Effective August 1, 2016, new Nasdaq Rule 5250(b)(3) requires Nasdaq-listed companies to disclose the material terms of all agreements and arrangements between a director or director nominee and a third party related to “compensation” or “other payments” for a director’s service as a director or for a nominee’s candidacy.
What payments must be disclosed?
The new rule covers not only cash payments, but also “non-cash compensation and other payment obligations, such as health insurance premiums or indemnification.” However, companies need not disclose agreements or arrangements:
- relating to reimbursement of expenses in connection with a nominee’s candidacy;
- existing before the nominee’s candidacy and where the nominee’s relationship with the third party has already been disclosed (for example, in the director/nominee’s proxy statement or annual report biography); or
- previously disclosed under Schedule 14A, Item 5(b) or Form 8-K, Item 5.02(d)(2) relating to interests of certain persons in connection with a proxy contest (though disclosure will be required annually thereafter).
Where must the disclosures appear?
Disclosure may be made:
- in the company’s proxy statement (or Form 10-K if the company does not file a proxy statement); or
- on the company’s website (or via a hyperlink to another “continuously accessible” website).
When is the new disclosure required?
Disclosure must appear in the company’s first proxy statement following August 1, 2016 or be posted on the company’s website not later than when the company files its next proxy statement (or Form 10-K if the company does not file a proxy statement).
Thereafter, the company must make this disclosure annually until the earlier of (a) the director’s resignation or (b) one year following termination of the relevant agreement or arrangement.
How will companies obtain the required information?
Companies must undertake “reasonable efforts” to identify all disclosable agreements and arrangements “in a manner designed to allow timely disclosure.” This means that companies should update their D&O Questionnaires to solicit the required information.
What’s behind this new disclosure requirement?
As support for the new rule, the SEC invoked the Securities Exchange Act’s Section 6(b)(5) requirement that national securities exchange rules be designed to prevent fraud and manipulative acts and promote equitable principles of trade and protect investors. The SEC further noted that securities exchange corporate governance rules play an important role in providing greater transparency in the governance process.
Several commentators referenced in the SEC’s release more specifically noted that:
- the subject disclosures address “the obvious potential conflict of interest that shareholders should consider in voting for board members;”
- “the ability to keep both arrangement and the terms thereof secret provides ‘raiders’ and other types of activists an unfair tactical advantage over incumbent board members;”
- “secrecy around [a] board member’s outside compensation can inhibit effective functioning of the board;” and
- disclosure of third party arrangements is “a necessary element of understanding and assessing the ability of directors and director nominees to fulfill their fiduciary duties.”
The SEC was untroubled by the overlap between new Rule 5250(b)(3) and various existing disclosure rules, such as Regulation S-K Items 401(a) and 402(k), Schedule 14A Item 5(b) and Form 8-K Item 5.02(d), noting that supplementing or overlapping is not unusual and is consistent with goal of listing standards to enhance corporate governance.