On October 27, 2016, Institutional Shareholder Services (ISS) released certain proposed changes to its voting policies for 2017 for comment. One of its proposed changes is to recommend against the election of Nominating & Corporate Governance (NCG) committee members of any company that eliminates or imposes “undue restrictions” on its stockholders’ ability to unilaterally amend its bylaws (i.e., submit a binding stockholder proposal to amend the company’s bylaws under Rule 14a-8). This position is premised on ISS’s view that, regardless of state law, it should be a fundamental right of stockholders to be able to amend their company’s bylaws. The proposed voting policy indicates that stock ownership requirements or time holding requirements to submit a binding stockholder proposal to amend the company’s bylaws in excess of those required by Rule 14a-8 (i.e., holding stock worth $2,000 for at least one year) are examples of what ISS would consider undue restrictions. ISS also may take the view that super-majority vote requirements constitute undue restrictions, as ISS specifically requested comments on whether the introduction of a super-majority vote requirement to approve a binding stockholder proposal to amend the company’s bylaws in place of a previous prohibition would be sufficiently responsive to address this issue.
As permitted by Maryland law, many REITs that are incorporated in Maryland have provisions in their charter and/or bylaws stating that the bylaws may only be amended by the board of directors. ISS’s proposed voting policy, if it is adopted, will result in recommendations against NCG committee members at these REITs unless and until they take action to change these provisions. The proposed voting policy may be found on ISS’s website. ISS is soliciting comments on its proposed voting policy through November 10, 2016 and expects to announce final changes to its voting policies during the second half of November.
ISS Survey Results
ISS’s proposed policy change was informed, in part, by the results of the survey conducted by ISS as part of its annual process of updating its voting policies. In its survey, ISS specifically targeted governance practices of REITs incorporated in Maryland. ISS asked respondents whether it should consider recommending against the election of board members at Maryland REITs that have the following governance features:
- Bylaws that may only be amended by the board and/or the ability to increase authorized capital stock without stockholder approval; or
- The ability to opt in to the provisions of the Maryland Unsolicited Takeovers Act (MUTA) (i.e., no permanent opt out from MUTA).
In both cases, a majority of the investors surveyed indicated that ISS should consider recommendations against either all NCG committee members or the full board, whereas a majority of non-investors indicated that no adverse recommendations should be considered. There are limitations to the implications of ISS’s survey results, as a majority of investor respondents to ISS’s survey does not equate to a majority of shares held by a particular company’s institutional investors. Nevertheless, the survey does suggest that, at least for some investors, companies interested in retaining provisions requiring board approval for bylaw amendments will bear the burden of justifying why these provisions are appropriate. A full summary of the results of ISS’s survey may be found on ISS’s website.
The proposed policy changes released by ISS did not include any changes with respect to the ability to increase authorized capital stock without stockholder approval or MUTA. As a result, we would not expect ISS’s final voting policies for 2017 to include changes relating to these topics; however, ISS is not required to release all proposed policy changes for comment and could decide to address these topics without seeking comments.
Impact on Investor Voting
We believe that many investors in public REITs could conclude that the existence of provisions requiring board approval for bylaw amendments is not per se inappropriate, particularly where stockholders have not specifically requested this right. In situations in which this issue has been the subject of a specific stockholder proposal, investors have not uniformly supported the recommendation that stockholders be given the right to unilaterally amend the bylaws. The differing results on these proposals logically would seem to suggest that a uniform policy of voting against the election of NCG committee members at companies that have provisions requiring board approval for bylaw amendments would be unwarranted.
Substantively, investors currently have multiple avenues available for changing or influencing a company’s bylaw provisions that do not involve proposing binding bylaw amendments. These include direct conversations with the company’s management and/or board regarding desired changes, the ability to submit a formal, non-binding proposal requesting that the company make specified changes to its bylaws and the ability to nominate and elect directors. The ability to propose binding bylaw amendments is not necessary to effectively influence a company’s corporate governance practices. This is evidenced by the significant stockholder-driven changes in common corporate governance practices (many of which required bylaw amendments) that have occurred over the last 10‑15 years, which have largely occurred without the submission of binding proposals to amend companies’ bylaws.
Furthermore, companies and their boards typically are in the best position to appropriately craft bylaw provisions implementing corporate governance practices. While some stockholders might take the time to carefully draft these technical provisions prior to submitting them in their proposal, it is far from assured that this would be the case. Given current practice by many of the most prolific proponents of stockholder proposals, it seems more likely that technical flaws, inconsistencies, errors and ambiguities would be introduced into companies’ bylaws if binding stockholder proposals become the norm.
We believe that many investors could conclude that voting against members of a company’s NCG committee, merely because they have not provided that stockholders have the unilateral right to amend the bylaws, is unwarranted. We would expect the larger, more thoughtful institutional investors to carefully consider whether or not to change their votes based on this issue independently of ISS’s voting recommendation, and, in our view, the proposed ISS voting policy would be similar to some of ISS’s other policies regarding director elections that have not as consistently aligned with actual voting outcomes for REITs. As a result, it is difficult to predict how much impact the proposed ISS voting policy would have in elections at REITs that do not permit stockholders to unilaterally amend their bylaws.
What Action Should REITs Take if the Proposed ISS Voting Policy is Adopted?
If ISS adopts this change to its voting policy, REITs that currently do not permit stockholders to unilaterally amend their bylaws should ensure that their board members are aware of expected ISS recommendations based on this issue and consider what, if any, action to take prior to their 2017 annual meeting. Among other things, REITs may consider engaging in informal outreach to their largest stockholders regarding this issue, amending their bylaws (and/or proposing amendments to their charter, if required) to eliminate or modify the provision requiring board approval for bylaw amendments, submitting binding or non-binding proposals to its stockholders regarding these provisions or taking a wait-and-see approach based on the outcome of their annual meetings.