controlled companies, mutual funds, ipos, dual listed, BDC, and SPACs

Question 1

We believe controlled companies warrant certain exceptions to our independence standards. The board’s function is to protect shareholder interests; however

Answer 1

when an individual, entity (or group of shareholders party to a formal agreement) owns more than 50% of the voting shares, the interests of the majority of shareholders are the interests of that entity or individual.Consequently, Glass Lewis does not apply our usual two-thirds board independence rule and therefore we will not recommend voting against boards whose composition reflects the makeup of the shareholder population

Question 2

We do not require that controlled companies have boards that are

Answer 2

at least two-thirds independent. So long as the insiders and/or affiliates are connected with the controlling entity, we accept the presence of non-independent board members.

Question 3

(CONTROLLED COMPANY)The compensation committee and nominating and governance committees do not need

Answer 3

to consist solely of independent directors.

Question 4

We believe that standing nominating and corporate governance committees at controlled companies are

Answer 4

unnecessary. Although having a committee charged with the duties of searching for, selecting, and nominating independent directors can be beneficial, the unique composition of a controlled company’s shareholder base makes such committees weak and irrelevant.

Question 5

we believe that independent compensation committees at controlled companies are

Answer 5

unnecessary. Although independent directors are the best choice for approving and monitoring senior executives’ pay, controlled companies serve a unique shareholder population whose vot-ing power ensures the protection of its interests. As such, we believe that having affiliated directors on a controlled company’s compensation committee is acceptable. However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not serve on the compensation committee. Therefore, Glass Lewis will recommend voting against any insider (the CEO or otherwise) serving on the compensation committee.

Question 6

Controlled companies do not need

Answer 6

an independent chair or an independent lead or presiding director. Although an independent director in a position of authority on the board — such as chair
or presiding director — can best carry out the board’s duties, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests.

Question 7

board size requirements for controlled companies.

Answer 7

We have no board size requirements for controlled companies.

Question 8

Despite a controlled company’s status, unlike for the other key committees, we nevertheless believe that audit committees

Answer 8

should consist solely of independent directors. Regardless of a company’s controlled status, the interests of all shareholders must be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors to oversee the preparation of financial reports could create an insurmountable conflict of interest

Question 9

With regard to companies where voting control is held through a multi-class share structure with disproportionate voting and economic rights, we will

Answer 9

carefully examine the level of approval or disapproval attributed to unaffiliated shareholders when determining whether board responsiveness is warranted. Where vote results indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.

Question 10

Where an individual or entity holds between 20-50% of a company’s voting power

Answer 10

we believe it is reasonable to allow proportional representation on the board and committees (excluding the audit committee) based on the individual or entity’s percentage of ownership.

Question 11

We believe companies that have recently completed an initial public offering (“IPO”) or spin-off should be allowed

Answer 11

adequate time to fully comply with marketplace listing requirements and meet basic corporate governance standards

Question 12

Generally speaking, Glass Lewis refrains from making recommendations on the basis of governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.)

Answer 12

during the one-year period following an IPO.

Question 13

When evaluating companies that have recently gone public, Glass Lewis will review

Answer 13

the terms of the applicable governing documents in order to determine whether shareholder rights are being severely restricted indefinitely. We believe boards that approve highly restrictive governing documents have demonstrated that they may subvert shareholder interests following the IPO. In conducting this evalua-
tion, Glass Lewis will consider:
1. The adoption of anti-takeover provisions such as a poison pill or classified board
2. Supermajority vote requirements to amend governing documents 3. The presence of exclusive forum or fee-shifting provisions
4. Whether shareholders can call special meetings or act by written consent
5. The voting standard provided for the election of directors
6. The ability of shareholders to remove directors without cause
7. The presence of evergreen provisions in the company’s equity compensation arrangements
8. The presence of a multi-class share structure which does not afford common shareholders voting
power that is aligned with their economic interest

Question 14

In cases where Glass Lewis determines that the board has approved overly restrictive governing documents, we will

Answer 14

generally recommend voting against members of the governance committee. If there is no governance committee, or if a portion of such committee members are not standing for election due to a classified board structure, we will expand our recommendations to additional director nominees, based on who is standing for
election.

Question 15

In cases where, preceding an IPO, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board, we will

Answer 15

generally recommend voting against all members of the board who served at the time of the IPO if the board: 
(i) did not also commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of these provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class 
share structure). In the case of a multi-class share structure, if these provisions are put to a shareholder vote, we will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.

Question 16

In our view, adopting an anti-takeover device

Answer 16

unfairly penalizes future shareholders who (except for electing to buy or sell the stock) are unable to weigh in on a matter that could potentially negatively impact their ownership interest. This notion is strengthened when a board adopts a classified board with an infinite duration or a poison pill with a five- to ten-year term immediately prior to going public, thereby insulating management for
a substantial amount of time.

Question 17

shareholders should also be wary of companies that adopt

Answer 17

supermajority voting requirements before their IPO. Absent explicit provisions in the articles or bylaws stipulating that certain policies will be phased out over a certain period of time, long-term shareholders could find themselves in the predicament of having to attain a supermajority vote to approve future proposals seeking to eliminate such policies.

Question 18

For companies that trade on multiple exchanges or are incorporated in foreign jurisdictions but trade only in the U.S., we will apply the governance standard most relevant in each situation. We will consider a number of factors in determining which Glass Lewis country-specific policy to apply, including but not limited to:

Answer 18

(i) the corporate governance structure and features of the company including whether the board structure is unique to a particular market; (ii) the nature of the proposals; (iii) the location of the company’s primary listing, if one can be determined; (iv) the regulatory/governance regime that the board is reporting against; and (v) the availability and completeness of the company’s SEC filings.

Question 19

Companies trading on the OTC Bulletin Board are not considered

Answer 19

“listed companies” under SEC rules and therefore not subject to the same governance standards as listed companies. However, we believe that more
stringent corporate governance standards should be applied to these companies given that their shares are still publicly traded.

Question 20

When reviewing OTC companies, Glass Lewis will review the available disclosure relating to the shareholder meeting to determine whether shareholders are able to evaluate several key pieces of information, including:

Answer 20

(i) the composition of the board’s key committees, if any; (ii) the level of share ownership of company insiders or directors; (iii) the board meeting attendance record of directors; (iv) executive and non-employee director compensation; (v) related-party transactions conducted during the past year; and (vi) the board’s leadership structure and determinations regarding director independence.

Question 21

We are particularly concerned when company disclosure lacks any information regarding

Answer 21

the board’s key committees. We believe that committees of the board are an essential tool for clarifying how the responsibilities of the board are being delegated, and specifically for indicating which directors are accountable for ensuring:
(i) the independence and quality of directors, and the transparency and integrity of the nominating process;
(ii) compensation programs that are fair and appropriate; (iii) proper oversight of the company’s accounting,
financial reporting, and internal and external audits; and (iv) general adherence to principles of good corporate governance.

Question 22

In cases where shareholders are unable to identify which board members are responsible for ensuring oversight of the above-mentioned responsibilities

Answer 22

we may consider recommending against certain members of the board. Ordinarily, we believe it is the responsibility of the corporate governance committee to provide
thorough disclosure of the board’s governance practices. In the absence of such a committee, we believe it is appropriate to hold the board’s chair or, if such individual is an executive of the company, the longest-serving non-executive board member accountable.

Question 23

Mutual funds, or investment companies, are

Answer 23

structured differently from regular public companies (i.e., operating companies). Typically, members of a fund’s advisor are on the board and management takes on a different role from that of regular public companies.

Question 24

MF- Size of the board of directors

Answer 24

The board should be made up of between five and twenty directors.

Question 25

MF- The CFO on the board

Answer 25

Neither the CFO of the fund nor the CFO of the fund’s registered investment advisor should serve on the board.

Question 26

MF- Independence of the audit committee

Answer 26

The audit committee should consist solely of independent directors.

Question 27

MF- Audit committee financial expert

Answer 27

At least one member of the audit committee should be designated as the audit committee financial expert.

Question 28

MF-Independence of the board

Answer 28

We believe that three-fourths of an investment company’s board should be made up of independent directors. This is consistent with a proposed SEC rule on invest-
ment company boards. The Investment Company Act requires 40% of the board to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent. In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal appeals court ordered that this rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund boards play a vital role in overseeing the relationship between the fund and its investment manager, there is greater need for independent oversight than there is for an operating company board.

Question 29

MF-When the auditor is not up for ratification

Answer 29

We do not recommend voting against the audit committee if the auditor is not up for ratification. Due to the different legal structure of an investment com-
pany compared to an operating company, the auditor for the investment company (i.e., mutual fund) does not conduct the same level of financial review for each investment company as for an operating company.

Question 30

MF-Non-independent chair

Answer 30

The SEC has proposed that the chair of the fund board be independent.
We agree that the roles of a mutual fund’s chair and CEO should be separate. Although we believe this would be best at all companies, we recommend voting against the chair of an investment company’s nominating committee as well as the board chair if the chair and CEO of a mutual fund are the same person and the fund does not have an independent lead or presiding director. Seven former SEC commissioners support the appointment of an independent chair and we agree with them that “an independent board chair would be better able to create conditions favoring the long-term interests of fund shareholders than would a chair who is an executive of the advisor.”

Question 31

MF-Multiple funds overseen by the same director

Answer 31

Unlike service on a public company board, mutual fund boards require much less of a time commitment. Mutual fund directors typically serve on dozens of other mutual fund boards, often within the same fund complex. The Investment Company Institute’s (“ICI”) Overview of Fund Governance Practices, 1994-2012, indicates that the average number of funds served by an independent director in 2012 was 53. Absent evidence that a specific director is hindered from being an effective board member at a fund due to service on other funds’ boards, we refrain from maintaining a cap on the number of outside mutual fund boards that we believe a director can serve on.

Question 32

Glass Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its investment advisor or sub-advisors are

Answer 32

generally best left to management and the members of the board, absent a show-
ing of egregious or illegal conduct that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:
• The terms of any amended advisory or sub-advisory agreement;
• Any changes in the fee structure paid to the investment advisor; and
• Any material changes to the fund’s investment objective or strategy.

Question 33

We generally support amendments to a fund’s investment advisory agreement absent a material change that is not in the best interests of shareholders

Answer 33

ending voting against a proposed amendment to an investment advisory agreement or fund reorganization. However, in certain cases, we are more inclined to support an increase in advisory fees if such increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements between a fund’s advisor and sub-advisor, primarily because the fees received by the sub-advisor are paid by the advisor, and not by the fund.

Question 34

In matters pertaining to a fund’s investment objective or strategy, we believe

Answer 34

shareholders are best served when a fund’s objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally recommend voting against amend-
ments to a fund’s investment objective or strategy when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally purchased, and which could therefore potentially negatively impact some investors’ diversification strategies.

Question 35

a REIT must have a minimum

Answer 35

of 100 shareholders (the “100 Shareholder Test”) and no more than 50% of the value of its shares can be held by five or fewer individuals (the “5/50 Test”).

Question 36

as a publicly traded security listed on a stock exchange, a REIT

Answer 36

must comply with the same general listing requirements as a publicly traded equity.

Question 37

REITs typically include percentage ownership limitations in their
organizational documents, usually

Answer 37

in the range of 5% to 10% of the REITs outstanding shares. Given the com-
plexities of REITs as an asset class, Glass Lewis applies a highly nuanced approach in our evaluation of REIT proposals, especially regarding changes in authorized share capital, including preferred stock.

Question 38

Glass Lewis is generally against the authorization of preferred shares that

Answer 38

allows the board to determine the preferences, limitations and rights of the preferred shares (known as “blank-check preferred stock”). We believe that granting such broad discretion should be of concern to common shareholders, since blank-check preferred stock could be used as an antitakeover device or in some other fashion that adversely affects the voting power or financial interests of common shareholders.

Question 39

given the requirement that a REIT must distribute 90% of its net income annually,

Answer 39

it is inhibited from retaining capital to make investments in its business. As such, we recognize that equity financing likely plays a key role in a REIT’s growth and creation of shareholder value.

Question 40

shareholder concern regarding the use of preferred stock as an anti-takeover mechanism may be allayed by

Answer 40

the fact that most REITs maintain ownership limitations in their certificates of
incorporation. For these reasons, along with the fact that REITs typically do not engage in private placements of preferred stock (which result in the rights of common shareholders being adversely impacted), we may sup-
port requests to authorize shares of blank-check preferred stock at REITs.

Question 41

Business Development Companies (“BDCs”) were created by the U.S. Congress in 1980; they are

Answer 41

regulated under the Investment Company Act of 1940 and are taxed as regulated investment companies (“RICs”) under the Internal Revenue Code.

Question 42

BDCs typically operate as

Answer 42

publicly traded private equity firms that invest in early

stage to mature private companies as well as small public companies.

Question 43

BDCs realize operating income when

Answer 43

their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements that are similar to those of REITs—the most evident of which is that BDCs must distribute at least 90% of their taxable earnings as dividends.

Question 44

Considering that BDCs are required to distribute nearly all their earnings to shareholders,

Answer 44

they sometimes need to offer additional shares of common stock in the public markets to finance operations and acquisitions.

Question 45

shareholder approval is required in order for a BDC to

Answer 45

sell shares of common stock at a price below Net Asset Value (“NAV”). Glass Lewis evaluates these proposals using a case-by-case approach, but will recommend supporting such requests if the following conditions are met:
• The authorization to allow share issuances below NAV has an expiration date of one year or less from the date that shareholders approve the underlying proposal (i.e. the meeting date);
• The proposed discount below NAV is minimal (ideally no greater than 20%);
• The board specifies that the issuance will have a minimal or modest dilutive effect (ideally no greater than 25% of the company’s then-outstanding common stock prior to the issuance); and
• A majority of the company’s independent directors who do not have a financial interest in the issuance approve the sale.
In short, we believe BDCs should demonstrate a responsible approach to issuing shares below NAV, by proactively addressing shareholder concerns regarding the potential dilution of the requested share issuance, and explaining if and how the company’s past below-NAV share issuances have benefitted the company.

Question 46

When a BDC submits a below-NAV issuance for shareholder approval, we

Answer 46

will refrain from recommending against the audit committee chair for not including auditor ratification on the same ballot.

Question 47

Because of the unique way these proposals interact, votes may be

Answer 47

tabulated in a manner that is not in shareholders’ interests. In cases where these proposals appear on the same ballot, auditor ratification is generally the only “routine proposal,” the presence of which triggers a scenario where broker non-votes may be counted toward shareholder quorum, with unintended consequences.

Question 48

Under the 1940 Act, below-NAV issuance proposals require relatively high shareholder approval. Specifically, these proposals must be approved by the lesser of:

Answer 48

(i) 67% of votes cast if a majority of shares are represented at the meeting; or (ii) a majority of outstanding shares. Meanwhile, any broker non-votes counted toward
quorum will automatically be registered as “against” votes for purposes of this proposal. The unintended result can be a case where the issuance proposal is not approved, despite sufficient voting shares being cast in favor. Because broker non-votes result from a lack of voting instruction by the shareholder, we do not believe
shareholders’ ability to weigh in on the selection of auditor outweighs the consequences of failing to approve an issuance proposal due to such technicality.

Question 49

Special Purpose Acquisition Companies (“SPACs”), also known as “blank check companies,” are

Answer 49

are publicly traded entities with no commercial operations and are formed specifically to pool funds in order to complete a merger or acquisition within a set time frame.

Question 50

In general, the acquisition target of a SPAC is either

Answer 50

not yet identified or otherwise not explicitly disclosed to the public even when the founders of the SPAC may have at least one target in mind. Consequently, IPO investors often do not know what company they will ultimately be investing in.

Question 51

SPACs are therefore very different from typical operating companies. Shareholders

Answer 51

do not have the same expectations associated with an ordinary publicly traded company and executive officers of a SPAC typically do not continue in employment roles with an acquired company.

Question 52

Governing documents of SPACs typically provide for the return

Answer 52

of IPO proceeds to common shareholders if no qualifying business combination is consummated before a certain date. Because the time frames for the consummation of such transactions are relatively short, SPACs will sometimes hold special shareholder meetings at which shareholders are asked to extend the business combination deadline. In such cases, an acquisition target will typically have been identified, but additional time is required to allow management of the SPAC to
finalize the terms of the deal.

Question 53

Glass Lewis believes management and the board are generally in the best position to

Answer 53

determine when the extension of a business combination deadline is needed. We therefore generally defer to the recommendation of management and support reasonable extension requests.

Question 54

The board of directors of a SPAC’s acquisition target is in many cases

Answer 54

already established prior to the business combination. In some cases, however, the board’s composition may change in connection with the business combination, including the potential addition of individuals who served in management roles with the SPAC.

Question 55

The role of a SPAC executive is

Answer 55

unlike that of a typical operating company executive. Because the SPAC’s only
business is identifying and executing an acquisition deal, the interests of a former SPAC executive are also different. Glass Lewis does not automatically consider a former SPAC executive to be affiliated with the acquired operating entity when their only position on the board of the combined entity is that of an otherwise independent director. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will therefore consider such directors to be independent.