Reminder to Internally-Managed Business Development Companies Regarding Shareholder Engagement Following Say-on-Pay Vote
A. 2017 Voting Policy Change
In November 2016, Institutional Shareholder Services Inc. (ISS), a proxy advisory firm, released updates to its US Proxy Voting Policies and Procedures for its voting recommendations for annual stockholders meetings occurring on or after February 1, 2017. One change included in the updates related to a new ISS position to recommend a vote against or a withhold vote with respect to the election of any director on the nominating and corporate governance committee of the board of directors of a company that imposes “undue” restrictions on the ability of stockholders to amend its bylaws. This update primarily impacted publicly-traded Maryland corporations because, as permitted by Section 2-109(b) of the Maryland General Corporation Law, many publicly-traded Maryland corporations, including business development companies (BDCs), reserve the power to amend or adopt bylaws exclusively to the board of directors (in either their charter and/or bylaws).
In February 2017, ISS issued a frequently asked question (FAQ) noting that this new “policy does not apply to open- or closed-end funds.” Given that BDCs are closed-end funds under the Investment Company Act of 1940, many BDCs assumed that the new policy position would not apply to them. However, as the 2017 proxy season got underway, it became clear that ISS was not following the FAQ and, in fact, in April 2017, it took the formal step of amending the FAQ to clarify that “[a]lthough closed-end funds are not currently impacted by the ISS policy, this exemption does not extend to business development companies.”
In light of the fact that many BDCs scheduled to hold annual stockholder meetings before June 30, 2017 likely relied on the initial FAQ, we understand that ISS will recommend a vote in favor of directors on the nominating and corporate governance committee of BDCs that have publicly committed (usually via a Form 8-K filing with the Securities Exchange Commission) to engage in a dialogue to discuss what steps, if any, to take in light of the application of this new policy change to BDCs. However, for BDCs that have such provisions in their charter and/or bylaws and that are scheduled to hold their annual stockholder meetings after June 30, 2017, we understand that ISS is looking for a stronger commitment in exchange for a favorable voting recommendation by requesting that BDCs publicly commit to remove the restriction within a reasonable timeframe or putting the removal of restriction to a stockholder vote at the BDC’s next annual meeting of stockholders.
B. Stockholder Engagement After Say-on-Pay Vote
As a reminder to internally-managed BDCs, ISS has had a long-standing policy that it may recommend a vote against or a withhold vote with respect to the election of any director on the compensation committee of the board of directors of a company which received less than 70% (of votes cast) support on a say-on-pay vote if the company did not subsequently conduct any outreach to its stockholders to determine the reason for the below 70% support. An internally-managed BDC in this situation should add disclosure in its proxy statement for its next annual meeting of stockholders about its outreach activities relating to the prior year’s say-on-pay proposal to limit the likelihood that ISS recommends a vote against or a withhold vote with respect to the election of directors on the compensation committee of its board of directors.