Corporate Governance

Shearman & Sterling 26 | IPO Governance IPO GOVERNANCE INSIGHTS By Richard Alsop and Rupa Briggs In 2016, ISS Governance (ISS) initiated a voting policy seemingly designed to influence the governance practices of companies considering an initial public offering (IPO) in the United States by recommending a vote against directors of newly public companies due to the adoption, either prior to or in connection with an IPO, of governance policies that diminish shareholder rights. Last year, in order to establish a baseline for evaluation, we surveyed the governance policies of companies that went public in 2015 in advance of the implementation of the new ISS policy. This year we examine ISS's approach to recommendations for the 2015 class, the voting impact of the policy, and what impact the policy had on governance practices for 2016 IPOs. The multi-class capital structure / unequal voting rights test was added in ISS's 2017 policy updates, and the "any reasonable sunset provision" (which presumes eventual elimination of the adverse practices), replaced the original "public commitment to put the provision to a shareholder vote within three years of the date of the IPO." The ISS policy does not define "charter provisions materially adverse to shareholder rights," but the 2017 version of the policy specifically calls out unequal DETAILS OF THE NEW ISS POLICY Specifically, the ISS policy states that for newly public companies, ISS will generally vote against or withhold votes from individual directors, committee members or the entire board (except new nominees, who are considered on a case-by-case basis) if, prior to or in connection with the company's IPO, the company or its board adopted by-law or charter provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, considering the following: the level of impairment of shareholders' rights 1 5 the ability to change the governance structure (e.g., limitations on shareholders' right to amend the by-laws or charter, or supermajority vote requirements) 3 the disclosed rationale 2 6 the ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board 4 any reasonable sunset provision other relevant factors voting rights, and the ISS policy on director performance evaluations identifies problematic provisions including: • classified board structure • supermajority vote requirement • either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality vote carve out for contested director elections • the inability of shareholders to act by written consent • a multi-class capital structure • a non-shareholder approved poison pill

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