Today, ISS provided special policy guidance on the impact of the COVID-19 pandemic, observing that, in light of the current uncertainty, it is appropriate “to provide our stakeholders with some specific guidance on a number of voting policy issues that are likely to be directly implicated over the coming months by the pandemic and the global response to it.” While the guidance suggests that ISS will apply its policies more flexibly under the circumstances, some things never change: option repricings—still disfavored.
Annual Meeting Issues
Postponements: ISS recognizes that, this year, “health and safety concerns must be paramount.” If virtual meetings are not permitted in some jurisdictions, “companies will need to follow their markets’ regulatory guidance and only hold physical meetings when it is determined to be safe to do so.” As a result, meetings may be delayed for weeks or months in some locations, and shareholders will expect companies to use “their standard disclosure documents (proxies, reports and accounts etc.), press releases and websites to keep all constituencies informed about material events and developments. In this time of uncertainty, it will be positively noted when companies and boards use webcasts, conference calls and other mediums of electronic communications to engage with their shareholders and investors, even if meetings have necessarily been postponed.”
▪ Virtual-Only Meetings: ISS is “extremely mindful” of the risks that prevent gatherings like physical annual meetings and acknowledges that virtual-only meetings “may be both necessary and desirable in the current situation.” ISS does not have a policy to recommend votes against companies that hold virtual-only meetings and is not changing that approach. If boards decide to hold virtual-only meetings, ISS “would encourage them to disclose clearly the reason for their decision (i.e. that it is related to the COVID-19 pandemic) and to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish. In such situations, boards are encouraged to commit to return to in-person or ‘hybrid’ meetings (or to put that matter to shareholders to decide) as soon as practicable.”
Poison Pills, Shareholder Rights and Boards/Directors
Poison Pills and other Defensive Measures: Some companies are considering adopting poison pills or other defensive measures “to protect against any threat of opportunistic bidders in the wake of recent stock price shocks.” ISS policy, “in the face of genuine, short-term potential threat situations such as during the current pandemic,” is to consider poison pills/rights plans with a duration of less than a year on a case-by-case basis, taking into account the board’s explanation or rationale for adoption of a poison pill, the existence of any imminent threats, the specific provisions (such as “triggers, terms, ‘qualified offer’ provisions and waivers for ‘passive’ investors”), 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.” For a short-term rights plans with reasonable triggers, a “severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification.” ISS advises boards to “provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period. The triggers for such plans will continue to be closely assessed 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 shareholder meetings, “[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.”
Changes to the Board of Directors or Senior Management: In connection with issues such as overboarding, director independence and board diversity, ISS believes “that boards should have broad discretion during this crisis to ensure that they have the right team in place and [ISS] will adjust the application of [its] policies as appropriate for the exceptional circumstances of the current pandemic.” For example, board members may need to fill senior executive roles on an interim basis as a result of illness or boards may need to fill board vacancies for the same reason or to add expertise to address pandemic concerns. In those circumstances, ISS will consider any issues raised on a case-by-case basis, taking into account the company’s explanation for the changes.
Change in Metrics/Shift in Goals or Targets: ISS expects that many boards will change performance metrics and targets used in their short-term compensation plans in light of stock market declines and a potential recession. Although shareholders will not be asked to consider those changes until next year, ISS is encouraging boards to explain their rationales for these changes to shareholders contemporaneously. For long-term plans, ISS is generally “not supportive of changes to midstream or in-flight awards since they cover multi-year periods. Accordingly, we will look at any such in-flight changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes.” ISS will also assess any structural changes to long-term plans designed to “take the new economic environment into consideration” under existing benchmark policies.
Option Repricing: ISS is still not a fan of stock option repricings, especially without timely shareholder approval, and will continue to apply its board accountability benchmark policy to the directors’ actions. If boards seek shareholder approval in 2020, ISS will consider the action on a case-by-case basis. In the U.S., pandemic notwithstanding, ISS “will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price.” ISS will also look at “whether (1) the design is shareholder value neutral (a value-for-value exchange), (2) surrendered options are not added back to the plan reserve, (3) replacement awards do not vest immediately, and (4) executive officers and directors are excluded.”
Capital Structure and Payouts
Dividends: In light of the need to manage cash, some boards are canceling or reducing dividends, and, this year, ISS “will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice.”
Share Repurchases: Stock buybacks are currently under harsh scrutiny, and ISS suggests 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.” To the extent that boards seek buyback authority, they 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, “the board’s actions related to repurchases over the course of 2020 will be reviewed in the run up to the time of the next AGM (generally 2021) to consider if the directors managed risks in a responsible fashion for any repurchases undertaken under the authority.”
Capital Raisings: Many companies will likely need to engage in financings to help them through the crisis, and ISS will assess requests to increase authorized common on a case-by-case basis. For share issuances, ISS will take into account “any appropriate local market regulatory relaxations or new guidance as a result of the crisis,” as well as company-specific factors such as proxy disclosure of the purposes of the increase, the the risks to shareholders of not approving, and “the size and potential dilutive impact of the request combined with any market-specific guidelines on limits and preemptive rights.” For preferred shares, ISS will consider whether the shares requested are “blank check preferred shares that can be used for antitakeover purposes.” In exceptional circumstances—which ISS believes include the current pandemic—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 will apply a case-by-case analysis considering the rationale, potential dilution, the “discount/premium in issuance price to the unaffected 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 bankruptcy if the transaction is not approved or where the company’s auditor or management has indicated that the company has going-concern issues.