DealLawyers.com Blog

Traditionally, proxy advisory firms have effectively recommended one slate or the other in proxy contests. While they may have endorsed the election of a dissident’s candidate, their bottom line was always which proxy card to vote, not which candidate.  That made it difficult for their clients to follow their recommendations on individual candidates, but with universal proxy, that’s no longer likely to be the case.

That means the qualifications of individual candidates are going to assume greater prominence under the universal proxy regime, and a recent Sidley memo suggests that proxy advisors are well aware of the implications of that change. This excerpt from the blog summarizes ISS’s commentary on the new system & its role in it set forth a recent research note:

– ISS stated that its two-prong framework for assessing the merits of a dissident proxy campaign will remain largely unchanged. ISS will still ask (1) is there a case for change? and (2) if so, how much change? “An activist leading with a brilliant nominee, but a weak case for change,” ISS observed, “will be less successful than the activist who leads with a detailed, insightful argument as to why a company may not be performing as well as it should ….”

– The second prong — “how much change?” — will come into sharper focus, given that shareholders will now be able “to more precisely adjust board composition.” ISS expects activist slates to be “proportionate” to the issues identified by the activist and implicitly cautions activists not to overreach in the number of directors they nominate, noting that doing so could “backfire” by undermining the overall quality of the dissident slate.

– ISS emphasized the importance of qualifications of individual nominees, implying that ISS intends to scrutinize candidates on an individual basis to determine which combination of candidates will be best for the company, without undue focus on whether the candidate hails from the company or dissident slate. In this spirit, ISS “will continue to highlight … nominees from either party who … appear particularly well-qualified.”

– ISS observed that because the universal proxy system allows shareholders to precisely mix and match candidate choices from the company and dissident slates, boards will be “far less able to shield their weakest contributors.” As an example, ISS mentioned the potential for replacement of a “long-tenured, overboarded director who seems disengaged with a new nominee who brings clearly-relevant skills to the board, or perhaps enhances diversity.”

One important point noted in the memo is that investors may find it difficult to evaluate the qualifications of competing nominees on their own, and thus may rely more heavily on proxy advisor recommendations. That puts ISS & its competitors in a position to exercise significantly more influence over the outcome of proxy contests than they’ve enjoyed in the past.

– John Jenkins