April 9, 2020

Rights Plans: ISS Signals That Pills Aren’t So Poisonous In a Pandemic

This Sidley memo notes that ISS’s recent guidance on short-term poison pills suggests that it may not think they’re such a bad idea during a time of significant market disruption.  Here’s an excerpt:

In ordinary times, we typically advise companies to refrain from adopting a poison pill in the absence of a specific activist or takeover threat and instead keep it “on the shelf” (i.e., fully drafted and ready for adoption). That is because ISS, Glass Lewis and many institutional investors generally frown upon the adoption of poison pills in the absence of such a specific threat. What was unclear until ISS issued new guidance yesterday was whether the proxy advisory firms would consider market conditions due to the COVID-19 pandemic a type of threat that may justify the adoption of a poison pill.

As we hoped, it appears that at least ISS understands why the adoption of poison pills may be warranted in these unprecedented times. In its April 8 guidance, ISS reiterated that it would consider situations on a case-by-case basis, and it noted:

“A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should 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.”

The authors don’t expect ISS to penalize boards that adopt pills with a duration of less than a year in response to a sharp drop in their company’s stock price, assuming that the other terms – particularly the trigger threshold – are justified.  In that regard, the memo notes that ISS’s stated position is consistent with its April 3 recommendation to vote “against” the Chairman of The Williams Companies due to the board’s adoption of a poison pill with a 5% trigger in a situation where the poison pill was not adopted to protect the company’s NOLs.

Along the same lines, the memo makes it clear that ISS’s guidance isn’t going to provide companies with a free pass to implement short-term pills, and that a board adopting a pill “needs to communicate clearly the rationale for adoption, and the rationale for any terms that are outside the norm, to all constituencies, including ISS, other proxy advisory firms and institutional investors.”

The memo also suggests that ISS’s guidance indicates that it will take a more skeptical view of activist claims made in proxy contests in the current environment – with ISS noting that activists that move forward with contests this spring will be labeled by management as “opportunistic or unreasonable,” and stating further that, in some cases, “that will not be an unfair characterization.”

John Jenkins