October 30, 2020
The world’s largest proxy advisory firm, Institutional Shareholder Services (ISS), has announced its 2021 voting policy updates, adding a new general recommendation in favor of charter or bylaw provisions that specify Delaware, or the Delaware Court of Chancery, as the exclusive forum for state corporate law matters for Delaware corporations. ISS has not only acknowledged that Delaware’s robust body of corporate law increases the likelihood of speedy and efficient resolution of cases, but has implemented voting policies showing a preference for Delaware courts. ISS’s stated rationale explains that by including such exclusive forum provisions in their organizational documents, companies can avoid duplicative shareholder lawsuits in more than one forum, which can be costly and produce inconsistent results. An unstated rationale for including these provisions is to stymie forum shopping by opportunistic plaintiffs’ attorneys.
An exception to ISS’s general recommendation in favor of Delaware choice of forum provisions is for situations where there are “serious concerns about corporate governance or board responsiveness to shareholders.” With this qualifier, ISS has carved out a way for it to protect shareholders’ litigation rights when there are concerns about abuse of the provision or about poor governance more generally.
For exclusive forum provisions that specify the state of incorporation of non-Delaware companies, ISS will vote on a “case-by-case” basis, taking into consideration the company’s rationale for the choice, the company’s history with duplicative shareholder lawsuits in different forums, the breadth of the provision, and the company’s governance features. ISS will generally vote against provisions that specify a state other than the state of incorporation for state corporate law matters, or that specify a particular local court within the state.
In addition to updating its policy on forum provisions for state law matters, ISS has endorsed provisions requiring that U.S. federal courts be the sole forum for shareholder claims arising under federal securities law (the Securities Act of 1933, as amended). This change comes in light of the Delaware Supreme Court’s March 2020 decision that deemed such provisions facially valid under Delaware law. ISS recognizes that because such provisions would still allow plaintiffs to file claims in the federal courts of their home states, the “benefits of eliminating duplicative litigation and ensuring that cases are heard by courts that are well-versed in the applicable law carry greater weight.” Following this logic, ISS would vote against provisions restricting the federal forum to a specific district court, as ISS believes these provisions would reintroduce inconvenience to plaintiffs.
Importantly, ISS’s new policies do not support unilateral (without shareholder vote) adoption of provisions that (i) restrict the forum to a particular federal district court, (ii) specify a state other than the state of incorporation as the exclusive forum for state law matters, or (iii) specify a particular court within the state. Each of these sorts of unilateral actions would be considered a one-time failure under ISS’s Unilateral Bylaw/Charter Amendments policy, whereby ISS will “generally vote against or withhold from directors individually, committee members, or the entire board . . . if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders.” This means that if a board is considering specifying a specific state or federal court, or limiting forum to a state outside its company’s state of incorporation, a unilateral action may provoke ISS to recommend against those board members.
The comment period has closed, and ISS will announce its final policy updates later this year. The final voting policy updates will be generally applied for shareholder meetings taking place on or after February 1, 2021.