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SEC Approves Nasdaq Rules on Disclosure of Director Compensation

On July 1, 2016, the Securities and Exchange Commission (“SEC”) approved changes to Nasdaq Listing Rules 5250 and 5615 requiring Nasdaq-listed companies to publicly disclose compensation or other arrangements by third parties to directors or nominees for director. The new requirements take effect July 31, 2016.

Under the new Nasdaq Listing Rule 5250(b)(3), each Nasdaq-listed company is now required to publicly disclose 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) relating to compensation or other payment in connection with that person’s candidacy or service as a director. The disclosure requirement encompasses non-cash compensation and other forms of payment obligation, such as indemnification. The disclosure of all such agreements and arrangements must be made no later than the date that the company files or furnishes a definitive proxy or information statement in connection with the company’s next shareholders’ meeting at which directors are elected, and the disclosure must continue at least annually until the director no longer serves in such role or one year after the disclosed agreement or arrangement terminates. The required disclosure can be made either through the company’s website or in the definitive proxy or information statement. If a listed company discovers an agreement or arrangement that should have been disclosed but was not disclosed, then the company must promptly make the required disclosure by filing a Form 8-K or by issuing a press release.

The new rules provide that listed companies will not need to make disclosure of agreements or arrangements that: (i) relate only to reimbursement of expenses in connection with candidacy as a director; (ii) existed prior to the nominee’s candidacy and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or information statement or annual report; or (iii) have been disclosed in proxy materials or a Form 8-K in the current fiscal year, provided that the company will still need to make its annual disclosure in the following years.

Non-Nasdaq-listed public companies may also want to take note of this new development. It is arguable that the same disclosure requirements listed in Nasdaq’s new rules may be required to be disclosed by all public companies pursuant to Item 5 of Schedule 14A of the Securities Exchange Act of 1934, although there is no clear guidance on this point. If the new requirements made explicit to Nasdaq-listed companies achieve desired effects, the SEC may follow suit with its own similar guidance applicable to all publicly traded companies. 

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