Proxy Firm OKs Poison Pills, Bashes Buybacks In Pandemic

By Elise Hansen
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Law360 (April 9, 2020, 6:16 PM EDT) -- Short-term poison pills may be a reasonable response to coronavirus-related stock drops, but companies should be extremely wary about share repurchases during the pandemic, Institutional Shareholder Services Inc. said in releasing its COVID-19 policies.

The proxy advisory firm, issuing its guidance as proxy season approaches, said Wednesday that it generally prefers companies to put so-called poison pills, also called shareholder rights plans, to a shareholder vote. But current market conditions could provide a rationale for adopting short-term rights plans if a company is threatened with a hostile takeover, the guidance said. Proxy advisory firms such as ISS counsel shareholders on voting matters.

"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," ISS said. "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."

But businesses should think carefully about what qualifies as "severe" in applying the guidance, Stephen Quinlivan, a partner at Stinson LLP, told Law360. 

"I don't know that just moving down with the S&P 500 counts," he said, adding that only a few large companies have adopted shareholder rights plans in recent weeks. "[ISS] isn't opening the floodgates."

ISS also largely cautioned against stock buybacks in coming months, but said it would be more permissive about slashing dividend payments.

"Boards may open themselves and their companies up to intense criticism and reputational damage by undertaking [share] repurchases at the current time, especially (although not only) if the company's workforce has been reduced or has suffered other kinds of cutbacks," the guidance said.

However, many companies have signaled they may reconsider dividend levels. That may be appropriate under the circumstances, particularly since some governments are considering forbidding dividend payments for companies that accept public aid or other subsidies related to the pandemic, ISS said.

"This year, we will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice," ISS said. "We will look at whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce," the guidance added.

And the firm stressed ongoing engagement between companies and shareholders, even if communications have to shift online because of social distancing guidelines.

"'Virtual-only' meetings may be both necessary and desirable in the current situation," the guidance said. "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."

The advice comes as regulators, businesses and their advisers have been grappling with best practices during the pandemic. The U.S. Securities and Exchange Commission has released guidance on how companies should approach disclosure in the coming earnings season and urged companies that could receive funds from the federal rescue package to disclose their plans to investors.

Overall, the guidance asserts that existing ISS policies are largely adaptable to the current situation, Quinlivan said. But the guidance is still useful for those seeking clarity on ISS' views, he said. 

"They aren't giving much ground, but they're recognizing [COVID-19]," Quinlivan said. "People want to know which way ISS is headed, and now people know."

Representatives for ISS declined to comment beyond the published guidance on Thursday.

--Additional reporting by Tom Zanki. Editing by Michael Watanabe.

Update: this story has been updated with comment about the guidance. 

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