On April 8, 2020, Glass Lewis & Co. (“Glass Lewis”) clarified its guidance for issuers on the adoption of poison pills (shareholder rights plans) in light of the current COVID-19 pandemic. Glass Lewis’s guidance comes on the heels of the policy guidance issued by Institutional Shareholder Services (“ISS”) late last week that we discussed here. Similar to ISS, Glass Lewis acknowledged that the COVID-19 pandemic has created “dire conditions [that] have prompted many companies to consider the added risk of opportunistic activism.” And Glass Lewis confirmed that it believes the coronavirus and the related economic crisis provide a “reasonable context for adopting a poison pill under the following conditions: [t]he duration of the pill is limited to one year or less; and [t]he company discloses a sound rationale for adoption of the pill as a result of coronavirus.” Glass Lewis made clear, however, that “[i]f the pill does not meet these conditions, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s adoption.”
Glass Lewis also recommended that companies “provide shareholders with additional confidence by assuring them at the time of the pill’s adoption that any renewal of the pill will require shareholder approval.”
Glass Lewis emphasized that it continues to generally oppose the adoption of poison pills, but it is supportive of those that meet a particular objective, including managing a clear and present hostile takeover threat or a severe drop in stock price due to a widespread industry or market downturn.
Glass Lewis also noted that it is “generally supportive” of NOL poison pills. Glass Lewis reviews such poison pills “on a case-by-case” basis and looks for the pill to be “limited in duration (typically three years or less),” "to require shareholder ratification for each renewal," and to be supported by “a sound rationale for its adoption.”
Notably, Glass Lewis’s policy led it to take a different position from ISS on the poison pill recently adopted by The Williams Companies, Inc. ISS recommended against reelection of The Williams Companies’ chairman and only “cautionary support” for other directors due to the circumstances of The Williams Companies’ poison pill, which we discussed here. Glass Lewis, however, supported the election of all directors notwithstanding a 5% trigger in The Williams Companies’ poison pill or its decision not to submit the pill for stockholder ratification at its upcoming annual meeting, both of which were expressed concerns of ISS. Glass Lewis cited various factors—including the pill’s one year duration, the company’s reaching out to all of its major shareholders, extreme market dislocations, the conditions stemming from COVID-19 and oil market volatility and the pill’s goal of enabling shareholders to receive full value for their investment and to prevent a person from gaining control without paying a control premium.
Glass Lewis’s and ISS’s divergent reactions to The Williams Companies’ poison pill serve as a reminder that the two major proxy advisors do not march in lockstep when evaluating a poison pill in making their voting recommendations. Issuers should be cognizant of the different approaches of the two firms and which proxy advisor’s guidance its shareholders typically follow (if any).
We continue to believe that properly tailored poison pills play an important role in takeover defense. Glass Lewis emphasized the importance of good communication with shareholders in this context, noting that “Boards that are engaged with their shareholders and transparent in their disclosures, and which provide shareholders with a meaningful voice on matters that affect them, can more easily gain trust and approval from shareholders on a variety of issues.” Well-prepared companies should consider the benefits of having a poison pill “on the shelf,” and in some circumstances, the adoption of a poison pill may be warranted. Like ISS’s recent guidance, Glass Lewis’s guidance reminds companies that although current depressed share prices may provide a valid rationale for adopting a poison pill to prevent abusive takeover practices, a poison pill should be tailored to the circumstances, and the proxy advisors will continue to scrutinize their terms.
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