On April 8, 2020, Institutional Shareholder Services (ISS) issued new guidance explaining how it intends to apply certain of its voting policies during the 2020 proxy season in light of the challenges and uncertainty caused by the COVID-19 pandemic. This Sidley Update highlights the aspects of the guidance that are most significant to U.S. public companies.
Annual Shareholder Meetings
- Virtual-Only Meetings. ISS typically favors “hybrid” meetings with both a physical meeting and online virtual participation but acknowledges that virtual-only meetings may be “both necessary and desirable in the current environment.” ISS does not have a policy to recommend votes against U.S. companies that hold virtual-only meetings and confirmed in the new guidance that there will be no change to that approach for the 2020 proxy season.
- Meeting Postponements. ISS indicated that it will be “positively noted” when companies and boards that have necessarily had to postpone their annual shareholder meetings use webcasts, conference calls and other forms of electronic communication to engage with shareholders.
- Poison Pills. ISS noted that while it will continue to evaluate shareholder rights plans (poison pills) on a case-by-case basis, ISS will consider a significant drop in the company’s stock price as a result of the COVID-19 pandemic to be a valid justification “in most cases” for adopting a pill of less than one year in duration without a shareholder vote. In its determination, ISS will consider the board’s explanation for adopting the pill, including the specific pill provisions (e.g., trigger threshold, duration and exemptions). For more information on the new guidance on poison pills, see the Sidley Update titled ISS Signals More Understanding for Poison Pills and Skepticism for Activist Campaigns During the COVID-19 Crisis.
Director Attendance and Leadership Changes
- Director Attendance. ISS notes that disclosures related to director attendance at board, committee and shareholder meetings should be sensitive to privacy concerns with respect to an individual director’s health yet provide shareholders with adequate information to make informed voting decisions. As ISS noted, in the U.S., for disclosure purposes, directors who attend a meeting by telephone or electronic means are generally considered to have attended the meeting.
- Changes to the Board or Senior Management. Given the exceptional circumstances, ISS will apply its policies in a way that provides boards with broad discretion to ensure they have the right team in place. If the COVID-19 pandemic creates a need for a board to fill vacancies due to the disability or incapacity of a director or promptly add a director with critical expertise, ISS will evaluate the situation on a case-by-case basis taking into account the company’s explanation for the change. Current ISS policies already provide flexibility if a director needs to fill in for a member of the senior management team on an interim basis due to disability or incapacity. In addition, ISS notes that discretion and flexibility are already built into its current policies relating to director independence, overboarding and board diversity. Note that ISS’ current policies and the new guidance do not specifically address how ISS will evaluate members of senior management stepping in as directors for quorum purposes under emergency bylaws or other emergency powers (discussed in a previous Sidley Update), for example, if the board ceases to be majority independent.
- Change in Metrics or Targets. If the COVID-19 pandemic and its resulting economic effects cause boards to materially change the performance metrics, goals or targets used in short-term compensation plans for 2020, ISS encourages boards to contemporaneously disclose to shareholders the reasons for making the changes (even though shareholders will not generally vote on 2020 compensation until the 2021 annual meeting). Under its current policies, ISS generally does not support midstream changes to awards granted under long-term compensation plans because they cover multi-year periods. ISS will evaluate any such changes on a case-by-case basis to determine whether directors exercised appropriate discretion and adequately explained the reasons for the changes.
- Option Repricing. ISS believes its case-by-case policy approach to stock option repricing continues to be appropriate for the 2020 proxy season. If a board undertakes a repricing action (e.g., by repricing, exchanging or canceling and re-granting “out-of-the-money” options) without shareholder approval or ratification, the directors’ actions will be subject to scrutiny under ISS’ board accountability policies and could therefore result in vote recommendations against compensation committee members and potentially the entire board. If boards seek shareholder approval or ratification of repricing actions at their 2020 annual meetings, ISS will apply its existing case-by-case policy and will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price. In its evaluation, ISS will consider 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.
- Share Repurchases. ISS warned of the intense scrutiny and reputational harm a company may face if it were to repurchase shares in the midst of the current pandemic, particularly if the company recently made workforce reductions, and even if the repurchase is made under authority previously approved by shareholders. In the absence of “barring regulation” or serious concerns related to the company, ISS will generally continue to recommend in favor of repurchase authorizations (which typically extend for 12 months or more) within customary limits. However, ISS will review any repurchases undertaken pursuant to the authority in 2020 and through the date of the 2021 annual meeting to consider whether directors managed risks responsibly. While the new guidance does not specifically address repurchases under board-approved authority, boards should be aware that ISS could similarly scrutinize such repurchases from a risk oversight perspective under its “governance failures” policy. Under that policy, ISS recommends against directors, committee members and potentially the entire board due to material failures of governance, stewardship or risk oversight.
- Capital Raises. Current ISS policies generally provide for case-by-case evaluations of proposals to increase authorized common or preferred stock, share issuances and private placements, subject to any market-specific rules or guidance.
- Share Issuances. ISS will apply its existing case-by-case framework to general authorization and share issuance requests but will also adapt the framework to account for any appropriate local market regulatory relaxations or new guidance as a result of the pandemic. ISS already considers company-specific factors including (1) proxy statement disclosure of the specific purposes for the proposed increase, (2) the risks to shareholders of not approving the request and (3) the size and potential dilutive impact of the request combined with any market-specific guidelines on limits and preemptive rights. In the case of preferred shares requests or issuances, ISS also considers whether the shares requested are blank check preferred shares that can be used for antitakeover purposes. In exceptional circumstances, which ISS acknowledges the current pandemic “clearly constitutes,” and based on clear and compelling justification by the board of a company’s need, ISS policies already allow for case-by-case evaluations and vote recommendations in favor of proposals that exceed any normal market-specific limits on size and potential dilution.
- Private Placements. ISS policies already allow for case-by-case analysis of proposals seeking shareholder approval of private placements. ISS considers (1) the rationale for the private placement issuance, (2) the potential dilution to existing shareholders, (3) the discount/premium in issuance price to the unaffected share price before the announcement of the private placement, (4) any conflicts of interest, (5) consideration of alternatives and (6) the market’s reaction to the proposed private placement since announcement. ISS will also consider whether there are exceptional circumstances, such as an expectation that the company will go out of business or file for bankruptcy if the transaction is not approved or the auditor/management has identified going concern issues.
As the COVID-19 pandemic evolves, ISS may update or supplement the guidance as needed throughout the 2020 proxy season.
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