Nasdaq Proposal Would Increase Focus on Activist Payments to Director Candidates: Would Require Proxy or Website Disclosure of Third-Party Compensation to Directors or Nominees; Nasdaq Notes Potential for Conflicts of Interest, Short Term-ism and Fiduciary Duty Concerns

Sullivan & Cromwell LLP - March 21, 2016

The Nasdaq Stock Market has proposed to require all Nasdaq-listed U.S. companies to disclose, either on their website or in their annual proxy statement, any agreements and arrangements between any third party and a director or nominee providing for compensation or other payments in connection with the person’s candidacy or service as a director. Nasdaq notes its concerns that investors “may not have complete information” about these types of arrangements, which Nasdaq believes could lead to conflicts of interest among directors, call into question their ability to satisfy their fiduciary duties or promote a focus on short-term results at the expense of long-term value creation. The concerns underlying this proposal are similar to those that have caused a significant number of public companies to address the issue of third-party director or nominee compensation in their bylaws, by either requiring disclosure to the company of such arrangements or prohibiting them.

Nasdaq also states that it is separately surveying interested parties as to whether it should propose additional requirements surrounding directors and candidates that receive third-party payments, including whether such directors should be prohibited from being considered independent under Nasdaq rules or prohibited from serving on the board altogether.

The proposal was submitted by Nasdaq to the SEC on March 15, 2016 but has not yet been published by the SEC for public comment. If the SEC publishes the proposal, the comment period will run until the 21st day after publication of the proposal in the Federal Register. If approved, the rule would take effect on June 30, 2016. Companies should examine their most recent director questionnaires to confirm that they are worded broadly enough to elicit the information required to be disclosed by the rule. If they are not, companies should take appropriate steps in advance of the proposed June 30 effective date to confirm whether any disclosure would be needed.