On February 19, 2015, Institutional Shareholder Services (“ISS”) issued FAQs (available here) clarifying its policy on proxy access proposals as well as other key issues, including omission of shareholder proposals from company proxy materials in the absence of no-action relief from the Securities and Exchange Commission (“SEC”) staff, exclusive forum bylaws, and other bylaw amendments adopted without shareholder approval.
1. Proxy Access. Under the approach announced in the FAQs, ISS generally will support both shareholder and company proposals that provide for proxy access with the following features:
ISS will review any other restrictions on proxy access for reasonableness, and generally will oppose proposals with more restrictive features than those described above. If a company decides to submit two proxy access proposals for a shareholder vote—its own proposal and a shareholder proposal—ISS will review each proposal under its new policy.
- a maximum ownership threshold of no more than 3%
- a maximum ownership period of no more than three years for each member of the group of nominating shareholders;
- “minimal or no” limits on the number of shareholders that can form a nominating group; and
- a general cap on nominees at 25% of the board.
This approach provides more specific guidance than the policy ISS applied in prior years, which took a case-by-case approach that involved consideration of factors including ownership thresholds and duration, as well as company-specific considerations.
2. Exclusion of Shareholder Proposals from Company Proxy Materials. The FAQs include guidance on steps that ISS will take where a company omits a shareholder proposal from its proxy statement “without obtaining regulatory or judicial relief.” This guidance responds to recent developments involving a proxy access shareholder proposal at Whole Foods Market, Inc. and the SEC staff’s subsequent announcement that, for the 2015 proxy season, it will not issue no-action letters addressing the availability of Rule 14a-8(i)(9) to omit a shareholder proposal that “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” The SEC staff will be reviewing Rule 14a-8(i)(9) in the coming months at the request of SEC Chair Mary Jo White.
According to the FAQs, if a company omits a shareholder proposal from its proxy materials without obtaining a no-action letter or court ruling confirming that SEC rules allow exclusion, ISS will evaluate the situation under its voting policy on “governance failures.” ISS applies this policy in extraordinary circumstances to oppose the election of one or more directors if there have been “material failures of governance, stewardship, risk oversight or fiduciary responsibilities” at a company. The FAQs go on to state that ISS generally will recommend votes “against” or withhold votes from individual directors, certain committee members, or the entire board (depending on the circumstances) if a company omits a properly submitted shareholder proposal without:
- voluntary withdrawal of the proposal by the proponent;
- no-action relief from the SEC; or
- a ruling from a U.S. district court that excluding the proposal is permissible.
ISS will issue negative voting recommendations against directors whether or not a company includes its own proposal on the same topic in the proxy statement. As noted above, if a company includes both its own proposal and a shareholder proposal on a similar topic in its proxy materials, ISS will evaluate both proposals under its voting policies applicable to the proposal. Where a company has taken steps to implement a proposal, ISS will consider the degree to which the company has implemented the proposal and “any material restrictions” that the company has added.
3. Board-Approved Bylaw and Charter Amendments. As part of its voting policy updates for 2015, ISS added a new, stand-alone policy on unilateral (adopted by the board without stockholder approval) amendments to a company’s bylaws (or charter) that “materially diminish” shareholder rights. As noted in the FAQs, ISS previously assessed these amendments under its policy on “governance failures” (discussed above), but added a separate policy for 2015 due to what it sees as an increase in the adoption of charter and bylaw provisions that adversely impact shareholders. Under the stand-alone policy that applies beginning in 2015, ISS generally will recommend that shareholders vote “against” or withhold votes from individual directors, committee members or the entire board if the board has amended the company’s bylaws or charter without shareholder approval “in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders,” taking into account a series of factors.
The FAQs provide guidance on the types of amendments that fall under this policy, classifying them in two categories: those that are “materially adverse” to shareholders, and those that “generally are not . . . materially adverse” but that ISS will consider on a case by case basis. Significantly, the FAQs classify exclusive forum provision as not materially adverse, as long as the forum is the company’s state of incorporation. This is consistent with our existing understanding that ISS is not likely to oppose the election of individual directors solely because the board has adopted an exclusive forum provision without seeking shareholder approval. Other amendments that ISS has classified as not materially adverse are advance notice bylaws “with customary and reasonable deadlines” and director qualification bylaws that require disclosure of third party compensation arrangements.
Amendments that ISS classifies as “materially adverse” and that could lead to “against” or “withhold” recommendations for directors if implemented by a company’s board without shareholder approval include (but are not limited to) the following:
- amendments removing or restricting shareholders’ rights to call a special meeting (provisions raising ownership thresholds or restricting agenda items are cited as examples);
- amendments removing or materially restricting shareholders’ right to act by written consent;
- fee-shifting bylaws that requiring suing shareholders to bear all costs of legal proceedings that are not 100% successful;
- amendments increasing voting requirements for shareholders to amend the charter or bylaws;
- amendments implementing director qualification bylaws that disqualify directors who receive third-party compensation;
- amendments removing a majority voting standard in director elections and substituting plurality voting, or classifying the board of directors; and
- amendments authorizing capital increases that do not meet ISS’s capital structure framework.
With respect to fee-shifting bylaws, the FAQs also note that ISS will oppose company proposals seeking shareholder approval of fee-shifting bylaws if the proposed bylaw amendments mandate fee-shifting in cases where plaintiffs were only partially successful.