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Nasdaq Tightens Reins On Golden Leash Arrangements

02.24.17

On July 1, 2016, the SEC approved a new Nasdaq rule requiring listed companies to publicly disclose “golden leash” arrangements. It took effect on July 31 of last year. Will this affect your public company? Let’s take a closer look.

What are they?

In a golden leash arrangement, a third party — typically a major shareholder, such as an activist hedge fund or institutional investor — makes cash or noncash payments to directors or director nominees in connection with their candidacy for or service on the company’s board. Noncash payments might include benefits such as health care coverage or indemnification rights.

Critics of golden leash arrangements argue that they compromise directors’ independence and cause them to place the interests of their benefactors above the interests of shareholders as a whole. They also believe these arrangements encourage the compensated directors to focus on short-term results at the expense of long-term value creation.

What does the rule require?

Nasdaq’s rule requires a Nasdaq-listed company to disclose the material terms of all golden leash arrangements no later than the date on which it files or furnishes a proxy or information statement for the next shareholders meeting at which directors are elected. Alternatively, if the company doesn’t file proxy or information statements, the company must make the disclosure no later than the date it files its next annual report on Form 10-K or 20-F. The company should make the disclosure on its website, in its proxy or information statement or, if it doesn’t file proxy or information statements, in its annual report.

The rule excludes certain arrangements from the disclosure requirement, including those that:

  • Relate only to reimbursement of the recipient’s expenses in connection with his or her candidacy as a director,
  • Existed prior to a director’s candidacy (employment by the third party, for example), provided the director’s relationship with the third party has been publicly disclosed, or
  • Have been disclosed in a Schedule 14A or Form 8-K for the current fiscal year.

The required disclosure must be made at least annually until the earlier of the director’s resignation or one year following the termination of the golden leash arrangement. If a company discovers an arrangement that should have been disclosed but wasn’t, it must promptly make the disclosure by filing Form 8-K or 6-K, if required by SEC rules, or by issuing a press release.

The rule permits foreign private issuers to follow practices in their home countries in lieu of Nasdaq’s rule. However, they must make certain disclosures regarding such practices.

How will you ensure compliance?

Uncovering golden leash arrangements between your directors or director nominees and shareholders or other third parties is easier said than done. Fortunately, the new rule will deem you to be in compliance if you make reasonable efforts to identify these arrangements, including “asking each director or nominee in a manner designed to allow timely disclosure.” To meet this requirement, use director and officer (D&O) questionnaires, or adapt existing D&O questionnaires, to elicit information about golden leash arrangements.