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By: David A. Bell, Ran Ben-Tzur, James D. Evans, Robert A. Freedman and Amanda L. Rose, Fenwick & West LLP
This article discusses the updates issued by Institutional Shareholder Services (ISS) and Glass Lewis to their voting policies for the upcoming 2020 proxy season. Recently, ISS and Glass Lewis released revisions to their respective proxy voting guidelines for 2020. The ISS and Glass Lewis updates applicable to U.S. companies are discussed separately below.
Problematic Governance/Capital Structure
Under its prior guidelines, for newly public companies, ISS generally recommended a vote against directors if prior to the initial public offering (IPO) the company adopted charter or bylaw provisions that (1) were materially adverse to shareholder rights or (2) implemented a multi-class voting structure in which the classes had unequal voting rights. The prior guidelines listed several factors relating to these provisions (e.g., the level of impairment, the disclosed rationale, the ability of shareholders to change these provisions or to change directors annually, and sunset provisions) that ISS would consider in the specific case.
The new guidelines provide separate provisions for ISS recommendations for problematic governance provisions and for multi-class structures. ISS will generally recommend a vote against pre-IPO directors of newly public companies if prior to the IPO the company adopted bylaw or charter provisions that are materially adverse to shareholder rights, considering the following factors:
A reasonable sunset provision will be considered a mitigating factor. This section of the guidelines does not comment upon what is a reasonable sunset period. If an adverse provision was included in the IPO charter or bylaws and has not been reversed or removed, ISS will make case-by-case recommendations on nominees in subsequent years.
With regard to multi-class capital structures, which have been popular with recent IPO technology companies, ISS will generally recommend a vote against pre-IPO directors if prior to the IPO the company adopted a multi-class structure featuring unequal voting rights without subjecting this provision to a reasonable time-based sunset provision. No sunset provision of more than seven years will be considered reasonable. In assessing the reasonableness of the time-based sunset provision, ISS will consider the company’s lifespan, its post-IPO ownership structure, and the rationale provided for the length of the sunset provision. If a pre-IPO multi-class structure has not been removed, ISS will continue to recommend a vote against incumbent directors in subsequent years. ISS stated in the proposing release for this change that it is likely to have a minimal impact. ISS notes that if companies go public with multi-class structures with reasonable sunsets, but still have classified boards and supermajority requirements to amend charters and bylaws, an adverse recommendation will still be issued. This would also be the case under the prior policy.
Shareholder Proposal for Independent Board Chair
Under its prior guidelines, ISS generally recommended a vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following factors:
The prior guidelines also included an overview of how ISS would evaluate each of these factors.
The new guidelines add the rationale for the proposal as part of the first factor that ISS will take into consideration. The new guidelines dispense with the explanation of how ISS will evaluate the listed factors, but add the following as factors that will increase the likelihood of its support for the shareholder proposal:
ISS stated that the new guideline largely codifies its existing application of the prior policy.
Share Repurchase Shareholder Proposals
Under its prior guidelines, ISS would generally recommend a vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. The new guidelines include within the scope of proposals that ISS will support those that grant the board authority to conduct open market repurchases. In each case, ISS support will be contingent on the absence of company-specific concerns regarding greenmail, use of buybacks to inappropriately manipulate incentive compensation metrics, threats to the company’s long-term viability, or other company-specific factors.
In proposing the new guideline, ISS noted that most U.S. companies can and do implement buyback programs through board resolutions without shareholder votes. As such, and in light of the minimal change to the verbiage of the existing guidelines, this change seems likely to have a very limited impact. ISS noted that while some critics assert that buybacks may come at the expense of research and development, capital expenditures, or worker pay, shareholders generally support the use of buybacks as a way to return cash to shareholders.
Restrictions on Shareholders’ Rights
The prior guidelines indicated that ISS would generally recommend a vote against members of the governance committee if the company’s charter or bylaws imposed undue restrictions on shareholder ability to amend the bylaws. Such restrictions included share ownership and time-holding requirements in excess of those included in proxy Rule 14a-8. The new guidelines now add restrictions on the subject matter of shareholder proposals in excess of those contained in Rule 14a-8 as an under restriction. In addition, ISS has added a provision to the effect that prior shareholder approval of a management proposal to insert requirements more stringent than those contained in Rule 14a-8 will not be regarded as a mitigating factor unless a proposal for an unfettered right (i.e., not containing restrictions beyond those in Rule 14a-8) to submit proposals has been submitted to and rejected by shareholders.
Equity Compensation Plans
ISS has previously provided that it would generally recommend a vote against shareholder approval of equity plans that contain egregious factors. So-called evergreen (i.e., automatic share replenishment) terms have been added to the list of egregious factors.
The prior guidelines contained timing provisions for negative recommendations for boards of Russell 3000 or S&P 1500 companies lacking gender diversity, noting that they would first be applied for meetings after Feb. 1, 2020. Mitigating factors included both a commitment to add a female director in the near term and the presence of a female director at the time of the preceding meeting. The new guidelines eliminate the now irrelevant phase-in timing and require for both mitigating factors a commitment to appoint a woman director within a year. In this guideline, the references to female directors were changed to woman directors.
Diversity – Gender Pay
The prior guidelines indicated that ISS would recommend on a case-by-case basis on shareholder proposals for reports on pay data by gender, and in evaluating such reports would consider whether the company has been involved in controversy, litigation, or regulatory action related to gender pay gap. Each of these references to gender pay has now been expanded to include race and ethnicity in pay gap matters.
Under the prior guidelines, ISS would recommend votes against some or all incumbent directors due to specified accountability shortcomings. However, it provided an exception for new nominees and noted that they would be evaluated on a case-by-case basis. The definition of new nominees (essentially directors who have not been previously elected by shareholders) has been revised to provide greater flexibility to ISS in the case of directors on staggered boards, who of course may have served for more than one year prior to their upcoming election.
ISS will also generally recommend a vote against directors who attended fewer than 75% of board and relevant committee meetings. The prior guidelines excepted from this provision incumbent nominees who had not previously been elected by shareholders. These nominees would be evaluated on a case-by-case basis. Once again reflecting concern over directors up for election for the first time who were appointed to the board more than one year prior to the upcoming election, the 2020 guidelines simply except nominees who served for only part of the preceding year.
Glass Lewis Updates
By way of background, on Sept. 6, 2019, the U.S. Securities and Exchange Commission (SEC) announced two significant revisions to its practices relating to its no-action guidance for the exclusion of a shareholder proposal from company proxy statements. In the past, the staff of the SEC would either agree or disagree, in writing, with the company on the excludability of the proposal. Under its revised approach, the SEC may either agree with the company, disagree, or decline to state a view. In addition, the staff of the SEC may now respond orally to no-action requests related to the exclusion of shareholder proposals.
Glass Lewis is now likely to recommend against all members of the governance committee if the company excludes a shareholder proposal on which the SEC has declined to take a position regarding excludability. Further, Glass Lewis will generally recommend a vote against all members of the governance committee if the SEC has orally advised the company of its concurrence with the company’s position if the company does not provide some disclosure concerning this no-action relief. We note that in the past where a company has excluded a shareholder proposal due to the SEC’s written no-action letter concurring with the company’s position, no disclosure of the receipt and omission of the proposal would typically have been provided.
Under its new guidelines, Glass Lewis will recommend a vote against the governance committee chair (1) if directors' records for board and committee meeting attendance are not disclosed or (2) when it is indicated that a director attended fewer than 75% of board and relevant committee meetings, but the disclosure is sufficiently vague that it is not possible to determine which director has failed to attend. SEC rules require the disclosure of any director who has failed to attend at least 75% of the board and any relevant committee meetings held in the past year.
Glass Lewis has previously indicated in its guidelines that it would consider recommending a vote against the chair of the governance committee if the board adopted a forum-selection clause without shareholder approval or is seeking shareholder approval of a forum-selection clause as part of a bundled bylaw amendment rather than as a separate proposal. The new guidelines include a footnote that explains Glass Lewis may make an exception to its policy where it can be determined that a forum-selection clause is narrowly crafted to suit the particular circumstances of the company, and a reasonable sunset is included.
The new guidelines provide that Glass Lewis will generally recommend a vote against all members of the compensation committee if the board adopts a frequency for the say-on-pay advisory vote that is different from the frequency approved by a plurality of the shareholders. Public companies are required to submit to shareholders every six years the question of how frequently to hold the say-on-pay advisory vote.
The new guidelines address a number of matters that may impact Glass Lewis’ recommendation regarding a company’s say-on-pay proposal. These are:
Glass Lewis will consider recommending a vote against the chair of the audit committee when fees paid to a company’s independent auditor are not disclosed. If the chair is not up for election because the company has a staggered board, Glass Lewis will not recommend voting against other members of the audit committee who are up for election, but will note its concern regarding the audit committee chair. SEC regulations require the publication in the annual meeting proxy statement of the fees paid to the company’s independent auditor for the two most recent fiscal years.
Shareholder Proposals Regarding Supermajority Voting and Equal Pay
Glass Lewis has codified its approach to shareholder proposals requesting that companies eliminate any supermajority vote standard. In instances where such proposals are submitted to controlled companies, Glass Lewis will generally recommend a vote against, as the supermajority vote requirements may serve to protect minority holders.
With regard to shareholder proposals requesting that companies provide more disclosure on equal pay, Glass Lewis has clarified that it will review on a case-by-case basis proposals that request disclosure of median gender pay ratios (as opposed to proposals asking that such information be adjusted based on factors such as job title, tenure and geography). In cases where companies have provided sufficient information concerning their diversity initiatives as well as information concerning how they are ensuring that women and men are paid equally for equal work, Glass Lewis will recommend against such proposals.
David A. Bell is a partner at Fenwick & West LLP. David concentrates his practice on startup company advising, venture capital financings, mergers and acquisitions, initial public offerings, and intellectual property licensing, as well as counseling public companies in corporate, securities, governance, and compliance matters. He served as interim chief compliance officer of InVision Technologies, Inc. during its Foreign Corrupt Practices Act investigation and initial integration into General Electric. David is a Fellow of the American College of Governance Counsel.
Ran Ben-Tzur is a partner at Fenwick & West LLP. Ran provides strategic counseling on a wide range of corporate matters to high-growth private and public technology companies, primarily in the software, social networking, internet and mobility sectors. He has extensive experience in capital markets transactions and has represented numerous issuers and underwriters on initial public offerings and other equity and debt offerings, as well as SEC compliance and corporate governance. Ran’s issuer-side initial public offerings include Facebook, Fitbit, Upwork, Zuora, and Peloton Interactive. His underwriter-side initial public offerings include Jive, Rocket Fuel, Veeva Systems, New Relic, Impinj, Nutanix, and Cloudflare. He also counsels emerging companies on day-to-day corporate matters and advises them on strategic financing transactions.
James D. Evans is the co-chair of the Capital Markets & Public Companies group at Fenwick & West LLP. He focuses his practice on corporate and securities law, representing technology and life sciences companies of international prominence in a wide range of corporate matters. He has extensive experience in capital markets transactions and has represented issuers, underwriters and other parties in a variety of public and private offerings of both equity and debt securities, including some of the most high-profile technology public offerings in history. Jamie has led or co-led offerings that have raised over $40 billion of aggregate proceeds. In addition, Jamie regularly advises on mergers and acquisitions and related securities law issues and provides ongoing advice to both public and private companies on general corporate compliance, SEC reporting, and governance issues.
Robert A. Freedman is co-chair of the Capital Markets & Public Companies practice at Fenwick & West LLP. Leveraging more than 25 years of experience, Rob provides a wide range of corporate and securities legal services to innovative late-stage and public companies in the technology and life sciences industries. He represents issuers and underwriters in public offerings and private placements of equity and debt securities. Rob also advises boards and management as an outside general counsel on day-to-day corporate and securities matters, including corporate governance, public company reporting, and stock exchange rules and requirements.
Amanda L. Rose is a partner at Fenwick & West LLP. She advises life sciences and technology companies with respect to corporate finance, SEC reporting and governance matters. Amanda has represented issuers and underwriters in a wide variety of public and private financing transactions, including initial public offerings, follow-on and secondary offerings, at-the-market offerings, PIPEs, and preferred stock and debt financings. She also advises late-stage private companies with respect to general corporate governance and liquidity preparation and public companies on corporate and securities law compliance and disclosure matters, including corporate governance best practices, Exchange Act reporting obligations, and stock exchange requirements.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Capital Markets & Corporate Governance > Trends & Insights > First Analysis > Articles
For an overview of proxy statements and annual meetings, see
> PROXY STATEMENT AND ANNUAL MEETING RESOURCE KIT
RESEARCH PATH: Capital Markets & Corporate Governance > Proxy Statement and Annual Meeting > Resource Kits > Practice Notes
For guidance on locating practice notes, forms, and checklists that provide in detail the requirements for an audit committee, see
> AUDIT COMMITTEE RESOURCE KIT
RESEARCH PATH: Capital Markets & Corporate Governance > Corporate Governance and Compliance Requirements for Public Companies > Corporate Governance > Practice Notes
For more information on the roles and responsibilities of a compensation committee of a board of directors, see
> COMPENSATION COMMITTEE RESOURCE KIT
For a discussion of the interpretative release and new guidance relating to the proxy voting process that has been issued by the Securities and Exchange Commission, see
> SEC’S HIGHLY ANTICIPATED GUIDANCE ON PROXY ADVISORY FIRMS: FIRST ANALYSIS