On March 15, 2016, the NASDAQ Stock Market LLC resubmitted its proposed rule requiring NASDAQ-listed companies to publicly disclose third-party compensation arrangements for board members and board nominees, commonly referred to as “golden leash” arrangements. Golden leash arrangements arise when activist shareholders offer to compensate board nominees in connection with their candidacy or service on the board and usually occur in connection with a proxy contest. The types of golden leash arrangements vary but often include compensating directors based on achieving certain benchmarks, such as an increase in the company’s share price over a specified time period.
The re-proposed rule addresses NASDAQ’s concern that golden leash arrangements may lead to conflicts of interest and compromise a director’s ability to satisfy his or her fiduciary duties since such arrangements promote short-term results. NASDAQ initially submitted the proposed rule in January 2016, but it was rejected by the SEC for technical reasons. The re-proposed rule, Listing Rule 5250(c), is substantially similar to the initial proposed rule and would require NASDAQ-listed companies to publicly disclose all agreements and arrangements between directors or director nominees and any person or third-party entity that provide compensation or payment in connection with that person’s candidacy or service as a director. This disclosure would be made either on the company’s website or in their annual proxy statement or annual report and would at a minimum identify the parties and the material terms of such arrangements. The re-proposed rule is intended to be construed broadly to cover all forms of compensation, including payments for items such as health insurance premiums. However, the disclosure obligation would not include arrangements that relate only to the reimbursement of expenses in connection with a director’s candidacy or to arrangements that existed before the director’s candidacy and would have otherwise been publicly disclosed, such as an employment agreement.
A company’s obligation to disclose golden leash arrangements under the re-proposed rule would be continuous and terminate at the earlier of the resignation of the applicable director or one year following the termination of the applicable golden leash arrangement. If the re-proposed rule is approved by the SEC, it will become effective on June 30, 2016.
The re-proposed rule is available at: http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2016/SR-NASDAQ-2016-013_Resubmission.pdf.