by Cydney Posner
On March 15, Nasdaq resubmitted its “golden leash” disclosure proposal to the SEC. As discussed in this Pubco post, the proposal, which originally was rejected on technical grounds, relates to third-party compensation of directors in connection with their candidacy for or service on company boards. These “golden leash” arrangements are most common in connection with board nominations (either through negotiation or proxy contest) by hedge fund activists. The resubmission, which indicates that the proposed rule would be effective on June 30, 2016, adds some gloss to the initial filing.
The proposal arises out of Nasdaq’s concern that third-party compensation of directors may not always be publicly disclosed. While there is no set format for these arrangements, they may include compensation conditioned on achievement of specified benchmarks, such as an increase in share price over a fixed term. Nasdaq fears that these arrangements “may lead to conflicts of interest among directors[,] call into question the directors’ ability to satisfy their fiduciary duties [and] tend to promote a focus on short-term results at the expense of long-term value creation. Nasdaq believes that enhancing transparency around third-party board compensation would help address these concerns and would benefit investors by making available information potentially relevant to investment and voting decisions.”
Nasdaq’s proposal would require listed companies to publicly disclose third-party compensation of directors on or through companies’ websites or proxy statements under proposed new Rule 5250(c). The resubmission notes that the requirement could be satisfied initially by a filing under Item 5.02(d)(2) of Form 8-K Item if the disclosure identifies the material terms of the arrangement and the 8-K is posted on the company’s website. However, the proposed Nasdaq rule would also require annual disclosure because the company’s disclosure obligation under the proposed rule would be continuous and would terminate at the earlier of the resignation of the director or one year following the termination of the arrangement. Nasdaq advises that the proposed rule is “intended to be construed broadly” to all forms of compensation, including health insurance premiums, and would require, minimally, identification of the parties to and the material terms of the arrangement.
The proposed rule would not apply to previously existing and disclosed arrangements such as, the resubmission indicates, an agreement with a nominee for director employed “by a private equity 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.” Similarly, whether or not previously disclosed, an agreement that would only reimburse expenses incurred in connection with candidacy as a director would not require disclosure. And, in connection with a proxy contest, if the arrangement were disclosed under Item 5(b) of the proxy rules, the proposal would not require duplicative initial disclosure, but would require disclosure thereafter on an annual basis.
Interestingly, footnote 9 (previously footnote 5), remains largely intact. That footnote indicates that Nasdaq is considering whether to propose additional requirements regarding third-party payments to directors and candidates, including whether these directors should be prohibited from being considered independent under Nasdaq rules or prohibited from serving on the board altogether. The resubmission adds that a proposal on this topic, if any, would be made in a separate rule filing. The resubmission also notes that, under the subjective prong of the definition of independent director, any “individual having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director” is not considered to be independent. Implicit in this addition to the footnote is the view that, even if Nasdaq elects not to seek to enhance the definition of independence in this regard, directors may already be obligated to consider this type of third-party payment when assessing director independence.