The Advisors' Blog

– Broc Romanek, CompensationStandards.com

With the August 1st effective date looming, you should be learning about Nasdaq’s new “golden leash” disclosure requirement. We have posted memos about it in our “Director Compensation Disclosures” Practice Area (and I have updated our “Treatise Chapter” on disclosure compensation too).

Here’s a query that was recently posted in our “Q&A Forum” (#1144):

Newly adopted Nasdaq Rule 5250(b)(3), which requires listed companies to disclose the material terms of agreements and arrangements between their directors/nominees and third parties providing for compensation of the director/nominee in connection with that person’s board candidacy or service, contains an exception for agreements and arrangements that existed prior to the nominee’s candidacy (including as an employee of the third party) and where the nominee’s relationship with the third party is otherwise publicly disclosed in the proxy statement or annual report. The Nasdaq rule proposal then provides an example that would fit within this exception: “a director or a nominee for director being employed by a private equity fund where employees are expected to and routinely serve on the boards of the fund’s portfolio companies and their remuneration is not materially affected by such service.”

The text of the rule seems inconsistent with the example provided. Consider the following hypothetical: An employment agreement between a private equity fund and an employee of the fund provides for substantial additional consideration to be paid by the fund to the employee based on the number of portfolio company boards on which the employee serves. The agreement also provides for significant bonus payments by the fund to the employee based on the fund’s IRR in each portfolio company where the employee serves as a director. More than one year after commencing employment with the private equity fund and entering into the employment agreement, the employee is appointed to the board of Portfolio Company A, a public company controlled by the private equity fund. Portfolio Company A discloses in its proxy statement that this director is an employee of the private equity fund. This fact pattern seems to fit within the above exception to disclosing the terms of the compensation arrangement between the fund and the director. However, the individual’s compensation by the fund clearly could be materially affected by his/her service on the board of Portfolio Company A and therefore does not satisfy the condition laid out in the example. Any thoughts here?

Here was my answer (after I received some input from the Nasdaq Staff):

Based on the facts as presented in the hypothetical example, including that the director’s relationship with the third party has been disclosed, the Nasdaq Staff believes that the rule would not require disclosure because the compensation arrangement contemplates the director sitting on boards of portfolio companies in general but not on this particular board and, therefore, the material increase in remuneration (bonus in the hypo) is not “specifically in connection with” this director’s candidacy (see IM-5250-2).

Their answer might change, however, if the employment agreement at issue is amended or a new agreement or arrangement is entered into that contemplates the fund employee’s appointment to a specific portfolio company board.

If you call the Nasdaq Staff for input on a question that you have, please share with us in the “Q&A Forum” so that we can avoid duplicating the wheel…