Since our last memo on shareholder direct amendment of bylaws in Maryland on January 17, 2018, there have been seven additional Maryland REITs (for a total of ten since the end of the 2017 proxy season) that have announced amendment of their bylaws to permit shareholders to amend the bylaws directly, i.e., without board approval.1 Five of these Maryland REITs have adopted a compromise approach to ISS’s November 2016 policy2 by permitting shareholder-initiated binding bylaw amendments with (a) ownership requirements ranging from one percent for one year by up to five holders (1/1/5) to three percent for three years by up to 20 holders (3/3/20), (b) a majority (or, in one case, two-thirds) of the outstanding shares required to approve any such proposal and (c) limited ringfencing to protect the board from being divested of its power to amend the bylaws (and, in some cases, to safeguard director and officer indemnification provisions). The other two Maryland REITs permitted shareholder-initiated binding bylaw amendments by a majority of the votes entitled to be cast and without any ownership requirements (i.e., consistent with ISS’s policy).

Many boards are continuing to study developments regarding granting shareholders the power to directly amend the bylaws as they see a small but growing number of boards addressing the issue without wholesale adoption of ISS’s requirements. These boards are talking with their major holders and learning that many of these holders are not particularly concerned with this issue and are willing to accept ownership requirements for initiating a shareholder direct amendment proposal in excess of ISS’s $2,000/one-year requirement and/or other requirements that diverge from ISS’s stated policy. Boards are also finding that many major holders are separating their consideration of the bylaws issue from their consideration of the decision on voting for directors. They just don’t regard the bylaws issue as outcomedeterminative of whom they should vote for in the election of directors. Not surprisingly, REIT boards that are still considering action are inferring that the boards of REITs that have already taken action would not have done so without engaging with their major holders on the topic. For these reasons, the boards of some Maryland REITs may decide to wait for another year to address the issue after more of a consensus has developed.

We generally believe that for REITs that are exploring a compromise position the two key elements are (a) the ownership requirements for initiating a proposal and (b) the vote requirement for approving the proposal. Of course, an activist may be able to muster one percent  or three percent for proposing a bylaw amendment more readily than getting two-thirds of the outstanding for approving a bylaw amendment.

Notwithstanding ISS, we believe that major holders may see the wisdom of not allowing amendment of a fundamental, long-term corporate document like the bylaws by only a bare majority of the votes entitled to be cast, perhaps by holders that have been in the stock (or beneficial interest) only briefly. As we have been saying since last year, there is an important contextual difference between (a) a supermajority shareholder vote to approve, say, a charter amendment or a merger that has already been approved by the board and (b) a supermajority vote to approve, say, an amendment to the bylaws that has not first been approved by the board. While this point may be lost on ISS, we believe that many institutional holders (even ones with general proxy voting policies against supermajority vote requirements) may realize that there is a clear and relevant difference. Indeed, most shareholder proposals to directly amend the bylaws will almost surely be opposed by the board; otherwise, the board would have adopted it when it was first proposed.