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The Morning Risk Report: Exclusive Forums, Proxy Access Are Hot Governance Issues
By Ben DiPietro
The Wall Street Journal
Mar 28, 2017 7:12 am ET
An increasing number of publicly traded companies in the San Francisco Bay area are moving to limit the jurisdiction where a stockholder derivative class-action lawsuit can be filed. Some of these companies, as well as other companies from the region, are adopting some form of proxy access–and some are requiring board members to win a majority of votes before they can gain or retain their seat, according to a report from law firm Orrick released on Monday. The report looked at 153 Bay Area companies that are publicly traded and have market capitalizations of $750 million or more, said Ed Batts, global leader of Orrick’s M&A and private equity practice.
With regard to the so-called “exclusive forum” provisions that allow a company to decide in which jurisdiction a shareholder can file a lawsuit—it’s usually Delaware—Mr. Batts said more companies are changing their incorporation bylaws or other rules to stipulate where such lawsuits can be litigated. “In 2011-2012 nobody had it. Now 50% of companies have it” and more are likely to follow suit, said Mr. Batts. With proxy access—a provision allowing group of up to 20 stockholders who own collectively 3% of the company’s stock for at least three years to be able to nominate up to 20% of the board of directors–the report found fewer than 20% of the companies permit it. Mr. Betts said he expects that number to increase. “My guess is it will jump from 20% to 50% next year, and to 75% not too long after,” he said. “Companies are beginning to proactively adopt it.” Of the Bay Area companies that don’t have dual-class shares of common stock that allow founders to retain super-voting rights, 70% have some rule requiring a board nominee to get a majority of votes in support to win the seat in an uncontested election.
What does all this mean for companies outside of the Bay Area? Mr. Batts said they need to start to pay attention to some of these governance issues—and ought to do so before an activist investor comes knocking at the door. “They ought to get a check-up of their corporate governance health profile,” he said, adding the time to make changes is before an outside group starts to put pressure on the company, at which point making changes will look bad. “Be proactive in how you attack the corporate governance assessment and ask, ‘What do we have, what should we have?’”