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ISS Releases 2020 Proxy Voting Guideline Updates

On November 12, the Institutional Shareholder Services (ISS) published its U.S. 2020 Proxy Voting Guideline Updates, which will be effective for shareholder meetings held on or after February 1, 2020. In general, the updates involve clarification of guidelines and formalization of factors to codify ISS’s existing approach on recommendations relating to specific issuers. These updates are also intended to bring certain references within ISS’s existing guidelines up to date. Particularly significant changes are summarized below.

New nominees

ISS has revised the definition of “new nominee” to mean a director who is being presented for election by shareholders for the first time and has stated that only a new nominee who has been on a board for less than one year may, on a case by case basis, not be held responsible for problematic governance actions taken by the board before such new nominee joined the board. This update intends to close a previous loophole under which a new nominee may have included directors who served on the board up to three years (depending on the class to which he/she was appointed before being elected by shareholders) and directors who may have served on the board for years prior to the company’s public offering.

Director attendance

ISS clarified that nominees who served for only part of the fiscal year, rather than all new nominees, are exempt from its policy to generally recommend a vote against or withhold from directors who attend less than 75 percent of board and committee meetings for the period for which they served.

Board diversity

ISS will recommend voting against the chair of the nominating committee (or other directors as applicable) if there are no women on the company’s board, unless the company makes a firm commitment in its proxy statement to appoint at least one woman to the board within one year, with such exception only available through 2020.

Newly public companies

The ISS updates regarding newly public companies create two distinct policies that separately address problematic (1) governance provisions and (2) capital structure.

Problematic Governance Provisions:

ISS will generally recommend voting against or withholding voting for directors (excluding new nominees considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board adopts bylaw or charter provisions materially adverse to shareholder rights without a reasonable sunset clause. The update clarifies and narrows the focus of ISS’s policy regarding certain highly problematic governance structures, such as supermajority voting requirements to amend the bylaws or charter, a classified board structure or other provisions ISS deems egregious. Additionally, unless the adverse provision is reversed or removed, ISS may continue to vote against or withhold voting for such directors in subsequent years.

Problematic Capital Structure:

ISS created a new policy regarding capital structure for newly public companies, stating that it will generally recommend voting against or withholding voting for directors (excluding new nominees, who will be considered on a case-by-case basis) if prior to the company’s initial public offering, the company or its board implements a multi-class capital structure that leads to unequal voting rights without a reasonable sunset clause. To assess whether such sunset clause is reasonable, ISS will consider (1) the company’s lifespan, (2) post-IPO ownership structure and (3) the board’s disclosed rationale for the sunset period (so long as such period is less than seven years). Unless the adverse provision is reversed or removed, ISS may continue to vote against or withhold voting for such directors in subsequent years.

Restrictions on shareholders’ rights

ISS clarified that subject matter restrictions, such as prohibitions on the ability of shareholders to amend particular bylaws that govern their ability to amend bylaws, are also considered undue restrictions on shareholders’ rights. ISS will generally recommend voting against or withholding voting for members of the governance committee until shareholders are provided with an unfettered ability to amend the company’s bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.

Independent board chair shareholder proposals

ISS generally recommends voting for a shareholder proposal that requires the chair of the board to be an independent director. This policy has been updated to largely codify ISS’s existing practice by adding six factors that are given “substantial weight” and will increase the likelihood of a recommendation supporting the proposal in question. The six factors taken into consideration are whether the company has (1) a majority non-independent board and/or non-independent directors on key board committees, (2) a weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role, (3) an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair and/or a departure from a structure with an independent chair, (4) evidence that the board failed to oversee and address material risks, (5) a material governance failure, particularly if the board failed to adequately respond to shareholder concerns or materially diminished shareholder rights, and (6) evidence that the board failed to intervene when management’s interests are contrary to shareholders’ interests.

Share repurchase program proposals

ISS expanded its existing policy that recommends shareholders vote for management proposals to institute open-market share repurchase plans, in which all shareholders may participate on equal terms to also recommend voting for proposals that grant the board authority to conduct open-market repurchases, each absent company-specific concerns regarding (1) the use of targeted share buybacks as greenmail to threaten a takeover, (2) use of buybacks to inappropriately manipulate incentive compensation metrics, (3) threats to the company’s long-term viability and (4) other company-specific factors as warranted.

Additionally, ISS clarified that it will vote on a case by case basis on proposals to repurchase shares directly from specified shareholders, evaluating any such proposal based upon the stated rationale and the possibility for misuse, such as the repurchase of shares from insiders at a premium.

Evergreen provisions in equity-based and other incentive plans

ISS expressed its view that the environment, following the 2017 tax reform, raises concerns regarding evergreen provisions that automatically replenish plan reserves and circumvent regular shareholder reapproval at reasonable time intervals. Evergreen provisions in equity-based compensation plans are now considered an overriding factor in ISS’s Equity Plan Scorecard evaluation and may lead to a recommendation that shareholders vote against an equity-based compensation plan proposal.

Pay gap data

ISS generally recommends voting on a case-by-case basis on requests for reports on a company’s pay data by gender or policies and goals to reduce any gender pay gap and has updated its existing guidelines to cover requests made on the basis of race or ethnicity.

The full text of the ISS 2020 Americas Proxy Voting Guidelines Updates is available here.

©2019 Katten Muchin Rosenman LLP

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About this Author

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a selection of Mark’s engagements.

  • Representation of hospitality company in connection with its initial public offering and listing on NYSE, as well as ongoing counseling with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed public company in the banking industry in connection with strategic transactions, capital raising transactions, compliance with securities laws and NYSE rules, disclosure and corporate governance matters, including strategic acquisitions, notes offering and at-the-market offering.
  • Representation of clean tech manufacturer for industrial equipment in connection with alternative public offering and listing on NASDAQ, as well as ongoing counseling with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed issuer in connection with selling stockholder block trades.
  • Representation of NYSE-listed industrial manufacturer with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed medical device company with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
312-902-5612
Associate

Irina Nica is an associate in the Corporate practice.

212-940-6344
Farzad F. Damania, Capital markets and securities lawyer, Katten Law Firm
Partner

Farzad F. Damania focuses his practice on capital markets and securities law, mergers and acquisitions, and general corporate law. He is regularly engaged on capital markets transactions, including initial public offerings, follow-on offerings, tender offers, and high yield debt transactions as well as direct investments by private equity acquirers, sellers and co-investors. He also represents public companies on corporate governance issues, securities law compliance and stock exchange regulations.

Farzad counsels US public companies and foreign...

212-940-3838