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Maryland Corporate - Client Memos

On Monday, Institutional Shareholder Services Inc. ("ISS") released its Governance Principles Policy Survey (the "Survey") for the 2019 proxy season. In keeping with its prior practice, ISS seeks responses from institutional shareholders, issuers, directors and other market constituents on a wide range of corporate governance matters. The Survey is generally a good indicator of the areas in which ISS is considering policy changes for its voting recommendations in the forthcoming proxy season. While we often disagree with ISS's policies, we continue to applaud it for soliciting and considering the views of market players.

This year, for the first time, ISS divided its Survey into a "global" section and "regionally focused" section. Publicly traded Maryland companies will note that the "Americas" regional section addresses the shareholder direct bylaw amendment issue.

As you may know, in November 2016, ISS adopted a policy of recommending a vote against or vote-withhold as to members of governance committees of boards of companies that did not provide their stockholders the power to directly (without board approval) amend the bylaws. Nevertheless, (1) approximately 90 Maryland companies have not amended their bylaws at all and continue to vest in their boards the sole power to amend the bylaws and (2) at least 17 Maryland REITs have amended their bylaws to permit stockholder amendments, but subject to certain conditions not approved by ISS in its 2016 policy change. Not one of the hundreds of governance committee members of a company in either of these two groups was not re-elected solely because of the board's position on the bylaws, although their vote percentages, while quite comfortable, generally ran 15% to 25% below the vote percentages for the non-committee members in both 2017 and 2018.

One of the most common conditions adopted by companies enacting a limited stockholder power to directly amend the bylaws was stock ownership requirements for stockholders seeking to propose bylaw amendments (usually one to three percent). In its Survey, ISS is asking respondents whether they support these minimum stock ownership requirements and, if so, at what levels and whether multiple stockholders should be able to aggregate their holdings to meet the requirement.

In light of the above results in the election of governance committee members over the past two proxy seasons, we view ISS's willingness to reconsider the bylaw amendment issue as a positive development. We continue to recommend reasonable ownership requirements as an appropriate prerequisite to the stockholders' power to propose direct amendments to the bylaws.

We note that both a three percent ownership requirement for stockholders to propose amending the bylaws and aggregation of a limited number of stockholders to meet this requirement are consistent with market standards for proxy access at public companies. We are hopeful that ISS will revise its policy to not recommend against directors at companies that adopt reasonable ownership requirements in excess of ISS's nominal SEC Rule 14a-8 limits.

The Survey is now open and may be accessed here. Responses are due August 24 for the "global" section and September 21 for the "regionally focused" sections.


Our colleagues and we are available at any time to discuss appropriate responses to the Survey or other matters.

Jim Hanks 
Michael Sheehan
Rachel Jones