ISS Says No to Certain Corporate Bylaws in 2015

Most folks would agree that there is a lot of frivolous litigation against Ds and Os.  When the Delaware Supreme Court handed down its decision on fee-shifting bylaws in May 2014 (aka the “loser pays” rule in litigation), I thought it would be an important step in reducing frivolous lawsuits.

By placing the burden of paying the winner’s legal bills on the loser, fee shifting discourages suits that lack merit.  This ultimately protects shareholders from the time and money it costs corporations to fight the myriad frivolous suits they face today.

Not everyone agrees that fee-shifting is a good idea, however. The competing narrative goes like this: plaintiffs may fear bringing meritorious suits that hold Ds and Os accountable if plaintiffs are potentially on the hook for the defendant’s legal fees, should a court not agree with the plaintiffs.

This seems to be the position of the Delaware State Bar Association’s Corporation Law council and others, like institutional investors who are putting pressure on the Delaware legislature to stop corporations from adopting fee-shifting bylaws.

An image of a businessman tapping on a yes button among other buttons saying no and the other saying maybe.

Last November we all learned that the proxy advisory service ISS may not be on the same side of the issue that the rest of us might wish. In its "Proxy Voting Guideline Updates and Process 2015 Benchmark Policy Recommendations," effective Feb. 1, 2015, ISS says “no” to certain corporate bylaws that it believes are not in the best interests of shareholders.

When it comes to fee-shifting bylaws like those that were upheld in the famous ATP Tour, Inc. v. Deutscher Tennis Bund case in Delaware in May 2014, ISS stated that its new guidance is to “generally vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are [only] partially successful).”

Of course it’s one thing if a board of directors puts the concept of adopting fee-shifting provisions in front of its shareholders, an entirely proper thing to do if a board would like to do so.

Boards should be aware, however, of adopting fee-shifting provisions unilaterally.  When it comes to adopting corporate bylaws in general without shareholder approval, the ISS says it will generally “vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) 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 ….”

So, to be clear, if a board adopts bylaws that the board sincerely believes will protect the best interests of shareholders by guarding against frivolous litigation, they could actually be at risk for a “no” vote from the ISS—not just for the bylaws, but for its own election results as well.

While some of us may agree there is a real reason to adopt bylaws like fee shifting and choice of forum for litigation, any board member thinking about pursuing them will have to do so with an awareness that they may be picking a fight with ISS.

What to do?

First, any good board member will do what he or she believes to be in the best interests of shareholders regardless of what a proxy advisory firm may believe. However, that doesn’t mean you necessarily need to “poke the bear,” so to speak.

Yes, it’s true that board members can usually unilaterally change bylaws (per the terms of the bylaws themselves).

However, a more measured approach may be in order: first talk to your major shareholders and find out if they agree with the proposed fee-shifting bylaw. If they do, then go for it. And if they don’t, it may not make sense to pursue the issue.

Some will wonder whether the board is needlessly giving away power or setting an unfortunate precedent by asking for its shareholders’ opinion on a major change to a company’s bylaws.  My view is that this question is not the right one.

When an issue is of particular significance to shareholders and represents a major change from the status quo, the fact that board members have a legal right to do something isn’t really the point.

Shareholders have the right to empanel board members who will act with shareholders’ best interest in mind. Communicating with shareholders to get their view on important changes is definitely within the spirit of being a good fiduciary on behalf of the shareholders the board was elected to represent.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email:



Table of Contents