CII Updates Reincorporation & Shareholder Voting Rights Policies

March 21, 2025

 

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Thomas Bolger

On 10 March 2025 the Council of Institutional Investors’ US Asset Owner Members approved two amendments to its policies on corporate governance.

The First Amendment expands CII’s existing policy on reincorporation, which states that US companies should not reincorporate into other countries where corporate governance practices are weaker. The new policy addresses reincorporation within the US (i.e., from one state to another) as well as non-US companies reincorporation. The new policy also says companies should not make changes to governing documents in connection with reincorporation that diminish shareholder rights.

The change is timely with recent instances of US companies with a controlling shareholder seeking approval to reincorporate from Delaware to other jurisdictions, most notably Tesla Inc to Texas and TripAdvisor Inc to Nevada, have received attention.

There is a concern for minority shareholders where a company with a controlling shareholder seeks reincorporation to a state with more lenient laws and greater protection from liability for directors and officers, therefore impacting shareholder rights and ability to take legal recourse. Notably, non-controlled Delaware corporations tend to face fewer litigation challenges and as such it is less likely that such companies will seek to reincorporate.

For example, shareholders pursued legal action against TripAdvisor, arguing that the proposed  move would avoid accountability for its controlling shareholder, Greg Maffei, for potential self-dealing because Nevada sets a lower bar for such transactions, without offering compensation to minority shareholders.

The other change addresses the use of arrangements by companies that recreate the effects of dual-class share structures without actually adopting a dual-class share structure with disparate voting rights, often referred to as stealth dual-class shares. The changes also encourage companies not to adopt alternative structures or mechanisms that similarly misalign voting rights and economic ownership, discourage boards from entering agreements that reduce their ability to independent oversee management; and calls on companies to clearly disclose structures that misalign voting or other governance rights with economic ownership.

Examples of “stealth”dual-class structures include:

• Identify-based voting: such as providing superior voting rights to shares held by a “principal shareholder” or superior voting rights for shares held for a certain period of time.
• Golden Shares: issued by a company or a government that provide certain veto rights that allows the shareholder to block an action such as a merger.
• Vote caps: where the voting rights of shareholders are capped, such as by stating that a shareholder cannot exercise more than 25% of the total voting power.

Previous Policy	New Policy
1.8: U.S. companies should not reincorporate to offshore locations where corporate governance structures are weaker, which reduces management accountability to shareowners.	1.8: Companies should incorporate in jurisdictions with strong investor rights and protections. Companies should not reincorporate in jurisdictions where corporate governance structures are less robust than their current jurisdiction of incorporation. Additionally, companies should not adopt new articles of incorporation or bylaws which diminish investor rights and protections in conjunction with reincorporation.
2.6a: did not exist in the previous policy	2.6a: Boards should not enter into agreements that substantially reduce or eliminate their ability to independently oversee the management of a corporation, such as agreements that assign decision-making rights disproportionate to economic ownership over issues central to a board’s decision-making responsibility. Companies with a structure or mechanism that misaligns voting or other governance rights and economic ownership should clearly disclose this information to investors in conjunction with materials provided for investment decision-making and voting.
3.3: Each share of common stock should have one vote. Corporations should not have classes of common stock with disparate voting rights. Authorized, unissued preferred shares that have voting rights to be set by the board should not be issued without shareowner approval.	3.3: Each share of common stock should have one vote. Corporations should not have classes of common stock with disparate voting rights. Moreover, companies should not adopt alternative structures or mechanisms that similarly misalign voting rights and economic ownership. Authorized, unissued preferred shares that have voting rights to be set by the board should not be issued without shareowner approval.

 

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Last Updated: 21 March 2025