A little over two years ago, the Council of Institutional Investors (“CII”) asked the SEC to review its proxy disclosure rules related to director compensation received from third parties, which we had blogged about here. At the time, the CII was concerned that the existing proxy rules did not capture compensation that may be paid to directors serving on the board of a public company by a third party, such as a private fund or an activist investor, which are typically referred to as “golden leashes.”
In its letter to the SEC, the CII cited concerns that compensation under golden leash arrangements is not generally covered by the existing proxy disclosure rules, but could be material to investors due to the potential conflicts of interest arising under such arrangements. We had noted many of these issues in a prior blog post discussing the performance-based compensation arrangements of hedge fund-nominated directors for the boards of Hess Corporation and Agrium, Inc. in 2013. As we predicted would be the case, nothing really transpired on this topic in the wake of the CII’s request. That is until recently, when Nasdaq filed a proposed rule change, subsequently approved by the SEC, attempting to address this issue.
As reported by Broc Romanek, the proposed rule change would require Nasdaq-listed companies to provide certain disclosures related to director compensation received from third parties. Specifically, new Nasdaq Rule 5250(b)(3), which should become effective around the beginning of August 2016, will require Nasdaq-listed companies to disclose the material terms of all agreements and arrangements between any director or director nominee, and any person other than the listed company, relating to compensation or other payments in connection with such person’s candidacy or service on the listed company’s board of directors. Companies will have the option to make this disclosure either through its website or in the company’s proxy or information statement for the next shareholders’ meeting at which directors will be elected.
Additionally, the new rule will require:
- annual disclosure of all such agreements or arrangements until the earlier of resignation of the director or one year following termination of such agreement or arrangement; and
- filing of a Current Report on Form 8-K upon the discovery of such agreement or arrangement which should have been disclosed previously, but wasn’t.
It is important to note that new agreements or arrangements should not trigger a Form 8-K filing so long as the new agreement or arrangement is disclosed on the Company’s website or in a proxy or information statement prior to the next shareholders’ meeting at which directors are to be elected. Additionally, certain payments, such as (i) reimbursement for expenses, (ii) arrangements that existed prior to a person’s candidacy for director and (iii) other arrangements that have been previously disclosed in connection with a proxy contest or pursuant to item 5.02(d) of Form 8-K. However, listed companies would still be required to make the required annual disclosures.
A listed Company will not be considered deficient under this rule if it takes reasonable efforts to identify all such agreements or arrangements. Therefore, Nasdaq-listed companies should revise their annual Director and Officer Questionnaires to include this question if it is not already included. This should not only ensure that proper disclosures are made, but could protect the company under certain circumstances. One would assume that the NYSE will follow suit, but that has yet to be seen.