ISS Takes on Bylaw Provision Designed to Deter Dissident Director Candidates

News Brief

By Cydney Posner

Here is an interesting post from ISS on blog concerning a new type of bylaw amendment designed to deter dissident directors. The new provision, adopted this year by Provident Financial Holdings, disqualifies from service as a director any person who, with limited exceptions, "is a party to any compensatory, payment or other financial agreement, arrangement or understanding with any person or entity other than the Corporation in connection with candidacy or service as a director of the Corporation."  The bylaw was adopted after an activist fund joined an investor group and filed a 13D indicating that, while it hoped to "work with existing management and the board of directors to maximize shareholder value," if "the Issuer pursues any action that dilutes tangible book value per share," it would "aggressively seek board representation."

The post notes that this form of provision differs from similar provisions adopted by other companies in that the other forms make a person ineligible for service only if they do not disclose the third-party compensatory arrangements. This form of bylaw provision is a flat prohibition, regardless of disclosure. Apparently, at least 26 companies have adopted these types of provisions in their bylaws since May 2013, but Provident is the first to hold an annual meeting (where ISS has an opportunity to express its opinion).

No need to guess how ISS views the issue. The ISS post contends that investors "may find the new bylaw provision concerning because it could deter legitimate efforts to seek board representation via a proxy contest, particularly those efforts that include independent board candidates selected for their strong, relevant industry expertise, and who are generally recruited, but not directly employed, by the dissident shareholder. Such nominees often receive a reasonable fee for agreeing to stand for election, to compensate them for the considerable time commitments incurred in proxy contests." ISS also argues that the bylaw could exclude highly qualified individuals, restrict the rights of investors to select suitable board members and entrench the existing board and management.

Although recognizing that no shareholder vote was required, ISS also voices criticism of the company for failing to submit the bylaw for a vote: "investors may find it particularly concerning that the board adopted the bylaw provision without giving them the opportunity to vote on the matter, given the provision's potential impact in deterring legitimate board candidates. Given the provision's potential impact and its unilateral adoption by the board, investors may consider holding members of the board's Nominating and Governance Committee accountable."

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