NASDAQ Proposal Would Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and Director Nominees | Practical Law

NASDAQ Proposal Would Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and Director Nominees | Practical Law

NASDAQ issued a proposal that would require listed companies to disclose certain payments made by third parties to their directors or director nominees.

NASDAQ Proposal Would Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and Director Nominees

by Practical Law Corporate & Securities
Published on 01 Feb 2016 • USA (National/Federal)
NASDAQ issued a proposal that would require listed companies to disclose certain payments made by third parties to their directors or director nominees.
Update: This proposal was rejected.
On January 28, 2016, NASDAQ issued a proposed rule change that would require NASDAQ-listed companies to disclose certain payments made by third parties to their directors or director nominees. The proposal is intended to address concerns that arise when a shareholder privately offers to compensate director nominees in connection with those nominees' candidacy or service as a director. These arrangements vary, but may include compensating directors based on achieving benchmarks such as an increase in share price over a fixed term. The proposal states NASDAQ's belief that these currently undisclosed compensation arrangements may:
  • Lead to conflicts of interest among directors and call into question their ability to satisfy their fiduciary duties.
  • Promote a focus on short-term results at the expense of long-term value creation.
Under the proposal, a listed company would be required to publicly disclose, on or through its website or proxy statement for its next annual meeting (or, if it does not file proxy statements, in its Form 10-K or 20-F), all agreements and arrangements between any director or director nominee and any person or entity (other than the company) that provide for compensation or other payment in connection with that person's candidacy or service as a director. The proposal would require disclosure about:
  • Compensation.
  • Other forms of payment, such as health insurance premiums.
At a minimum, the disclosure would need to identify the parties and the material terms of the agreement or arrangement.
In recognition of circumstances that do not raise concerns or where disclosure may be duplicative, the proposed rule would not apply to agreements and arrangements that either:
  • Relate only to reimbursement of expenses incurred in connection with candidacy as a director.
  • Existed before the nominees' candidacy and have been otherwise publicly disclosed (for example, in a director's biographical summary included in periodic reports filed with the SEC).
The proposal also states that a listed company would not be considered deficient in the proposed disclosure obligations if the company:
  • Has undertaken reasonable efforts to identify all relevant agreements and arrangements, including by asking each director or nominee in a manner designed to allow timely disclosure.
  • Promptly makes the required disclosure by filing a Form 8-K or 6-K, where required by SEC rules, or by issuing a press release if it discovers an agreement or arrangement that should have been disclosed but has not.
Under the proposal, if a company were considered deficient, it would be required to provide a plan to regain compliance sufficient to satisfy NASDAQ's staff that the company has adopted processes and procedures designed to identify and disclose relevant agreements and arrangements in the future. If a company did not submit a plan to regain compliance, it would receive a Staff Delisting Determination, which the company could appeal to a Hearings Panel under NASDAQ Rule 5815.
The proposed rule change requires SEC approval.
To learn more about the listing requirements for NASDAQ and other exchanges, see Practice Note, Selecting a US Securities Exchange.