December 29, 2014

ISS Issues 20 FAQs on “Equity Plan Scorecard”

Last week, ISS issued 20 FAQs on its new “Equity Plan Scorecard.” Here’s some analysis from this excerpt of Steve Quinlivan’s blog:

The FAQs go a long way in adding some transparency to a complex new policy. Absent overriding factors, a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal. EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100. The FAQs include a useful chart showing factors scored and definitions, but it does not include the number of points allocated to the factors.

Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board’s Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders’ interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly.

ISS Issues 9 FAQs on Independent Chair Policy

Last week, ISS issued 9 FAQs on its new “Independent Chair Policy.” Here’s some analysis from this excerpt of Steve Quinlivan’s blog:

The FAQs reveal that board tenure can play a role in the analysis. According to ISS, board tenure may be a contributing factor in determining a vote recommendation for independent chair shareholder proposals, but will be considered in aggregate with other factors. Concurrence of director/CEO tenure, lenghty directorships, or high average director tenure, may be considered. These concerns will be considered in the context of the overall leadership structure in determining whether the proposal presents the best leadership structure at the company.

And if you get a proposal, what action can you take that would be sufficient for ISS? ISS states full implementation would consist of separating the chair and CEO positions, with an independent director filling the role of chair. A policy that the company will adopt this structure upon the resignation of the current CEO/Chair would also be considered responsive.

ISS says partial responses will be evaluated on a case-by-case basis, depending on the disclosure of shareholder input obtained through the company’s outreach, the board’s disclosed rationale, and the facts and circumstances of the case. There are many factors that can cause investors to support such proposals, without necessarily demanding an independent chair immediately. For example, through their outreach, a company may learn that shareholders are concerned about the lack of a lead director, weaknesses in the lead director’s responsibilities, or the choice of lead director. In such a case, creating or strengthening a robust lead director position may be considered a sufficient response, assuming no other factors are involved. If the company already has a robust lead director position, then the company’s outreach to shareholders to discover the causes of the majority vote and subsequent actions to address the issue will be reviewed accordingly.

Delaware Supreme Court: Curtails Use of Books & Records and Confirms Validity of Board-Adopted Forum Selection Bylaws

Here’s news from this Wachtell Lipton memo:

A unanimous Delaware Supreme Court yesterday reaffirmed the ability of Delaware companies to organize corporate litigation in the Delaware courts. United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014) (en banc). The case involved an action to produce corporate books and records under Section 220 of the Delaware General Corporation Law, an increasingly frequent preliminary battleground in derivative litigation. Following a familiar pattern, stockholder plaintiffs demanded access to certain books and records of United Technologies Corporation, allegedly to assist in their consideration of potential derivative litigation. UTC asked that all demanding stockholders agree to restrict use of the materials obtained in the inspection to cases filed only in Delaware, pointing out that litigation had already been filed relating to the same matters in the Delaware courts and that any derivative lawsuit would be governed by Delaware law. Then, further evincing its concern to organize corporate governance litigation in the courts of Delaware, UTC’s board adopted a forum selection bylaw during the pendency of the Section 220 lawsuit.

The stockholder plaintiff nevertheless refused to agree to the Delaware forum condition, insisting on his right to use UTC’s books and records to bring litigation in any court. The parties tried the case to the Court of Chancery, which concluded that it lacked the statutory power to enter the order and thus ruled for the plaintiff.

The Supreme Court reversed. Emphasizing that “the stockholder’s inspection right is a ‘qualified’ one,” Chief Justice Strine’s decision held that “the Court of Chancery has wide discretion to shape the breadth and use of inspections under § 220 to protect the legitimate interests of Delaware corporations,” including through use restrictions related to forum. In remanding to the Court of Chancery to exercise this discretion, the Supreme Court instructed that the Vice Chancellor should consider that a corporation has a “legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state,” and a similarly legitimate interest in avoiding undue expense in defending against duplicative derivative lawsuits. The Supreme Court also reaffirmed the power of boards to adopt forum selection bylaws, noting that such bylaws demonstrate a corporation’s interest in rationalizing stockholder litigation, and once more endorsed board-adopted bylaws as valid and enforceable against stockholders who purchased shares before adoption.

The Treppel decision demonstrates again the tools available to Delaware companies to manage litigation relating to the duties of directors. The multijurisdictional stockholder litigation problem extends to derivative as well as merger suits. Forum selection bylaws and the courts’ statutory powers, as invoked and clarified here, are complementary parts of the solution.

– Broc Romanek