November 21, 2022

Officer Exculpation: What About ISS?

Okay, so we know where Glass Lewis stands on officer exculpation – what about ISS?  This guest blog from Orrick’s J.T. Ho and Bobby Bee says that ISS seems to be more open to the concept:

ISS recently released proposed changes to its benchmark voting policies for the 2023 proxy season. Among the 17 proposed policy changes announced was an indication ISS will recommend “FOR” proposals to add officer exculpation provisions in a Delaware company’s charter. Such a charter amendment (an “officer exculpation charter amendment”) would be adopted to implement the August 2022 change in Section 102(b)(7) of the Delaware General Corporate Law permitting corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. For officers of Delaware corporations, adopting such a charter amendment can bring some parity with existing protection for directors.

While ISS is not expected to release its final U.S. Proxy Voting Guidelines for the 2023 proxy season until mid-December, it has already made a few “FOR” recommendations in line with these proposed policy changes. In making such recommendations, ISS identified the below factors as generally supporting adoption of an officer exculpation charter amendment:

– an expectation the protection afforded by the amendment will become commonplace for officers, and failure to provide could put a company at a disadvantage in recruiting or retaining executives;

– the amendment balances shareholders’ interest in accountability and their interest in attracting and retaining quality agents to work on their behalf; and

– the amendment does not appear to negatively impact shareholder rights and conforms to state law.

ISS will also consider company specific factors such as:

– whether a company is involved in the kind of litigation impacted by the proposed amendment at the time of the proposal; and

– whether a company was otherwise considered a “bad actor” with respect to corporate governance.

As of mid-November, there have been at least ten officer exculpation charter amendment proposals announced, with six already acted upon. Of those six, four were overwhelmingly approved by shareholders, while two failed. However, both failures were due to an inability to gain sufficient voting participation. Actual votes cast were overwhelmingly “FOR” adopting the amendment, just not enough votes were cast to cross the majority, or supermajority, participation mark required for approving a charter amendment.

While the above results are generally a good sign of things to come, Delaware companies considering an officer exculpation charter amendment proposal for the 2023 proxy season should take note of the company specific factors being considered by ISS, and consider the need for a proxy solicitor to ensure any majority or supermajority participation thresholds are met in connection with such a vote.

John Jenkins