Securities Law Blog

Institutional Shareholder Services Releases Updated Voting Guidelines Relating to Problematic Capital Structures at Newly Public Companies, Independent Board Chair Proposals and Board Diversity

Institutional Shareholder Services (“ISS”), the leading proxy voting advisory firm, recently released its 2020 proxy voting guidelines updates for the U.S. and other jurisdictions (effective for meetings on or after February 1, 2020) following its annual global benchmark policy survey and comment period that ran from July 22, 2019 to October 18, 2019. ISS addressed various topics in its updated guidelines, which included three guideline revisions that are relevant to shareholder activism in the U.S. and are the focus of this client alert.

U.S. Guideline Relating to Problematic Governance Structures at Newly Public Companies (See Redlined Guideline in Annex A - click here)

ISS’ existing guideline in this area provided that for newly public companies, ISS would generally recommend a vote against or withhold from one or more directors (except new nominees, who would be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company adopted charter or bylaw provisions that are materially adverse to shareholder rights or implemented a multi-class capital structure with classes having disparate voting rights. In making its determination, ISS would consider various factors enumerated in the guideline, including the level of impairment of the shareholder rights, the ability of shareholders to reverse the impairment of such rights (e.g., by way of a charter or bylaw amendment), the ability of shareholders to hold directors accountable through annual director elections and any sunset provisions applicable to the offending governance structure.

Recognizing the growing prevalence of newly public companies with multi-class capital structures with disparate voting rights and that a significant proportion of such companies provided for a sunset of these “discriminatory provisions” in their governing documents (most with time-based sunsets ranging from three to 10 years), ISS sought to “provide clarity” on the application of its policies for newly public companies by reformulating the existing guideline into two separate policies. The first policy specifically addresses problematic governance provisions. The second policy specifically addresses multi-class capital structures with disparate voting rights and provides a framework for assessing whether a sunset provision is reasonable and acceptable (no sunset period in excess of seven years from the IPO date will be considered reasonable). The revised guideline also “clarifies and narrows the focus” of the policy to specified “highly problematic” governance provisions.

U.S. Guideline Relating to Shareholder Proposals Requiring Independent Board Chairs (See Redlined Guideline in Annex B - click here)

ISS’ existing guideline in this area provided that ISS will generally recommend a vote in favor of shareholder proposals requiring that the board chair position be filled by an independent director after taking into consideration various enumerated factors, including the scope of the proposal, the company’s current board leadership and governance structures, the company’s performance and other relevant factors. The guideline also provided an overview of how ISS would analyze and apply the foregoing factors.

Recognizing that shareholder proposals requiring independent board chairs are “one of the most prevalent types of shareholder proposals” in the U.S., the guideline was updated to codify ISS’ existing policy application with respect to these proposals. As revised, the guideline now explicitly sets forth various factors that will increase the likelihood of ISS recommending in favor of proposals requiring an independent board chair. Consistent with input from investors, support for such a proposal “will be likely at companies where boards rely on a weak lead independent director role or there is evidence that directors failed to oversee material risks facing the company or did not adequately respond to shareholders’ concerns.” Components of the overview in the existing guideline of how ISS will analyze the scope of the proposal, the company’s current board leadership and governance structures, the company’s performance and other relevant factors will be updated and moved to the relevant Policy FAQ separately published by ISS.

U.S. Guideline Relating to Board Diversity in Uncontested Elections (See Redlined Guideline in Annex C - click here)

Given the heightened relevance of board gender diversity to shareholder activism, last year ISS issued a guideline stating that during a one-year transition period, it would highlight boards with no gender diversity, but no adverse vote recommendation would be made due to a lack of gender diversity until after the conclusion of the 2019 proxy season. Effective for uncontested meetings held on or after February 1, 2020, the guideline provided that ISS would generally recommend a vote against or withhold from the nominating committee chair (or other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies where there are no women on the board, subject to certain mitigating factors. These mitigating factors included a firm commitment by the company to appoint at least one female to the board in the near term or the presence of a female on the board at the preceding annual meeting.

The board diversity guideline was updated to reflect the expiration of the one-year transition period and to refer consistently to “women” rather than “females.” In addition, the guideline was revised to provide that a firm commitment by the company to appoint at least one woman to the board would only be a mitigating factor until February 1, 2021 and that such commitment must be to appoint a woman to the board within a year (as opposed to in the near term). Finally, the presence of a woman on the board at the prior annual meeting will no longer be a mitigating factor on its own – the company will also need to make a firm commitment to appoint at least one woman to the board within a year.

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Please contact the Olshan attorney with whom you regularly work or one of the attorneys listed below if you would like to discuss further or have questions.