Institutional Shareholder Services Initiates Comment Period on Several Potential New Voting Guidelines
On October 27th, ISS initiated its comment period on a handful of new voting guidelines they are contemplating for final publication. New ISS guidelines will be released the week of November 14th and will be in effect for shareholder meetings after February 1, 2017. Market participants will have until 6:00 PM EDT on Thursday, November 10th to provide comments.
The initiation of the comment period follows the release of their 2017 policy survey results, which we wrote about earlier this month. The lack of a comment period on some of the issues raised in their policy survey does not mean ISS has abandoned those topics. Indeed, it’s likely that some of these topics will appear in ISS’ updated guidelines. For this comment period, ISS is focusing on 15 “discrete” voting policies in various geographic markets. However, there are only 4 topics specific to the U.S. market and two of those four are specific to cross-market companies. In Canada, ISS focused solely on Director Compensation and in Europe ISS codified its new pay for performance methodology at European companies bringing the test more in line with their U.S. methodology.
The U.S. focused topics are noted in the section below.
Ability of Shareholders to Amend Corporate Bylaws
ISS has issued a preliminary guideline and is seeking comment on an issue that would impact corporations that prohibit shareholders from amending the bylaws or impose restrictions on that ability in excess of Rule 14a-8. The new guideline would result in against recommendations on at least members of the governance committee, in perpetuity, unless the provision is amended. The guideline would predominantly impact several companies incorporated in Maryland but would also effect a smaller number of companies incorporated in states that similarly allow for such restrictions. Delaware does not allow for the prohibition on a shareholder’s ability to amend bylaws.
Companies seeking to amend their governing documents to allow shareholders to amend bylaws should be cautioned that ISS is likely not consider a super-majority threshold for binding shareholder amendments to be responsive to their policy.
Unilateral Board Actions & Multi Class Capital Structure at IPO
ISS is potentially amending their policy on unilateral board adoptions of bylaws or charter provisions made prior to or in connection an initial public offering that negatively impact shareholder rights. As was suggested in the policy survey results, ISS will now regard multi-class capital structures with unequal voting rights as a unilateral board action that diminishes shareholder rights and results in negative recommendations on the board. ISS notes that as of August 30th, there were 17 companies that completed their IPO with multi-class unequal voting rights.
Moreover, whereas current ISS policy states that putting adverse provisions (e.g. classified board, supermajority voting provisions) to a shareholder vote is an evaluation factor in determining the appropriate director recommendations, the proposed policy call for the adverse governance provisions to sunset after a period of time. This change is probably, in part, a recognition that companies with multi-class capital structures and unequal voting rights, as well as many newly public companies with large insider holdings, were getting credit for putting the provisions to a shareholder vote but then defeating them with their high insider ownership.
ISS requests for comment:
- What factors do you consider as an appropriate sunset provision? Should a sunset provision always be based on duration, or is another factor such as ownership makeup considered appropriate?
- What length of time do you consider appropriate for a sunset provision?
- Should the terms of a sunset provision differ based on the feature being sunset (e.g., classified board vs. supermajority vote requirements vs. multi-class capital structure)? If so, how?
General Share Issuance Mandates for Cross-Border Companies
Since corporate laws in some countries require shareholder approval for any share issuances, rather than call a special meeting, most companies seek annual approval for a specified number of shares. ISS doesn’t currently have a U.S. policy that governs U.S. listed companies domiciled elsewhere. As such, ISS is proposing a new policy that would allow a company to issue up to 20% of the of their current issued capital, which is what the NYSE/NASDAQ allow listed companies to issue without shareholder approval.
ISS has requested comment on whether 20% is an appropriate level and, if not, what level should be considered appropriate. ISS also posed whether an annual approval is appropriate or would biennial or triennial approval period more appropriate. And finally, should this policy apply to Foreign Private Issuers?
Executive Pay Assessments (Cross-market Companies)
Cross-market companies that are listed in the U.S but incorporated elsewhere often have multiple proposals related to their compensation plans. Since ISS takes different approaches depending on the country of incorporation, the possibility of inconsistent recommendation on the same compensation program existed. As was expected, ISS is proposing to align their voting recommendations to the policy perspective of the jurisdiction where the company is listed. As such, for U.S. listed companies abroad, compensation proposals will be reviewed from the U.S. policy perspective.