SEC Approves Adoption of the “Golden Leash” Rule

On July 1, 2016, the Securities and Exchange Commission (“SEC”) approved Nasdaq Stock Market LLC’s (“Nasdaq”) proposed rule change to require listed companies to publicly disclose the compensation or other payments by third parties to members of the Board of Directors or nominees for director, i.e. the so-called “Golden Leash” rule.

Rule 5250 (b)(3) requires listed companies to publicly disclose, at least annually, the material terms of all agreements or arrangements between any director or nominee for director on the company’s board and any person or entity other than the company (“Third Party”) relating to compensation or other payments in connection with that person’s candidacy or service as director. However, disclosure is not required for any of the following agreements or arrangements that:

• relate only to reimbursement of expenses in connection with candidacy as a director;
• existed prior to the nominee’s candidacy, including as an employee of the Third Party, and the nominees relationship with the Third Party has been publicly disclosed in a definitive proxy or information statement or annual report;
• have been disclosed under Item 5(b) of Schedule 14A of the Act or Item 5.02(d)(2) of Form 8-K in the current fiscal year. However, this would not relieve the company of its obligations to disclose the required information on an annual basis.

Foreign private issuers are permitted to follow their home country’s practices in lieu of the new requirements, provided that the issuer complies with Nasdaq Rule 5615. Foreign private issuers are required to do the following to meet the conditions of Rule 5615:

• submit to Nasdaq a written statement from an independent counsel in its home country certifying that the company’s practices are not prohibited by the home country’s laws;
• disclose in its annual SEC filings or on its website that it does not follow the proposed rule’s requirements and briefly state the home country practice it follows in lieu of these requirements.

When is this effective?

This rule is effective August 1, 2016. Companies listed on Nasdaq must initially disclose the required information no later than the date on which the company files or furnishes a definitive proxy or information statement subject to Regulation 14A or 14C under the Act in connection with the company’s next shareholders’ meeting at which directors are elected or if the company does not file proxy or information statements, no later than when the company files its next Form 10K or Form 20-F. Thereafter, a listed company must disclose the required information annually until the earlier of the resignation of the director or one year after the termination of the agreement or arrangement.

If a company discovers an agreement or arrangement that was not previously disclosed, then the company must promptly make the required disclosure by filing a Form 8K or 6K or by issuing a press release. This however, would not satisfy the annual disclosure requirements.

What can companies do now?

Although calendar year companies have at least until their annual return filing dates to prepare, companies listed on Nasdaq should initiate a process of identifying agreements or arrangements governed under the Golden-Leash Rule. This can be achieved through the annual D&O inquiries or through a more informal process in the forthcoming board meetings. While many of these agreements or arrangements will be grandfathered (i.e., existed prior to nominee’s candidacy) as described above, it is important to obtain this information regardless of when they were initiated, as this would capture any changes that may need to be disclosed on an ongoing basis.