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

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

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

NASDAQ Reproposes Rule Change That Would Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and Director Nominees

by Practical Law Corporate & Securities
Published on 18 Mar 2016 • USA (National/Federal)
NASDAQ reproposed a rule change that would require listed companies to disclose certain payments made by third parties to their directors or director nominees.
Update: On May 18, 2016, NASDAQ issued an amendment to the reproposed rule change. On May 20, 2016, the SEC extended the time period for its consideration of the reproposed rule change. On June 30, 2016, NASDAQ withdrew the initial amendment and issued Amendment No. 2, which superseded the original filing in its entirety. The SEC approved the proposal, as modified by Amendment No. 2, on July 1, 2016. For more information on these developments, see Updates below.
On March 15, 2016, NASDAQ reproposed a rule change that would require NASDAQ-listed companies to disclose certain payments made by third parties to their directors or director nominees. NASDAQ issued a similar proposal in January 2016 that the SEC later rejected (see Legal Update, NASDAQ Proposal Would Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and 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 at which directors are elected (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. Foreign private issuers would be able to follow home country practice instead of the requirements of the proposal.
A listed company's obligation to publicly disclose these arrangements would be continuous and would terminate at the earlier of:
  • The resignation of the director subject to the arrangement.
  • One year following the termination of the arrangement.
Under the proposal, a company that provides disclosure under SEC rules (including under the requirements of Item 5.02(d)(2) of Form 8-K) would be relieved from the initial disclosure requirements of the proposal if:
  • The disclosure identifies the material terms of the agreement or arrangement.
  • The disclosure document is posted on the company's website.
However, the agreement or arrangement would still be subject to the continuous disclosure requirements of the proposal.
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, under Items 402(a)(2) or 402(k) of Regulation S-K, or in a director's biographical summary included in periodic reports filed with the SEC). An example of an agreement or arrangement falling under this exception would be a director or director nominee being 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 this service. If such a director or nominee's remuneration is materially increased in connection with that person's candidacy or service as a director of the company, only the difference between the new and the previous level of compensation would need to be disclosed.
  • Have been disclosed under Item 5(b) of Schedule 14A (however, the agreement or arrangement would still be subject to the continuous disclosure requirements of the proposal).
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.
  • Upon discovery of a non-disclosed arrangement, 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.
Under the proposal, if a company were considered deficient, it would be required to provide a plan to regain compliance within 45 calendar days 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. If approved, the proposal would take effect on June 30, 2016.

Updates

Amendment to Reproposed Rule Change

On May 18, 2016, NASDAQ issued an amendment to the reproposed rule change. Among other things, the amendment clarifies that:
  • The required disclosure would need to be made in the proxy statement for any shareholder meeting that elects directors, not just at annual meetings.
  • Indemnification payment obligations would be included in the definition of compensation.
This amendment was subsequently withdrawn (see Withdrawal of Amendment)

Extension of Time Period for Action

On May 20, 2016, the SEC extended the time period for its consideration of the reproposed rule change. The SEC will either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change by July 4, 2016.

Withdrawal of Amendment

On June 30, 2016, NASDAQ withdrew the amendment to the reproposed rule change.

Amendment No. 2

Also on June 30, 2016, NASDAQ issued Amendment No. 2, which superseded the original filing in its entirety. The SEC approved the proposal, as modified by Amendment No. 2, on July 1, 2016. To learn more, see Legal Update, SEC Approves NASDAQ Proposal to Require Listed Companies to Disclose Certain Third-Party Payments Made to Directors and Director Nominees.
To learn more about the listing requirements for NASDAQ and other exchanges, see Practice Note, Selecting a US Securities Exchange.