July 8, 2016

SEC Approves Nasdaq Golden Leash Disclosure Rule for Directors/Nominees

The SEC issued an order on July 1, 2016, approving new Nasdaq Rule 5250(b)(3), which requires listed companies to identify the parties to, and disclose the material terms of, all agreements or arrangements between any director or nominee for election as a 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. The terms “compensation” and “other payment” are intended to be construed broadly, and include non-cash compensation and other payments such as health insurance premiums and indemnification.

Disclosure is not required for agreements and arrangements that: (i) relate only to reimbursement of expenses in connection with candidacy as a director (whether or not such reimbursement arrangement has been publicly disclosed); (ii) existed prior to the nominee’s candidacy (including as an employee of the other person or entity) if the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or information statement or annual report (such as in the director or nominee’s biography); or (iii) have been disclosed under Item 5(b) of Schedule 14A (interest of certain persons in connection with a proxy contest) or Item 5.02(d)(2) of Form 8-K (selection arrangements in connection with election of a new director) in the current fiscal year. [1] The compensation that a director or nominee who is employed by a private equity or venture capital fund receives from the fund need not be disclosed (assuming disclosure of the relationship as contemplated by (ii) above) if the fund’s employees are expected to and routinely serve as directors of its portfolio companies and their remuneration is not materially affected by such service, and should not become disclosable merely because it is based on the listed company’s performance or the fund’s return on its investment.

Companies listed at the time the rule becomes effective or initially listed thereafter must make the required disclosures no later than the date on which such company files or furnishes a definitive proxy or information statement in connection with its next shareholders’ meeting at which directors are elected (or, if the company does not file proxy or information statements, no later than when the company files its next Form 10-K or Form 20-F). Thereafter, a listed company must make the required disclosure at least annually until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement. The rule does not separately require the initial disclosure of newly entered into agreements or arrangements, provided that disclosure is made for the next shareholders’ meeting at which directors are elected. Disclosure is required either on or through the company’s website, or in such proxy or information statement (or, if the company does not file proxy or information statements, in its Form 10-K or Form 20-F). A company posting the requisite disclosure on or through its website must make it publicly available (and continuously accessible) no later than the date on which it files such proxy or information statement (or, if they do not file proxy or information statements, no later than when the company files its next Form 10-K or Form 20-F).

If a Company discovers an agreement or arrangement that should have been disclosed pursuant to the rule but was not disclosed, the company must promptly make the required disclosure by filing a Form 8-K or 6-K, where required by SEC rules, or by issuing a press release. Such remedial disclosure, regardless of its timing, however, would not satisfy the annual disclosure requirements. A company will not be considered “deficient” if it undertakes reasonable efforts to identify all such agreements or arrangements, including asking each director or nominee in a manner designed to allow timely disclosure, and makes any required remedial disclosure promptly. Companies that are deficient under the new rule will have 45 calendar days to submit a remedial plan to the satisfaction of Nasdaq.

A foreign private issuer may follow home country practice in lieu of the requirements of the rule, provided such issuer submit a written statement from an independent counsel in its home country certifying that the company’s practices are not prohibited by the home country’s laws. The issuer would also be required to disclose in its annual filings with the SEC (or, in certain circumstances, on its website) that it does not follow the proposed rule’s requirements and briefly state the home country practice it follows in lieu of these requirements.

The new rule will be effective August 1, 2016.


[1] For agreements and arrangements not required to be disclosed in accordance with clause (ii), but where the director or nominee’s remuneration is thereafter materially increased specifically in connection with such person’s candidacy or service as a director of the company, only the difference between the new and previous level of compensation or other payment obligation need be disclosed. Disclosure under clause (iii) above does not relieve a company of its ongoing annual disclosure obligation.

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