SEC Approves Nasdaq Rule Requiring Disclosure of Third-Party Compensation to Director Candidates: Reflects Continued Focus on Activist Payments to Directors and Nominees; Nasdaq Notes Potential for Conflicts of Interest, Fiduciary Duty Concerns and Promotion of Short-Term Focus

Sullivan & Cromwell LLP - July 11, 2016

The U.S. Securities and Exchange Commission has approved a Nasdaq Stock Market Rule requiring all Nasdaq-listed U.S. companies to disclose annually, either on their website or in their annual proxy statement, any agreements or 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 or timely information” about these types of arrangements and that these arrangements could lead to conflicts of interest among directors, call into question their ability to satisfy their fiduciary duties and promote a focus on short-term results at the expense of long-term value creation. The concerns underlying this Rule change are similar to those that have caused a 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.

The new Rule will become effective 30 days after the date of SEC approval, which was July 1, 2016. No immediate disclosure is required as of the effective date – the disclosure will be required no later than the date of the proxy statement or information statement for the next shareholders’ meeting after the effective date at which directors are elected (or, if the listed company does not file proxy or information statements, no later than the company’s next Form 10-K or Form 20-F filing).  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 new Rule. If they are not, companies should take appropriate steps to confirm whether any disclosure will be needed.