DealLawyers.com Blog

From Francis Byrd of The Altman Group:

Not that they have ever truly been welcome with RiskMetrics, but the pressure has been ratcheted up on companies that have shareholder rights plans (commonly called poison pills). Under its new policy updates that were recently released, RMG will issue a withhold or against recommendation against ALL board nominees (except new nominees) if a company adopts a poison pill without shareholder approval. Starting in 2010 RMG will analyze companies with a classified board every year, and an annually elected board once every three years, and they will issue a withhold or against recommendation from all Board members if a company maintains a non-shareholder approved pill.

In prior years, RMG would only issue a negative recommendation at the shareholders meeting immediately following adoption or renewal of the pill. The new policy is not retroactive, and only applies to companies adopting or renewing pills after November 19, 2009. However, please note that RMG states in future years it may apply the new policy retroactively.

RMG is also making a distinction between long-term pills (a term of more than 12 months) and short-term pills (a term of less than 12 months). Companies that adopt short-term pills have a little more leeway with RMG as they will consider other factors before issuing a negative recommendation. These other factors include the date of the pill adoption relative to the next shareholder meeting, the rationale for adoption or renewal, the company’s governance practices, and the company’s track record of accountability to their shareholders.

This update is no doubt a negative development for companies with poison pills. Companies have always had to consider the RMG implications for adopting or renewing a pill. However, now companies have to consider the fact that RMG will be issuing a withhold or against recommendation every three years or every one year depending on the Board structure. Among other things companies will need to consider is the level of influence of RMG among their shareholders, how a negative recommendation may impact the vote (e.g. plurality versus majority voting), and whether or not to adopt a shareholder friendly pill.