As part of its annual policy consultation process in advance of proxy season,Institutional Shareholder Services (ISS) recently released for comment its draft governance policies for 2015. As per its usually practice, ISS has published proposed amendments to its prior policy provisions, this year seeking feedback on two specific aspects of its policy for TSX-listed Canadian issuers.
First, ISS has proposed to update its current policy on advance notice bylaws and policies in response to what it describes as "unreasonable" policies that could otherwise disqualify experienced shareholder nominees. According to ISS, it has opposed a "substantial majority" of advance notice policies in 2014 due to prohibitions on resetting of the notification period for adjourned or postponed meetings. As we discussed last month, ISS recently recommended a vote against the adoption of advance notice bylaws or policies that do not allow for the commencement of a new time period in the event of an adjournment or postponement.
ISS also specifically cited recent jurisprudence (see our recent post on Orange Capital vs. Partners REIT) as having substantiated its concern in this respect. As we discussed in connection with that case, a restriction on resetting the notice period is not novel and appears to be relatively common in advance notice bylaws and policies adopted by both U.S. and Canadian issuers. Given the purpose of an advance notice provision is to prevent a stealth proxy context, there may be some merit to ensuring that shareholders aren’t faced with having to deal with additional nominations where issuers may be forced to adjourn or postpone a meeting, even for a short time and for reasons unrelated to director nominations.
ISS’ blanket position also appears to ignore the distinction between adjournments and postponements. While it is arguable that the policy rationale underlying an advance notice requirement supports a reopening of the nomination window in the event of a postponement, an adjournment involves (at law) the continuation of the original meeting for which further notice is generally not required to be provided. As such, it may be difficult to understand how the policy rationale would apply to permit new nominees to be added to the adjourned meeting.
With respect to issuers who already have bylaws or policies in place, ISS states that it anticipates that such issuers will propose updates to bring them in line with “market expectations” for an acceptable advance notice requirement. It further states that ISS will review the terms of the advance notice requirement already adopted into bylaws as part of future bylaws amendments. Subject to ISS finalizing its position after the comment period is closed, issuers may be well advised to reconsider their existing bylaws and policies in light of these developments.
In addition to this issue, ISS has also proposed clarifying its position on advance notice bylaws by taking into consideration the following "potentially problematic" features when determining whether to recommend proposals to adopt or amend advance notice policies as summarized below:
- subject to certain specified circumstances, the company's deadline for notice of shareholders' director nominations being fewer than 30 days prior to the meeting date;
- the board's inability to waive, in its sole discretion, all sections of the advance notice provision;
- a requirement that any proposed nominee agree in advance to comply with all of the company's policies and guidelines that apply to directors;
- any provision that restricts the notification period to that established for the originally scheduled meeting in the event the meeting has been adjourned or postponed;
- any additional disclosure requests within the advance notice requirement or the company's ability to require additional disclosure that exceeded certain requirements;
- stipulations within the provisions that the corporation would not be obligated to include information provided by dissident director nominees or nominating shareholders in any shareholder communications; and
- any other feature or provision determined to have a negative impact on shareholders' interests and deemed outside the purview of the purpose of the advance notice requirement.
Meanwhile, in a second proposal, ISS also proposes amending the definition of independence to allow former CEOs, on a case-by-case basis, to be considered independent after a five-year cooling off period following retirement. Currently, ISS generally recommends a withhold vote in respect of any insider or affiliated outside director where the board is less than majority independent. ISS also generally recommends a withhold vote in respect of a director on the audit or compensation committee if the director has served as the CEO of the company at any time.
Under the amended policy, a former CEO could be deemed independent following expiry of the cooling off period, depending on a number of factors, including involvement in the company, whether the former CEO was or had been executive chairman of the board or a company founder, related party transactions, consulting arrangements, and any other factors that could reasonably be deemed to affect independence. The policy change is intended to reinforce a recently resigned CEO’s status as a non-independent director while recognizing that some boards believe that the contributions of a former CEO may be a valuable addition on a longer-term horizon.
ISS is accepting comments on its draft voting policies until October 29. Final policy updates are expected in November.