'Golden leashes': the disclosure cure-all?

• Author: Pinedo, Anna T.
• Position: DIRECTOR COMPENSATION

The SEC approved a new rule proposed by the Nasdaq Stock Market LLC that became effective on August 1, 2016. The rule requires Nasdaq-listed companies to disclose compensation or other payments made by third parties to nominees for director or board members.

These "golden leash" payments usually are made by activists to their nominees in proxy fights. The structure of the arrangements vary: some compensate nominees or dissident directors for travel and related expenses, while others provide bonuses to dissident directors that reward them for achieving performance targets (i.e., an increase in share price over a specified period or a "profit share" to the extent of the activists' return on investment in the company).

Golden leash payments may divide, or entrench divisions within, a board of directors, impede dissident directors from discharging their fiduciary duties as the dissident directors may be beholden to their sponsors and may not be able to act independently, and cause such directors to focus on short-term objectives at the expense of the company's long-term interests. Companies may consider measures to discourage or prohibit third-party payments (other than the usual expense reimbursements)to directors; however, by-law provisions may be of limited value and also may present their own governance concerns.

Although SEC disclosure rules already require disclosure of payments to directors, the Nasdaq rule is intended to promote additional transparency. Rule 5250(b)(3) requires disclosure of the material terms of all arrangements between a director or nominee and any person or entity other than the company (a "Third Party") relating to compensation or other non-cash payments in connection with a nominee's candidacy for director or an individual's service as a director.

In order to avoid duplication, the listed company need not disclose expense reimbursements in connection with candidacy as a...