ISS Proposes Voting Policy Updates for 2017 Proxy Season

Institutional Shareholder Services Inc. (“ISS”) has released its proposed voting policies for the 2017 proxy season for US and non-US companies listed in the US. The proposed US policies relate to: (1) unilateral board actions at companies with multi-class capital structures at their initial public offerings (“IPO”s), (2) restrictions on binding shareholder proposals, (3) general share issuance mandates for US-listed, foreign incorporated companies (“cross-market companies”), and (4) executive pay assessments for cross-market companies. The full texts of the proposed policies are available here. Comments to the proposed policies are due by 6 p.m. ET on November 10. The final 2017 policies are expected to be released in the week of November 14 and would be effective for shareholder meetings held on or after February 1, 2017.

Unilateral Board Actions—Multi-Class Capital Structure at IPO

In 2015, ISS amended its policies to establish a separate methodology for evaluating unilateral board actions to adopt bylaw or charter amendments prior to or in connection with a company’s IPO from methodology for evaluating unilateral board actions after completion of an IPO. Currently, however, ISS policy does not explicitly address director accountability with respect to a company’s capital structure in place at the time of an IPO. Recognizing that the number of companies completing IPOs with multi-class structures is increasing, ISS proposes to amend its policy for IPO-companies for the 2017 proxy season.

Under the updated policies, ISS would issue negative recommendations for director nominees at companies that have completed an IPO with a multi-class capital structure in which the classes have unequal voting rights, unless there is a “reasonable” sunset provision on the multi-class capital structure. Contrary to current policy, ISS would no longer consider a company’s commitment to put the provision to a shareholder vote when issuing vote recommendations.

ISS requests comments on the following issues:

• What factors are appropriate for a sunset provision (e.g., duration, ownership makeup, etc.)?
• What duration is 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 requirement vs. multi-class capital structure)?

Restrictions on Binding Shareholder Proposals

While shareholders’ ability to amend the bylaws is considered a fundamental right, some state laws allow companies to restrict this right in their charters. In addressing this problem, ISS proposes a vote against or withold from members of the governance committee if the company’s charter or articles of incorporation imposes “undue restrictions” on shareholders’ ability to amend the bylaws. Undue restrictions include, among others, (1) an outright prohibition on the submission of binding shareholder proposals and (2) share ownership requirements or holding period requirements in excess of Securities and Exchange Commission (“SEC”) Rule 14a-8 requirements. ISS would issue the negative recommendation on an ongoing basis.

ISS requests comments on the following issues:

• Is the negative recommendation against the members of the governance committee on an ongoing basis sufficient?
• How should boards address this issue (e.g., would the introduction of a supermajority vote requirement to approve binding shareholder proposals in place of a previous prohibition be viewed as sufficiently responsive)?

General Share Issuance Mandate for Cross-Market Companies

Some cross-market companies (US-listed, foreign incorporated companies) are required by rules of their countries of incorporation to seek approval for any share issuance. To avoid having  special meeting every time new shares are issued, these companies often seek annual approval for a general mandate for share issuance (i.e., those without a specific purpose). Currently, approval for general mandates is evaluated under the policy of the country of incorporation. However, these policies are often driven by local listing rules and best practices which do not generally apply to companies without a listing in that market. In contrast, US-listed companies are subject to New York Stock Exchange (“NYSE”) or Nasdaq rules on share issuances, which are not reflected in ISS’ non-US policies.

Under new policies, ISS would recommend in favor of general share issuance authorities up to a maximum of 20% of currently issued capital, as long as the duration of the authority is clearly disclosed and reasonable. The proposed policy is intended to better reflect US listing rules and the expectations of investors in the US market.

ISS requests comments on the following issues:

• Is 20% an appropriate threshold for cross-market companies, given that this would effectively extend the NYSE/NASDAQ requirements to scenarios where they do not currently apply, such as public share issuances for cash?
• Should such companies seek annual approval for share issuance mandates, or would a longer mandate (e.g., two or three years) be acceptable?
• Should the same policy also apply to foreign private issuers for SEC purposes?

Executive Pay Assessments for Cross-Market Companies

Due to differing home country and US requirements, certain cross-market companies are required to put multiple compensation proposals on the same ballot relating to a single pay program. Currently, items that are on the ballot due solely to the requirements of another market (listing, incorporation or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” market coverage. However, a growing number of investors and non-investors have expressed a preference for aligning vote policies and recommendations for multiple proposals on the same compensation program.

Recognizing this, ISS proposes that the new policy apply only to those cross-market companies that are US domestic issuers (foreign incorporated companies that have a majority of shareholders in the US, meet other criteria as determined by the SEC, and are subject to the same disclosure and listing standards as US-incorporated companies). Those US domestic issuers with multiple compensation proposals on the ballot that pertain to the same pay program would be assessed on a case-by-case basis using the following principles: (1) align voting recommendations to avoid inconsistent recommendations on the same pay program, and (2) use the policy perspective of the country in which the company is listed (e.g., US say-on-pay policy for all proposals relating to executive pay). If there is no applicable US policy, then the policy of the country that requires the proposal to be on ballot would apply.

ISS seeks feedback on the following issue:

• How does it apply to companies that are dual-listed or have dual incorporations?

*Jennifer Huh, a law clerk, assisted in the preparation of this article.