Despite the wave of corporate governance reform that began after the enactment of Sarbanes-Oxley in 2002 – and that continues pretty much unabated today – companies going public have gotten a pass. Whether the process of going public takes the form of a spin-off or a conventional IPO, newly public companies have been able to emerge into the world with a full (or nearly full) arsenal of defensive weapons that can help them stave off an unwanted acquisition.
The rationale for this leniency is that newly public companies are like tadpoles that need to be given time to turn into frogs (or princes) before they are gobbled up.
That seems to be changing.
The first hint of a change came in 2012, when the California Public Employees’ Retirement System – CalPERS – the ginormous public pension fund, announced that it was considering boycotting IPOs where the issuers had adopted a dual class stock structure with unequal voting rights. However, that doesn’t seem to have stopped or even slowed the inclusion of dual class stock or other defensive provisions in IPOs.
More recently – in fact, on February 5, 2016 – the Council of Institutional Investors issued a statement on “investor expectations for newly public companies.” The statement
“…emphasizes [the Council’s] longstanding support for a ‘one-share, one vote’ equity structure, majority voting for directors in uncontested elections, simple majority-vote requirements for bylaw amendments and proposals, independent board leadership and non-classified boards.”
However, as is often the case, the Council’s position is not entirely unreasonable (yes, I said that) in that it does not bar these prohibitions for fledgling public companies or suggest that Council members refrain from investing in them. Rather, its position is that companies that come into the world with these provisions should sunset them “within a limited time period.” Moreover, the statement encourages companies and their investors to “focus on long-term outcomes.”
(As an aside, this isn’t the first time that the Council has included a soupçon of reason in its governance stew. In fact, in my dealings with the Council over the years, I’ve found it to be constructive even when its views differ greatly from mine.)
The statement is set to be voted on by CII General Members at their spring meeting, coming up on March 23. I expect to attend (though not as a General Member — i.e., I will have no vote) and will let you know what happens.
In the meantime, let me know your thoughts.