Capital Markets Alert
Both ISS and Glass Lewis have provided guidance on the application of their respective policies due to the impact of COVID-19. Below is a summary of certain of the guidance and related considerations for public companies during this proxy season.
ISS (which has also established its own COVID-19 resource center)
Annual Meetings. ISS is “extremely mindful” of the risks that prevent major (and minor) gatherings like physical annual meetings and acknowledges that virtual-only meetings “may be both necessary and desirable in the current situation.” ISS is not changing its existing lack of a policy to recommend votes against companies that hold virtual-only meetings. If boards decide to hold virtual-only meetings, ISS encourages disclosure that clearly articulates the reason for moving to a virtual-only meeting (i.e., like COVID-19) and to provide shareholders with a meaningful opportunity (subject to jurisdictional law) to participate as fully as practicable, including being able to ask questions of directors and senior management and engage in dialogue. Companies are encouraged to commit to return to in-person or hybrid (physical location combined with a remote component) meetings in the future.
Poison Pills. Many companies are considering adopting poison pills or other defensive measures to ward off potential bidders due to recent stock price drops and general volatility. ISS has a generally flexible policy to consider poison pills (also known as a rights plan) with a duration of less than a year on a case-by-case basis, analyzing the board’s rationale for adoption of such a measure, the existence of imminent threats, the specific provisions, whether the company has committed to seek a shareholder vote for any future renewal of the pill and “whether directors appear to have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team.” ISS states that, for a short-term rights plan with reasonable triggers, a steep stock price decline as a result of COVID-19 is likely to be considered valid justification. ISS advises companies to provide detailed disclosure regarding choice of duration or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period. ISS will continue to closely analyze the triggers for such plans “within the context of the rationale provided and the length of the plan adopted, among other factors.”
Director Attendance. Although many directors may decide to not attend in-person shareholder meetings or scheduled board meetings for safety reasons, they may still be able to attend by phone or electronically. In disclosing director absences from annual or special meetings, ISS states that “[w]hile disclosures related to directors’ attendance records should be sensitive to privacy concerns with respect to an individual director’s health, they should provide shareholders with adequate information to allow them to make informed judgments and considered voting decisions if relevant about directors’ attendances and any absences from board and committee meetings.”
Dividends. ISS “will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice” in order to allow companies to manage cash in light of COVID-19.
Share Repurchases. Stock buybacks are under intensifying scrutiny, and ISS indicates that “boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at the current time, especially (although not only) if the company’s workforce has been reduced or has suffered other kind of cutbacks.” Board will need to take into account “reputational, regulatory and business risks that exercising such authority might create before going ahead with any repurchases under the authority, even if approved by shareholders.” Although ISS will generally recommend in favor of repurchase authorities within customary limits, a board’s actions related to repurchases during 2020 will be reviewed during the 2021 proxy season to “consider if the directors managed risks in a responsible fashion for any repurchases undertaken under the authority.”
Fundraising. ISS intends to assess requests to increase authorized shares of common stock on a case-by-case basis due to the likely need to engage in financings for many companies trying to weather the COVID-19 impact. For preferred stock, ISS will consider whether the shares requested are blank check preferred stock issuable for antitakeover purposes. In exceptional circumstances, including the impact of COVID-19, based on “clear and compelling justification by the board of a company’s underlying need in the current economic environment,” ISS will apply a case-by-case analysis and may recommend in favor of proposals “that exceed any normal market-specific limits on size and potential dilution.” For private placements, ISS intends to apply a case-by-case analysis considering the rationale, potential dilution, the discount/premium in issuance price as compared to the pre-issuance share price before the announcement of the private placement, conflicts of interest, consideration of alternatives and market reaction since announcement. ISS will also consider exceptional circumstances, such as potential insolvency/bankruptcy if the transaction is not approved or if there are going-concern issues.
Annual Meetings. Glass Lewis acknowledges investor concerns about potential “mischief” that could result from the virtual-only format, but believes that the virtual-only format provides “compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings[,]” given the current COVID-19-related restrictions. Accordingly, for the 2020 proxy season, Glass Lewis will review virtual-only meetings “on a case-by-case basis and will also note whether companies state their intention to resume holding in-person or hybrid meetings under normal circumstances” and will “refrain from recommending to vote against members of the governance committee on this basis, provided that the company discloses, at a minimum, its rationale for doing so, including citing COVID-19.” If companies continue holding virtual-only meetings in the future, Glass Lewis expects to see robust disclosure concerning shareholder participation in their proxy statements. Of note, the standard policy will apply to all shareholder meetings occurring after June 30, 2020, even “if the pandemic continues well beyond this date,” because “companies have been given sufficient time to address shareholder concerns as outlined in our standard policy.”
Poison Pills. While the impacts of COVID-19 may delay activism at least initially, Glass Lewis believes that existing market conditions have revealed opportunities for activism. Glass Lewis “remains generally skeptical of poison pills,” and states that its “current policy is designed to apply a nuanced, contextual assessment of these provisions.” Thus, Glass Lewis is supportive of poison pills that are limited in scope to accomplish a particular objective, such as “the closing of an important merger, managing a clear and present hostile takeover threat, or other contextual factors like a severe drop in stock price due to a widespread industry or market downturn.” Glass Lewis considers COVID-19 and the related economic crisis to be a “reasonable context for adopting a poison pill” if the duration of the pill is one year or less and the company discloses a rational COVID-19-related rationale for adoption. If a pill does not satisfy these conditions, Glass Lewis will recommend opposing the re-election of all board members who served at the time of adoption. Additionally, if the company fails to seek shareholder approval for a future renewal of the pill, Glass Lewis intends to recommend opposing the re-election of all board members who served at the time of renewal and encourages companies to give assurances that they will seek shareholder approval of any future renewal.
Balance Sheets. Glass Lewis anticipates “widespread pausing of buyback programs, suspending dividends and an increase in capital raisings and placements.” Glass Lewis takes the view that “responsible companies hit hard by the crisis have taken early and decisive action to roll back planned salary increases or above-target bonus outcomes, sharing the pain felt by employees and shareholders. […] Trying to make executives whole at even further expense to shareholders and other employees is a certainty for proposals to be rejected and boards to get thrown out—and an open invitation for activists and lawsuits onto a company’s back for years to come. Even those companies [that] project a ‘business as usual’ approach to executive pay will face opposition if employees and shareholders see their own ‘paychecks’ cut. Companies would be wise to avoid this.”
General Approach. Glass Lewis believes that its existing guidelines allow “appropriate discretion and pragmatism” but will need to rely on the openness and fulsome disclosure provided by companies in order to exercise such discretion. Glass Lewis believes that companies with “a good track record on governance, performance and the use of board discretion prior to the pandemic will be afforded more discretion in our analysis than those that do not.” Glass Lewis “will exercise discretion when considering governance issues where there is a clear material benefit to shareholders for supporting proposals that bring timing and/or certainty of decisions and outcomes.”
Please contact any member of Orrick's Capital Markets Group for further assistance regarding coronavirus implications for public companies and other legal impacts of the coronavirus on your company.