ISS Revisits Policy on Exclusive Forum Provisions
Exclusive forum provisions in charters and bylaws, under which derivative suits and other shareholder litigation must be brought in the courts of the company's state of incorporation, drew some attention during the 2011 proxy season. My recent piece summarizing the state of the law and the practice on this subject is here. No consensus on this topic has yet emerged among institutional investors, and the 2011 votes were close and had mixed results.
ISS's position on these provisions in the 2011 season ignored the merits of exclusive forum requirements and instead looked to a set of largely unrelated governance "best practices":
- annual election of directors
- majority voting for directors in uncontested elections
- 10% shareholders having the right to call special meetings
- the absence of a poison pill unless approved by shareholders
Only companies that had adopted all four of these practices would receive an ISS recommendation in support of an exclusive forum provision.
ISS has revisited this policy in connection with its overall policy review for the 2012 season and, as often seems to be the case with ISS, has taken a step or two forward and a step back. Instead of the checklist approach used in 2011, ISS says that this issue will now receive "case-by-case" analysis, taking into consideration most of the same factors that were in the checklist. The weighting of these factors is unclear.
A step forward is the deletion of the 10% shareholder special meeting requirement from the list of best practices. ISS acknowledges that "this governance feature is less relevant to exclusive venue than it is to other proposals". (The same could of course be said about the other items on the list, but never mind.)
The step backward is the addition of a new factor that ISS says it will consider: "[w]hether the company has been materially harmed by shareholder litigation outside its jurisdiction of incorporation, based on disclosure in the company's proxy statement." It's hard to make sense of this one, since exclusive forum provisions are by their nature prophylactic and not retrospective. If avoidance of potentially duplicative litigation is a legitimate goal, it hardly becomes less legitimate if the company has not yet been a victim of the practice. This would be akin to saying that you shouldn't buy fire insurance unless your house has burned down at least once in the past.
The new guidelines make ISS's position on any particular company's proposal less predictable than before, and to that extent further complicate the decision tree for companies considering whether to adopt an exclusive forum provision and, if so, whether to submit it for shareholder approval. We may need to see another proxy season's results before this becomes more clear.
Contact Bill Kelly.