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Dividend and Dividend Equivalent Plan Provisions

One important change in the 2017 ISS policy updates with respect to ISS’ Equity Plan Scorecard (EPSC) policy is with respect to dividend and dividend equivalent provisions.  Until the 2017 policy updates, ISS policy had been to recommend against equity plans that permitted the current payment of dividends or dividend equivalents on performance-based awards prior to the vesting of such awards.  The policy permitted companies to accrue such dividends and dividend equivalents and pay them out when the performance-based award vested.

Now under the 2017 ISS policies (effective for shareholder meetings occurring on or after February 1, 2017), ISS will include a new factor under the Plan Features portion of its EPSC policy that will look to see whether dividends or dividend equivalents can be paid on any award under the plan prior to the vesting of the underlying shares/award. Companies that do not prohibit the payment of dividend and dividend equivalents on all plan awards before the awards vest, will receive no points under this factor. Companies that prohibit the payment of dividends and dividend equivalents until the awards vest (and can allow for accrual of such dividends/dividend equivalents), will receive full points under this factor. Because the ISS policy permit for the accrual of dividends and payment when the award vests, many companies will view complying with this prohibition to gain the points under the EPSC policy will make sense, and may enable them to gain a few additional shares in their request everything else being equal.

ISS has not yet released its FAQs on the new EPSC policy, but I expect that the FAQs will indicate that the old dividend/dividend equivalent policy with respect to performance-based awards has been supplanted by the new EPSC factor and anything less than a complete prohibition of the payment of dividend/dividend equivalents on all unvested awards will not provide any points under the EPSC policy.

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Equilar’s Peer Group Submission Window Open Until December 31, 2016

Equilar announced that companies may now submit their peer groups through December 31, 2016.  Equilar recommends companies that will file their proxies between January 15, 2017 and July 15, 2017 submit their peer groups.  The company peer groups will be used to create the company’s 2017 Equilar Market Peers™.

As a reminder, the Equilar Market Peers are used by Glass Lewis when it generates its say on pay vote recommendations.

Companies may submit their updated peer groups at: https://insight.equilar.com/app/peer_update/

Equilar’s FAQs on its peer group submission process and how the Equilar Market Peers may differ from the Glass Lewis Market Peers powered by Equilar can be found at: https://insight.equilar.com/app/peer_update/peer_update_faq.jsp

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Caution on Transferable Equity Award Provisions

As companies begin to get their equity plan proposals ready for the 2017 proxy season, it is an appropriate time to review those equity plan proposals to see if they contain or permit the transfer of equity awards to third parties for value, e.g., the ability of participants to sell stock options to an unrelated investor, such as was done at Microsoft in 2003. If companies review ISS’s Equity Plan Scorecard Policy, there is not a specific mention of any concern over transferable stock awards.  Instead, companies need to review the ISS policy on Transferable Stock Option (TSO) Programs.  Under that policy, ISS indicates that it will recommend against equity plan proposals if the details of an ongoing TSO program are not provided to shareholders.

This is significant because the specific criteria that ISS expects companies to detail are not those ordinarily include in a typical equity plan proposal seeking shareholder approval of a new or amended equity plan, and include, but are not limited to, the following:

  • Eligibility
  • Vesting
  • Bid-price
  • Term of options
  • Cost of the program and impact of the TSOs on a company’s total option expense, and
  • Option repricing policy.

If a company’s equity plan provides for the transferability of equity awards to third parties, and the above TSO disclosure are not made (which ISS will then evaluate on a case-by-case basis), then the company can expect a negative ISS vote recommendation on their equity plan proposal even if they have run the ISS Equity Plan Scorecard model and believe the plan will pass muster.

Source: ISS United States Proxy Voting Manual, 2016 Benchmark Policy Recommendations, Effective for Meetings on or after February 1, 2016, Published February 23, 2016,  p. 187

This very scenario just played out at Thor Industries, Inc. Thor had an equity plan proposal in its proxy filed October 27, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516748833/d251706ddef14a.htm#tx251706_29 ) that provided for transferability of equity awards to third parties (see Section 6.6 of the Thor Industries, Inc. 2016 Equity and Incentive Plan). “A Nonstatutory Stock Option may, in the sole discretion of the Administrator, be transferable to a permitted transferee, as hereinafter defined, upon written approval by the Administrator to the extent provided in the Option Agreement.” The plan goes on to define permitted transferree to include “(b) third parties designated by the Administrator in connection with a program established and approved by the Administrator pursuant to which Participants may receive a cash payment or other consideration in consideration for the transfer of such Nonstatutory Stock Option.” [emphasis added]

As a result of this language, ISS found that the proposed plan permitted the transfer of stock options to financial institutions without prior shareholder approval.  ISS classified this as a problematic equity-related provision under its list of overriding features and practices.  As a result, even though the plan scored sufficient points under the ISS Equity Plan Scorecard to warrant ISS support, ISS nevertheless recommended against the proposed plan in its November 22, 2016 report. Thor announced it would amend its proposed equity plan to remove this transferability feature (https://www.sec.gov/Archives/edgar/data/730263/000114420416136370/v453873_defa14a.htm) and then filed the updated proxy with the amended proposed plan that had removed this transferability feature on November 28, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516777872/d301535ddefa14a.htm). Then on November 29, 2016, ISS released an updated Proxy Report Alert in which it changed it recommendation to support Thor’s proposed equity plan.

The odd thing in all this? None of Thor’s current named executive officers hold any stock options and stock options are not part of the long-term incentive program disclosed for fiscal 2016. This case serves as a good reminder to check equity plans being taken to shareholders to ensure that they do not permit such TSO programs without shareholder approval.

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Glass Lewis Releases 2017 Policy Updates

On November 18, 2016, Glass Lewis announced that it had released updated 2017 proxy voting guidelines for several countries and that updated guidelines for other countries would be released over the next few weeks. The announcement can be found at: http://www.glasslewis.com/2017-proxy-season-asian-guidelines-available/

The countries that Glass Lewis released updated proxy voting guidelines for initially were:

Glass Lewis identified the following key areas for changes in the US 2017 proxy voting guidelines (none related to compensation):

  • Evaluating director commitments
  • Governance following an IPO or spin-off
  • Board evaluation and refreshment

And these were the key areas for Canada:

  • Evaluating director commitments
  • Board responsiveness to a failed advisory vote
  • Equity compensation plans
  • Shareholder rights plans
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ISS Peer Group Submission Window Open Until 8 pm Eastern on Dec. 9

ISS announced that the window period for public companies to submit updates for their peer groups is open and will close at 8 pm Eastern on December 9, 2016.

The peer group submissions are now handled through ISS Corporate Solutions’ Governance Analytics website.  Only companies (issuers) may submit their peer groups to ISS.

What peer companies is ISS seeking?  Those that were used to set pay that is required to be covered in the next proxy to be filed. For example, for calendar-year companies, their 2017 proxies will cover 2016 pay and pay decisions. Therefore, ISS is seeking the peer group used for setting/considering 2016 pay, not the peer group used for setting/considering 2017 pay (which would be required to be disclosed in the 2018 proxy). If a company has not made any changes to its 2016 peer group compared to its 2015 peer group, it does not have to submit anything to ISS.  If a company has made changes to its 2016 peer group, it should seriously consider submitting this peer group to ISS during the window period to ensure that the 2017 ISS proxy report accurately reflects the company’s 2016 peer group as disclosed in the proxy.  Failure to submit an updated peer group for 2016 will mean that ISS will likely use the company’s 2015 peer group in its 2017 proxy report.

For more information about the peer group submission process, companies can visit this ISS website:

https://www.issgovernance.com/company-peer-group-feedback

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