ISS Issues Policy Guidance Addressing the Impacts of the COVID-19 Pandemic | Practical Law

ISS Issues Policy Guidance Addressing the Impacts of the COVID-19 Pandemic | Practical Law

Institutional Shareholder Services (ISS) issued policy guidance related to the impacts of COVID-19.

ISS Issues Policy Guidance Addressing the Impacts of the COVID-19 Pandemic

Practical Law Legal Update w-024-9334 (Approx. 6 pages)

ISS Issues Policy Guidance Addressing the Impacts of the COVID-19 Pandemic

by Practical Law Corporate & Securities
Published on 09 Apr 2020USA (National/Federal)
Institutional Shareholder Services (ISS) issued policy guidance related to the impacts of COVID-19.
On April 8, 2020, Institutional Shareholder Services (ISS) published policy guidance for the impacts of COVID-19. ISS' policy guidance provides stakeholders with specific guidance on a number of voting policy issues that are likely to be directly impacted over the coming months by COVID-19 and the global response to it, including:

AGMs: Postponing Physical Meetings or Holding Virtual-Only Meetings

ISS issued guidance related to the impact of COVID-19 on AGMs, including postponing physical meetings or holding virtual-only meetings. Specifically:
  • In markets that do not permit online shareholder meetings, companies should follow market regulatory guidance and only hold physical meetings when it is determined to be safe to do so. In the interim, companies should use their standard disclosure documents, press releases, and websites to keep all stakeholders informed about material events and developments. It will be positively noted by ISS when companies and boards engage with shareholders and investors through webcasts and conference calls.
  • In markets that permit online shareholder meetings, companies should hold virtual-only meetings. Although ISS usually promotes hybrid meetings (physical and online participation), ISS is currently encouraging virtual-only meetings. ISS will not make adverse voting recommendations related to companies holding virtual-only meetings until it is safe to hold in-person meetings again.
  • ISS encourages companies opting to hold virtual-only meetings to disclose the reason for their decision clearly, and to provide shareholders with a meaningful way of participating in the meeting as fully as possible.
  • Companies should return to in-person or hybrid meetings when practicable and safe.
Additionally, see the Legal Updates:

Poison Pills, Directors, and Management

ISS issued guidance related to board management and defensive responses by companies impacted by COVID-19, including:
  • Poison pills. A severe stock price decline due to COVID-19 would provide a valid justification for the adoption of a rights plan of less than one year in duration. In doing so, boards should provide detailed disclosure relating to their choice of duration and/or providing a shareholder approval vote.
  • Director attendance. In response to the COVID-19 pandemic, absences should be disclosed in a manner that addresses privacy concerns and protects directors' sensitive information (director health, etc.), but still provides shareholders with adequate information to allow them to make informed judgments and voting decisions relating to directors' attendances.
  • Director or management changes. ISS existing benchmark policy provides boards with the flexibility to make changes to the boardroom roster under circumstances that make it necessary to do so, such as COVID-19. Similarly, ISS policy also provides flexibility to boards in filling senior executive roles on an interim basis when necessary. ISS believes that boards should have broad discretion during the COVID-19 crisis to ensure that they have the right management team in place. ISS will adjust the application of its policies as appropriate for the exceptional circumstances of COVID-19.

Compensation Issues

ISS issued guidance related to company compensation plan changes in response to COVID-19, such as:
  • If companies make changes to their performance metrics, goals, or targets used in their short-term compensation plans, ISS encourages them to provide contemporaneous disclosure of the rational for such changes, which ISS will assess under its existing benchmark policies.
  • With regard to stock options, some companies may seek to reprice, replace, exchange, cancel, or re-grant "out-of-money" awards. ISS will apply its existing case-by-case policy approach if boards seek shareholder approval/ratification of its repricing actions at 2020 meetings. Generally, ISS policy in the US market recommends opposing any repricing that occurs within one year of a precipitous drop in the company's stock price. In such cases ISS will consider (among others) the following factors:
    • whether the design is shareholder value neutral (value-for-value exchange);
    • whether surrendered options are not added back to the plan reserve;
    • whether replacement awards do not vest immediately; and
    • whether executive officers and directors are excluded.

Capital Structure and Payouts

ISS issued guidance related to company capital structure and payouts, including:
  • Dividends. Ordinarily, ISS looks for dividend payout ratios to be within a certain range based on earnings for the prior year. However, this year ISS will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice. In the event of dividend reductions, ISS will consider whether boards disclose plans to use any preserved cash from dividend reductions to support or protect their business and workforce.
  • Share repurchases. During this crisis, ISS stated that companies will be subject to intense scrutiny and criticism by undertaking repurchases, especially if the company's workforce has been reduced or suffered any cutbacks. ISS encourages boards to consider the reputational, regulatory, and business risks that exercising buybacks might create prior to making repurchases, even with shareholder approval. ISS will, in the absence of barring regulation or serious concerns related to the company, generally continue to recommend in favor of repurchase authorities within customary limits for each market. ISS will review the board's actions related to repurchases over the course of 2020 according to whether the directors managed risks in a responsible fashion.
  • Capital raisings. Generally, ISS assesses requests to increase authorized common or preferred stock, share issuances, private placements, and other related proposals on a case-by-case approach, subject only to any market-specific rules or guidance. ISS clarified that the impact of COVID-19 constitutes an exceptional circumstance and justification for share issuances. However, ISS will still consider various company-specific factors when reviewing such issuances, including disclosure, rationale, potential dilution, conflicts of interest, and the market reaction.
For more information on the COVID-19 impact on share issuance requirements, see Legal Update, NYSE Waives Certain Shareholder Approval Requirements Due to COVID-19.
Throughout the remainder of the main 2020 proxy season, ISS will monitor any additional issues and impacts created by COVID-19 developments and new regulations and update its guidance accordingly. ISS welcomes feedback, questions, or concerns through the ISS Help Center. For more information on the COVID-19 impact on capital markets and securities, see Practice Note, Road Map to the COVID-19 Impact on Capital Markets and Securities and Global Coronavirus Toolkit.