DealLawyers.com Blog

As noted in this Steve Quinlivan blog and this Ning Chiu blog, the SEC approved Nasdaq’s golden leash disclosure rule last week – just before it’s July 4th extended deadline. Here’s the 14-page order from the SEC. Both of those blogs were written before Nasdaq released Amendment No. 2 yesterday. Amendment No. 2 contains the actual rule language (starting on page 30). The new rule will be effective in approximately 30 days. I’m posting memos in our “Executive Compensation Practices” Practice Area.

Here’s an excerpt from Cydney Posner’s blog, which she tweaked after Amendment No. 2 was released:

Rule 5250(b)(3) will require each listed company to disclose, by the date the company files its definitive proxy statement for its next annual meeting, the parties to and material terms of all arrangements between any director or nominee and any person or entity other than the company relating to compensation or other payment in connection with that person’s candidacy or service as a director. A 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 accompanying interpretive material indicates that the terms “compensation” and “other payment” as used in the rule are not limited to cash payments and are intended to be construed broadly. The disclosure requirement encompasses non-cash compensation and other forms of payment obligation, such as indemnification or health insurance premiums. Note that the rule does not separately require the initial disclosure of newly entered arrangements so long as disclosure is made under the rule for the next annual meeting. The information must be disclosed either on or through the company’s website (in which case it must be continuously accessible) or in its definitive proxy statement.

Nasdaq also explicitly states that, if a company provides disclosure in a definitive proxy or information statement, including to satisfy the SEC’s proxy disclosure requirements, sufficient to comply with the proposed rule, the company’s obligation to satisfy the rule is fulfilled regardless of the reason that the disclosure was made.

No disclosure will be required for arrangements that:

– relate only to reimbursement of expenses in connection with candidacy as a director;
– existed prior to the nominee’s candidacy (including as an employee of the other person or entity) and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or annual report (such as in the director or nominee’s biography); or
– have been disclosed under Item 5(b) of the proxy rules (interests of certain persons in connection with a proxy contest) or Item 5.02(d)(2) of Form 8-K (description of arrangements in connection with election of a new director) in the current fiscal year. (However, this disclosure would not obviate the need for the company to comply with its annual disclosure obligations under the rule.)

Nasdaq cites as an example of an agreement or arrangement falling under the exception for arrangements that existed prior to the nominee’s candidacy is a director or a nominee employed by a private equity or venture capital firm or a related fund, “where employees are expected to and routinely serve on the boards of the fund’s portfolio companies and their remuneration is not materially affected by such service. If such a director or a nominee’s remuneration is materially increased in connection with such person’s candidacy or service as a director of the company, only the difference between the new and the previous level of compensation needs to be disclosed under the proposed rule.”

So long as a company has undertaken reasonable efforts to identify all arrangements — including asking each director or nominee in a manner designed to allow timely disclosure — if the company then discovers an agreement or arrangement that should have been disclosed but was not, then the company can remedy the inadvertent failure to disclose by prompt disclosure after discovery of the error by filing a Form 8-K, where required by SEC rules, or by issuing a press release; in that event, the company will not be considered deficient with respect to the rule. However, remedial disclosure, regardless of its timing, would not satisfy the annual disclosure requirements. In all other cases, the company must submit a plan showing that the company has adopted processes and procedures designed to identify and disclose relevant agreements or arrangements, subject to approval by Nasdaq.

Nasdaq is also amending Rule 5615 to provide that the required disclosure of third-party payments to directors will be among the provisions allowing a foreign private issuer, upon satisfying specified conditions, to follow home country practice.