Nasdaq Proposes New Independence Rule for Directors Receiving Third Party Payments for Board Service

On February 18, 2016, Nasdaq published a proposed rule to require listed companies to publicly disclose the amount and material terms of third party payments to director nominees and sitting directors in connection with their board service. Payments for board service – sometimes referred to as “golden leashes” – arise when a shareholder agrees to pay nominee directors in connection with the nominees’ service as a director. These arrangements vary but may include compensating directors based on achieving benchmarks such as an increase in share price over a fixed term.

Nasdaq is concerned that third party payment arrangements have the potential to impair a director’s independence. Accordingly, Nasdaq is considering whether it should adopt listing rules to prohibit directors that receive third party payments from either (i) being considered independent directors under Nasdaq rules or (ii) from serving on the Board at all. The latter consideration is noteworthy as an activist investor compensating a director nominee to serve as a candidate without a compensatory arrangement if elected to the Board is a widely accepted practice. Activist investors seek to nominate qualified individuals to serve as directors, and compensating nominees for their participation in a contest has become part of the process. Stockholders’ ability to nominate alternate board candidates would be significantly undercut if a ban on compensating director nominees were enacted.

In light of the potential impact a new independence rule may have on public company boards, Nasdaq is conducting a survey among market participants as to the appropriateness of this proposed rule. The survey is available on Nasdaq’s Governance Clearinghouse webpage here.  The deadline to respond is Monday, March 18, 2016. The Nasdaq rule would be subject to SEC review and approval.

Nasdaq’s listing rules currently require that the majority of the members of the board of directors of a listed company must be independent and that each member of a listed company’s audit, compensation and nominations and corporate governance committee must be independent, subject to certain exceptions. If Nasdaq determines, after the results of the survey and with the SEC’s approval, to adopt listing rules prohibiting directors who receive third-party payments from being considered independent, it would essentially limit the number of directors on the board who can receive third party payments and prohibit directors who receive these payments from serving on audit, compensation and nominations and corporate governance committees.

We will provide updates on this important Nasdaq proposal.

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