Last month, we described the increased threat of activists and acquirors seeking to capitalize on the COVID-19 sell-off to build positions in high-value companies at depressed prices. Even before the current crisis emerged, we recommended that all U.S. public companies regularly review their defense profile and have a shareholder rights plans “on the shelf.” For companies uniquely impacted by the crisis—especially those whose market capitalization has fallen below $1 billion—we suggested they re-assess their vulnerabilities in this new environment and consider whether now was the right time to adopt a rights plan to ward off potential opportunistic behavior. Some companies have done just that—since March 1, 2020, 24 U.S. public companies have adopted a defensive shareholder rights plan (6 other U.S. public companies have adopted NOL rights plans).
As we noted at the time, for a rights plan to comport with long-standing ISS and Glass Lewis guidance it must be limited in duration (one year or less unless otherwise approved by a shareholder vote) and the ownership trigger cannot be so low as to be unduly restrictive (recent precedents have tended to cluster in the 10-15% range, unless the shareholder rights plan is designed to protect tax attributes, in which case it will typically have a 4.9% trigger; ISS’ official position is that defensive pills generally should have a trigger no lower than 20%). If a rights plan adopted by a board adheres to this guidance, ISS and Glass Lewis will consider the adoption on a “case-by-case” basis in issuing their respective recommendations for the election of the directors adopting the rights plan. As witnessed last week, a board adopting a rights plan that meaningfully departs from a proxy advisor’s guidance can result in the firm issuing a withhold recommendation for one or more of the directors.
On April 8, 2020, ISS issued its policy guidance on the “Impacts of the COVID-19 Pandemic”. While ISS indicated that it will continue to take a “case-by-case” approach to reviewing rights plans with a term of less than a year, it also provided a few specific guidelines that should be considered in designing rights plans in the current environment:
- Rights plans should generally be limited to “genuine, short-term potential threat situations such as during the current pandemic.” The policy guidance states that “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.”
- Boards should provide detailed disclosure when implementing a rights plan; ISS will review both the board’s explanation for choosing to adopt a poison pill, as well as the features of the pill itself—including the triggers, duration, “qualified offer” provisions and waivers for “passive” investors.
- Trigger thresholds for rights plans will be evaluated holistically “within the context of the rationale provided and the length of the plan adopted, among other factors.”
- Although ISS encourages boards to put pills to a shareholder vote, ISS’s guidance indicates a failure to put a short-term rights plan to a vote in the near term will not be fatal. Disclosure should include an explanation of the board’s choice of duration and any decision to delay or avoid putting a pill to a shareholder vote beyond the initial duration of the pill.
On April 9, 2020, Glass Lewis released a post entitled “Poison Pills and Coronavirus: Understanding Glass Lewis’ Contextual Policy Approach”. Glass Lewis stated that while it continues to generally oppose the adoption of poison pills, it is “supportive of poison pills that meet certain conditions, particularly those that are limited in scope to accomplish a particular objective.” Glass Lewis went on to state that the coronavirus and the “related economic crisis” present reasonable context for adopting a poison pill that is limited to one year or less, and as to which the “company discloses a sound rationale for adoption . . . as a result of coronavirus.” Glass Lewis also explicitly stated that it will recommend against re-election of all board members adopting a pill that does not meet those guidelines, and that it will also recommend against the re-election of all board members renewing a rights plan without seeking shareholder approval. While Glass Lewis did not give specific guidance on the appropriate trigger threshold for a COVID-19-related rights plan, it highlighted its support for the board of directors of a company that recently adopted a rights plan with a 5% trigger (which conversely led ISS to recommend against the election of chairman of the company’s board).
As always, the decision of whether or not to adopt a rights plan will be situation specific. We continue to believe boards should carefully consider adding active defenses to their profile during this unusual dislocation. The recent updates from ISS and Glass Lewis reinforce the need for boards not only to consider the terms of a potential rights plan holistically in light of their overall defense and governance profile, but also to tailor the terms of any rights plan that is adopted to the nature of the threat and to clearly communicate and engage with key constituencies with respect to the rationale for adopting the rights plan.