NASDAQ Adopts Rule to Require Disclosure of Third Party Compensation of Directors

Nasdaq has released a new rule, Rule 5250(b)(3), which requires listed companies to disclose the material terms of all agreements and arrangements between entities other than the issuer (“Third Parties”) and directors or nominees for director that provide for compensation or other payment in connection with that person’s candidacy or service as a director. The concept of the compensatory agreements and arrangements covered by the rule is to be broadly construed, and would include indemnity arrangements. The required disclosure may be made either in the company’s proxy statement (or information statement if proxies are not solicited) for an annual meeting or on the company’s website. If electing to provide the information on its website rather than in the proxy statement, the information must be posted on the website by the time the proxy statement is released for the annual meeting. The disclosure must continue to be made on an annual basis until the agreement or arrangement is terminated or the person ceases to serve as a director, and need not be updated on a current basis for events occurring since the last proxy statement.

The new rule does not require disclosure of agreements or arrangements relating solely to the reimbursement of expenses in connection with the candidacy as a director. The new rule also does not require disclosure of agreements or arrangements with a Third Party that existed prior to the person’s candidacy, provided that the person’s relationship with the Third Party is disclosed in a proxy statement, information statement or annual report. Accordingly, an employee of a Third Party who receives no additional compensation from the Third Party for joining, or being a candidate to join, a company’s board need not report his or her income from that Third Party, if the nominee's or director’s relationship is disclosed in the proxy statement. If a person’s pre-existing compensatory agreements or arrangements with a Third Party are materially increased in connection with such candidacy or board service, only the difference between the pre-existing and new compensation need be reported.

A company is not in violation of the Nasdaq rules for failure to report agreements and arrangements covered by the new rule if it has undertaken reasonable efforts to identify such agreements and arrangements (including asking the director or nominee in a timely manner). If it has done so and subsequently discovers a previously unreported agreement or relationship, the company must promptly make the required disclosure by way of a Form 8-K or 6-K or by issuing a press release.

The new rule becomes effective on August 1, 2016 and applies to a company at the time of its first proxy statement or information statement filed on or after that date. Companies will want to update their Director and Officer Questionnaires prior to their next annual meeting to include appropriate questions about Third Party relationships.

The new rule and the related interpretive guidance, IM-5250-2, may be reached at Nasdaq Listing Rule 5250(b)(3) and IM-5250-2.