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ISS Targets Evergreen Provisions

November 18, 2019

ISS is concerned about a recent decline in the number of companies submitting stock plans for shareholder approval. As a result, they’ve modified the Equity Plan Scorecard to make evergreen provisions a deal-breaker.

You’re Still Blogging About ISS?

I know, right? But in my poll last week, no one selected “snore” so I’m taking that as encouragement. If you are getting tired of hearing about ISS, this will probably be my last blog on them until they release an updated FAQ on their equity plan voting policy for next year.

Ok, Fine, What’s the Deal with Evergreen Provisions?

An evergreen provision allows a company to add a specified number of shares to its stock plan on an annual basis without obtaining shareholder approval for the allocation. Essentially, the allocations are included in the terms of the plan and approved by shareholders in advance, when the plan is initially submitted to a shareholder vote.

Most proxy advisors and institutional investors are not fans of evergreen provisions because they potentially allow the plan to continue for up to ten years without additional shareholder approval (the NYSE and Nasdaq require that plans with evergreen provisions be approved by shareholders at least once every ten years).

How Has ISS Scored Plans with Evergreen Provisions in the Past?

Historically, ISS simply included the effect of the evergreen provision in its Shareholder Value Transfer calculation. This would usually result in a very high cost for the plan, which often led to an unfavorable recommendation from ISS.

What’s Changing?

ISS’s Equity Plan Scorecard includes several overriding factors that result in an unfavorable recommendation regardless of whether the plan would otherwise receive a passing score. ISS is now adding an evergreen provision to these overriding factors. Thus, beginning with the 2020 proxy season, if a plan has an evergreen provision, ISS will automatically recommend that shareholders vote against it.

Why Implement This Change?

In their announcement, ISS notes that they have seen a 27% decline in the number of companies submitting plans for shareholder approval. They attribute this decline to the 2017 amendments to Section 162(m) under the Tax Cuts and Jobs Act. Previously, companies had to obtain shareholder approval for their stock plans once every five years to qualify for exemption under 162(m). Now that this exemption is no longer available, companies can wait longer to request shareholder approval for their stock plan if they have sufficient shares available in their plan.

The More Things Change, the More They Stay the Same?

Historically, ISS rarely recommended that shareholders vote for plans with evergreen provisions anyway. For plans that include an evergreen provision, the new policy is sort of a “go directly to jail, do not pass go, do not collect $200” card, but these plans probably wouldn’t have received a favorable recommendation even under ISS’s prior analysis.

- Barbara