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By Michael Greene
Nov. 21 — The number of proxy access proposals are expected to increase for the upcoming proxy season, while fee-shifting bylaws and other similar provisions may face stiff opposition, according to speakers at the Nov. 21 American Bar Association Business Law Section fall meeting.
The panelists discussed some of Institutional Shareholder Services, Inc.'s recently amended benchmark voting policies, including the adoption of a standalone policy related to unilateral bylaw/charter amendments and a new policy on bylaws that impact shareholders' litigation rights, such as fee-shifting bylaws.
To address a growing trend among boards of adopting unilateral bylaw/charter amendments, ISS adopted a standalone policy, effective for the 2015 proxy season, related to these types of provisions (29 CCW 345, 11/12/14).
The bottom line? Boards could lose support from institutional investors when they adopt non-shareholder approved bylaws, even when investors agree with the underlying substance of the bylaw, according to Patrick McGurn, ISS's executive director and special counsel.
Regardless of their passivity level, institutional investors have a “virtually universal” and “absolute visceral reaction” to these types of amendments, he said.
Accordingly, directors should think twice before making unilateral changes to bylaws that “affect the three basic rights of shareholders—the right to vote, the right to sell and the right to sue,” he added.
ISS is also looking at bylaw amendments that affect shareholder litigation rights on a case-by-case basis, said McGurn.
The language of each bylaw really matters, he said. Fee-shifting bylaws that require the plaintiff to be completely successful on the merits of all claims made in the litgation is “worst case scenario language” from a shareholder's perspective.
Fee-shifting, or “loser pays,” bylaws have been a lightning rod since the Delaware Supreme Court, responding to a certified question, in May found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable (29 CCW 161, 5/21/14).
In the aftermath of this decision, both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws. A legal challenge to one such bylaw is ongoing in the Delaware Chancery Court (29 CCW 348, 11/12/14), and the Delaware General Assembly is scheduled to take up a bill in January that would prohibit all such bylaws (29 CCW 202, 7/2/14).
The rhetoric is that fee-shifting bylaws will prevent abusive litigation—many times related to mergers and acquisition claims, McGurn said. However, even if many investors would agree that a lot of derivative litigation is abusive, many of these bylaws are too broad and impact other sorts of litigation as well, he said.
Both McGurn and Margaret Foran, chief governance officer, vice president and corporate secretary for Prudential Financial, Inc., agreed that they expect an increase in the number of shareholder proposals regarding proxy access in the 2015 proxy season.
McGurn cited a recent initiative announced by New York City Comptroller Scott Stringer as a catalyst for these proposals (29 CCW 362, 11/26/14).
On behalf of the $160 billion New York City Pension Funds, Stringer said Nov. 6 that he submitted proxy access proposals to 75 companies requesting bylaws to give shareholders who meet the threshold of owning 3 percent of the company for three or more years the right to list their director candidates on the company's ballot.
McGurn noted that other sponsors have indicated that the number of similar proposals could be in the triple digits, even though some of them will probably never come to a vote.
According to both Foran and McGurn, these types of proposals are likely to receive support from a majority of investors.
A lot of investors would like to see lower ownership requirements than were prescribed under the SEC's defunct rule (26 CCW 225, 7/27/11), he said.
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