A new Clearbridge analysis provides the low-down on 2023 share request proposals and offers guidance on what investors and proxy advisors are looking for when considering these proposals.
Why it matters: Unlike Say on Pay votes, shareholder votes on equity proposals are binding. Although failures are rare, they are slightly up from past years, so companies should pay careful attention to guidelines and evolving practice.
The stats: Share request proposals increased by 13% this year, largely due to increased share usage in 2022 because of lower stock prices.
- Share requests as a percentage of common shares outstanding ranged from 2.4% (at the 25th percentile) to 6.4% (at the 75th percentile).
- Rejected proposals tripled from 2022 from 2 to 6, yet represent less than 1% of the total.
Key factors in a vote:
- Dilution. Shareholder support swings significantly based on dilution – from 94% support when dilution is less than 5% to 76% support when dilution is 15% or above.
- Burn Rate. Consider historical burn rates - 2022 had a higher burn rate as more shares were required to grant the same equity value at lower stock prices.
Check the box: Review these suggestions to prepare for an upcoming share request.
- Evaluate the current share pool in context of stock price. Review the projected duration of your current share pool and model different scenarios with market volatility, assuming various stock prices to understand impact.
- Identify plan design changes that could impact share usage and burn rate. Remember, PSUs should be accounted for at maximum achievement.
- Assess plan features. Investors and proxy firms examine specific features and performance metrics that could be perceived negatively. Check if your plan provides for elements like evergreen provisions, liberal share recycling or reload options that could reduce support.
- Engage shareholders. Determine if a preemptive conversation with key stakeholders about the share request is appropriate and if so, incorporate feedback.
- Understand voting policies. Know where key shareholders, ISS and Glass Lewis stand on share proposal policies. Many companies take advantage of the ISS Equity Plan Scorecard to determine the share limits that would “guarantee” a recommendation in support.