On April 8, 2020, International Shareholder Services (ISS) issued guidance on how ISS analysts will apply its ISS Benchmark and Specialty Proxy Voting policies (ISS benchmark policies) in light of the impacts of the COVID-19 pandemic. Generally, the ISS benchmark policies afford the ISS research teams the ability to exercise discretion and use case-by-case analysis to take into consideration macro and various other circumstances, although, historically, ISS recommendations have rarely deviated from their framework guidance. In light of the COVID-19 pandemic, ISS determined that it was appropriate to provide specific guidance on certain voting policy issues likely to be directly implicated by COVID-19, where research teams may be asked to exercise more discretion in the current proxy season.
The key takeaways for the policy guidance as it relates to annual meetings, shareholder rights plans, corporate governance, board compensation, and capital structures are discussed below.
Annual Meeting Issues
Meeting Postponements. In markets where virtual meetings are prohibited, many companies are postponing their annual meetings to a date when it is safe to hold physical meetings. As these companies announce their postponed annual meetings, ISS will note positively companies that engage with their shareholders and investors using forms of electronic communications, including webcasts and conference calls.
Virtual-Only Meetings. ISS will not change its approach to virtual-only meetings under most ISS benchmark policies, including under its U.S. policy, where ISS does not recommend against nominees of companies holding virtual-only meetings. In the small number of markets where the ISS benchmark policies discourage "virtual-only" annual meetings, ISS will alter such policies so as to not make adverse vote recommendations until it is safe to hold in-person meetings again. Companies that switch to "virtual-only" annual meetings are encouraged to explain clearly the reason for their decision to switch to a "virtual-only" meeting and to provide shareholders a "meaningful opportunity" to participate as fully as possible, including the ability to ask questions and to engage in a dialogue with directors and senior management.
Poison Pills, Shareholder Rights Plans, and Board/Director Issues
Poison Pills and Other Defensive Measures. Many companies are considering adopting poison pills or shareholder rights plans as a possible takeover defense in light of the recent steep declines in stock prices. ISS will continue its policy applicable to poison pills/rights plans with a duration of less than twelve months, which includes examining, on a case-by-case basis, (1) whether shareholders are adequately protected, (2) whether the existing board and management team are not "inappropriately entrenched," (3) the board's explanation for adopting a poison pill, and (4) the specific provisions of the rights plan. ISS noted that a severe decline in a company's stock as a result of COVID-19 is likely to justify adopting a rights plan of less than one year, but that boards should provide detailed disclosure regarding their choice of duration for the poison pill or any decisions to delay or avoid shareholder approval beyond the one-year period and that ISS would continue to carefully assess the terms of each plan within the context of the rationale provided by the board for adoption.
Director Attendance. Many directors may not attend in person the annual meeting or board meetings out of health and safety concerns. In the U.S., telephonic/electronic participation generally constitutes full participation in board and committee meetings. For markets that do not count telephonic/electronic participation as full participation in board or committee meetings, ISS will look for and welcome disclosure providing explanations of the alternative form of attendance. Disclosure regarding director attendance should allow shareholders to make an informed judgment about directors' attendance and any absences from board and committee meetings.
Changes to the Board or Senior Management. Boards may need to take crucial action quickly to address changes in the composition of the board or senior management. ISS affirmed its belief that boards should have broad discretion to ensure they have the right executive and management teams in place and implied that it will exercise more flexibility in applying its guidelines related to director independence, overboarding, diversity, and other attributes if boards are faced with the need to fill vacancies due to the disability or incapacity of a director or need to urgently add critical expertise to the board.
Changes in Metrics/Shift in Goals or Targets. As companies adjust their short-term and long-term compensation plans in response to changes in the market, boards are encouraged to disclose the rationale for such adjustments as they are made. ISS benchmark policies generally do not support changes to long-term compensation plans, but ISS has indicated that, this proxy season, it will review changes on a case-by-case basis to determine if directors exercised appropriate discretion and adequately explained to shareholders the reasons underlying the changes.
Option Repricing. ISS will apply its existing benchmark policies for each market to boards that seek to approve or ratify any option repricing. In the U.S. and other markets, repricing will continue to be subject to policies that require shareholder approval. For the U.S. market, where shareholder approval is sought, ISS will continue to apply its current policy and generally recommend against any repricing that occurs within one year of a "precipitous" decline in the company's stock price and will examine whether (1) the design is shareholder value neutral, (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 Issues
Dividends. Many companies are now questioning the appropriateness of continuing to pay dividends at previously anticipated levels, and some government assistance programs are prohibiting or considering prohibiting dividend payments for companies that accept loans or other subsidies. In the cases of those market-specific policies that look for dividend payout ratios to be within a certain range based on earnings for the prior year, ISS will support broad discretion for boards that set dividend payout ratios that fall below historic levels or customary market practice. ISS emphasized that it will consider whether the board announced plans to use any of the preserved cash from the dividend payment reduction to support and protect the company's business and workforce.
Share Repurchases. ISS generally favors share repurchases that are within customary limits of a company's market and will generally continue to recommend in favor of repurchase authorities within customary limits for each market. However, ISS explicitly suggested that boards should consider the reputational, regulatory, and business risks that continued repurchases may create in the current pandemic environment before going ahead with any repurchases under the authority, even if approved by shareholders, and indicated that ISS will, in the context of the 2021 annual meeting, review the board's actions related to repurchases in 2020 to see if the board managed risk in a responsible fashion.
Capital Raisings. ISS's guidance indicates that its analysts may use more discretion in reviewing proposals relating to a company's capital structure during the current proxy season in light of many companies' need of additional sources of financing, potentially loosening its historical practice of recommending against increases in authorized capital in excess of ISS's market-specific limits.
For proposals to increase authorized capital or approve share issuances in excess of current market-specific limits (currently 100% for U.S. issuers), ISS indicated that it may consider additional company-specific factors, including (1) disclosure in the proxy statement or equivalent disclosure documents 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. ISS stated that the pandemic constitutes an exceptional circumstance, which means that any capital raising proposal that exceeds any normal market-specific limits on size and potential dilution may still receive case-by-case review and a "For" recommendation. However, ISS emphasized that, in the case of increases in authorized preferred stock or approval of the issuance of preferred stock in excess of its current market-specific limits, it will continue to consider whether the shares requested are blank check preferred stock that can be utilized for anti-takeover purposes.
For proposals seeking approval of private placements, ISS will consider (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 exceptional circumstances exist, such as whether the company would be expected to file for bankruptcy protection if the transaction is not approved.
ISS will update this policy guidance as additional issues and impacts are created by the pandemic or identified by companies and investors.
For further alerts, webinars, and resources from Venable relating to the COVID-19 crisis and its impact, please see Venable's COVID-19 Resources.