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An Analysis of Nasdaq's "Golden Leash" Disclosure Rule

On July 1, 2016, the Securities and Exchange Commission (SEC) approved, on an accelerated basis, Nasdaq's new Rule 5250(b)(3), which requires Nasdaq-listed U.S. companies to publicly disclose any arrangements or agreements relating to compensation provided by a third party to the company's directors or director nominees in connection with their candidacy or board service. Because some of these so-called "golden leash" arrangements involve the compensation of a director by a shareholder or shareholder group based on the achievement of certain corporate metrics or stock performance criteria, Nasdaq’s new rule is intended to alleviate concerns that such arrangements could lead to conflicts of interest, call into question a director's ability to satisfy his or her fiduciary duties, and promote a focus on short-term results at the expense of long-term value creation.

The new rule will become effective on July 31, 2016, and initial disclosure pursuant to the new rule must be made either on the company's website (or through a hyperlink to another, "continuously-accessible", website) or in its proxy or information statement no later than the date on which the company files or furnishes a proxy or information statement in connection with its 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 annual report on Form 10-K or Form 20-F). Thereafter, a listed company must make the required disclosure at least annually, until the earlier of the resignation of the director or one year following the termination of the compensation agreement or arrangement. Listed companies are not required to disclose new agreements or arrangements at the time they are entered into, so long as disclosure is made pursuant to the rule for the next shareholders' meeting at which directors are elected.

In approving the new rule, the SEC explicitly acknowledged that it overlaps significantly with existing disclosure requirements applicable to U.S. domestic issuers. Accordingly, except with respect to foreign private issuers (FPI), there are only limited circumstances where the rule applies and where there would otherwise be no already-existing disclosure obligation. One context likely to trigger additional disclosure obligations is payments to a director or director nominee by a third party during the year of a shareholder meeting (rather than during the previous year) in an uncontested election. There is also the possibility that certain golden leash arrangements that are intentionally structured to fall outside the purview of existing disclosure rules will now be captured under the new rule. For example, if a golden leash arrangement provides that the majority of the relevant compensation will be paid to a director upon the achievement of certain company stock benchmarks, rather than specifically for his or her service as a director, Item 402(k) of Regulation S-K would not necessarily capture such payment as compensation paid for "services rendered… to the registrant." In contrast, the new rule requires the disclosure of all material terms of such an incentive payment. In addition, the new rule requires annual disclosure of these arrangements, so even if an arrangement is structured such that compensation is not paid in any given year, the existence of the arrangement and its material terms would still be required to be disclosed under the new rule, whereas Item 402(k), which only addresses compensation paid during the last completed fiscal year, would not require such disclosure. The broader scope and the annual disclosure requirement of the new rule could lead to increased shareholder awareness of, and focus on, golden leash arrangements. In addition, the specificity of the rule will likely focus companies' attention on disclosure of such compensation to directors and nominees pursuant to existing rules.


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