Securities Regulation and Corporate Governance

On April 8, 2020, Institutional Shareholders Services (“ISS") released guidance regarding the application of its policies amid the COVID-19 pandemic (available here).  In the guidance, ISS discusses various governance issues in light of the COVID-19 pandemic and states that it will be flexible in its application of its policies, while requiring disclosure of the rationale for certain actions that companies may take.  The following are four main topics covered in the guidance for companies in the United States:

​1.      Annual Meeting Related Matters: Postponements and Virtual Meetings

• Meeting postponements.  Given the current pandemic, when it becomes necessary or appropriate for companies to postpone their annual meetings, ISS notes that shareholders will expect and appreciate companies providing disclosure that keep all stakeholders informed about material events and developments.  ISS further encourages companies and boards to use webcasts, conference calls and other mediums of electronic communications to engage with their shareholders and investors, even if meetings have necessarily been postponed.
  
• Virtual-only meetings.  While in prior years ISS has favored hybrid meetings (in-person meetings that include a virtual aspect to allow shareholders to participate remotely) over virtual-only meetings, ISS has not recommended votes against companies that hold virtual-only meetings.  ISS encourages companies opting to hold “virtual-only" meetings to disclose clearly that it is related to the COVID-19 pandemic and to strive to provide shareholders with a meaningful opportunity to participate as fully as possible, including being able to ask questions. 
  

2.      Shareholder Rights: Poison Pills and Board or Senior Management Absences and Changes

• Poison pill.  ISS will continue to evaluate poison pills or shareholder rights plans with a duration of less than a year on a case-by-case basis, while considering various factors, including the disclosed rationale for adopting the pill, any imminent threats, and specific provisions (such as triggers, terms, qualified offer provisions and waivers for passive investors) of the pill.  ISS reiterates that this policy encourages boards to put poison pills to a shareholder vote but notes that a severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification for adopting a pill of less than one year in duration.  However, ISS further notes that 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 the initial less-than-one-year duration.  
• Director Attendance.  In examining directors' attendance, ISS will be open to disclosures addressing alternative forms of attendance and, while sensitive to privacy concerns, will take into account disclosures about absences due to COVID-19 related circumstances.
• Board or senior management changes.  ISS will be flexible in applying guidelines related to directors' independence, potential overboarding, board diversity and other attributes if boards need to fill vacancies due to the disability or incapacity of a director, or urgently need to add critical expertise to address issues arising from the pandemic.  Overall, ISS believes that boards should have broad discretion to ensure having the right board and management team in place during this crisis and will adjust its policies as appropriate. 
  

3.      Executive Compensation: Changes to Metrics and Targets and Option Repricing 

• Changes to metrics and targets.  While the decision to make adjustments to 2020 compensation programs generally will be analyzed and addressed by shareholders at 2021 meetings, ISS encourages boards to provide contemporaneous discussion of their rationale for making any adjustments.  ISS generally does not support midstream changes to long-term awards, and it will conduct a case-by-case analysis by evaluating whether directors exercised appropriate discretion and provided adequate explanations for any such changes to shareholders.
• Option repricing.  If boards reprice options without asking for shareholder approval or ratification in a timely fashion, ISS will generally continue to recommend votes against directors under their board accountability policies.  If boards seek shareholder approval or ratification of repricing action at 2020 meetings, ISS will generally recommend opposing any option repricing actions that occur within one year of a drastic drop in the company's stock price.  
  

4.      Capital Structure: Dividends, Share Repurchases, and Capital Raising​ 

• Dividends.  While ISS ordinarily looks for dividend payout ratios to be within a certain range in certain markets, in light of the current pandemic, ISS will support broad discretion for boards to set dividend payout ratios that may fall below historic levels or customary market practice this year.
• Share repurchases.  ISS notes that given the current pandemic, repurchases are anything but routine and that “boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at the current time."  In addition, ISS will evaluate a board's repurchase actions in 2020 prior to the company's 2021 annual meeting to consider whether directors managed risks in a responsible fashion.
• Capital raising.  With respect to share issuances and private placements, ISS will continue to make case-by-case assessments, while considering company-specific factors.  For share issuances, in light of the current pandemic, ISS may recommend votes for proposals that exceed any normal market-specific limits on size and potential dilution based on a board's clear and compelling justification in light of the current pandemic.  For private placements, ISS will also consider whether there are exceptional circumstances, such as the possibility of the company's going out of business or filing for bankruptcy protection if the transaction is not approved or if the company's auditor or management indicate that the company has going concern issues.  
  

Special thanks to Jenny Choi in our New York office for her contributions on this article.​