial disclosure requirements under the final rule. However, the applicable agreement or arrangement will still be subject to the annual disclosure requirements of the final rule.
- If certain conditions are met, a foreign private issuer may follow its home country practice in lieu of the requirements of the final rule.
It will not be a violation of the final rule if a NASDAQ-listed company fails 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. However, such remedial disclosure, regardless of its timing, will not satisfy the ongoing annual disclosure requirements under the rule. If a listed company is deemed deficient with respect to the disclosure obligations under the final rule, it will 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 will be issued a delisting determination.