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

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

The SEC approved a NASDAQ proposal to require listed companies to disclose certain payments made by third parties to their directors or director nominees.

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

by Practical Law Corporate & Securities
Published on 05 Jul 2016 • USA (National/Federal)
The SEC approved a NASDAQ proposal to require listed companies to disclose certain payments made by third parties to their directors or director nominees.
On July 1, 2016, the SEC approved a NASDAQ proposed rule change to require NASDAQ-listed companies to disclose certain payments made by third parties to their directors or director nominees. The rule change will take effect 30 days following the SEC's approval, and NASDAQ will notify listed companies of the effective date.
Update: NASDAQ released an issuer alert notifying listing companies that the rule change will take effect on August 1, 2016.
The rule change 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 rule change 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 rule change, a listed company will be required to publicly disclose, on or through its website, or its proxy statement or information statement for any shareholders' meeting at which directors are elected (or, if it does not file proxy or information statements, in its Form 10-K or 20-F), the material terms of all agreements and arrangements between any director or director nominee and any person or entity other than the company (Third Party) relating to compensation or other payment in connection with that person's candidacy or service as a director. A company may make this disclosure through its website by hyperlinking to another website, which must be continuously accessible. If the website becomes inaccessible or the hyperlink inoperable, the company must promptly restore it or make other disclosure in accordance with the rule change.
Foreign private issuers will be able to follow home country practice instead of the requirements of the rule change by utilizing the process set out in Listing Rule 5615(a)(3).
The rule change will require companies listed at the time the rule change takes effect, or initially listed thereafter, to disclose all agreements and arrangements by no later than the date on which the company files or furnishes a proxy or information statements in connection with the company's next shareholders' meeting at which directors are elected (or, if it does not file proxy or information statements, no later than when the company files its next Form 10-K or Form 20-F). A listed company must make this disclosure at least annually until the earlier of:
  • The resignation of the director.
  • One year following the termination of the agreement or arrangement.
The rule change does not separately require the initial disclosure of newly entered into agreements or arrangements, as long as the disclosure is made for the next shareholder meeting at which directors are elected.
The terms "compensation" and "other payment" are intended to be construed broadly and apply to:
  • Agreements and arrangements that provide for non-cash compensation.
  • Other payment obligations, such as health insurance premiums or indemnification.
At a minimum, the disclosure should identify the parties to and the material terms of the agreement or arrangement relating to compensation.
In recognition of circumstances that do not raise concerns or where disclosure may be duplicative, the proposed rule will 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 the nominee's relationship with the Third Party has 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 is a director or director nominee being employed by a private equity or venture capital firm, or a fund established by such firm, 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 will be required to be disclosed.
  • Have been disclosed under Item 5(b) of Schedule 14A in the current fiscal year (however, the agreement or arrangement will still be subject to the continuous disclosure requirements of the rule change on an annual basis).
Similarly, a company that provides disclosure in the current fiscal year under the requirement in Item 5.02(d)(2) of Form 8-K will not be required to make separate disclosure under the rule change. However, the agreement or arrangement will still be subject to the continuous disclosure requirements to make annual disclosure.
The proposal also states that a listed company will 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.
However, this remedial disclosure, regardless of its timing, will not satisfy the ongoing annual disclosure requirements of the rule change.
Under the rule change, if a company is considered deficient, it will 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 does not submit a plan to regain compliance, it will receive a Staff Delisting Determination, which the company could appeal to a Hearings Panel under NASDAQ Rule 5815.
To learn more about the listing requirements for NASDAQ and other exchanges, see Practice Note, Selecting a US Securities Exchange.