On April 8, 2020, Institutional Shareholder Services Inc. (“ISS”) issued new policy guidance based on the effects of the current coronavirus pandemic on poison pill (shareholder rights plan) adoption. Notably, and consistent with our prior analysis of poison pills in the current corporate environment here, ISS affirmed that the current pandemic is a “genuine, short-term potential threat” and 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.” As a result, ISS will continue to consider these short-duration poison pills on a case-by-case basis, considering the disclosed rationale for adopting the plan, including any imminent threats, and other relevant factors (such as a commitment to put any future renewal of the pill to a shareholder vote). Notably, ISS emphasized that boards should provide detailed disclosure regarding their choice of duration of the rights plan, or on any decisions to delay or avoid putting plans to a shareholder vote for a period of a year or longer. In prior published guidance, ISS has expressly focused on the date of the pill’s adoption relative to the date of the next meeting of shareholders, including whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances.
ISS will also examine the specific provisions of a pill (including triggers, terms, “qualified offer” provisions, and passive investor waivers). ISS also reemphasized that the triggers for poison pills will continue to be closely scrutinized within the context of the rationale provided and the length of the plan adopted. Most commonly antitakeover poison pills have a 10%-20% trigger and NOL poison pills have a 4.9% trigger. Notably, this week, ISS recommended against a vote in favor of the Williams Companies, Inc.’s chairman and only “cautionary support” for other directors at the company’s annual meeting this month, because of circumstances relating to the company's recently adopted poison pill, including what ISS characterized as an "extremely rare" 5% trigger for an antitakeover poison pill. Other than NOL poison pills, only three poison pills have been adopted since 2016 with a trigger threshold below 10%.1 ISS also noted Williams Companies' failure to put that pill to a vote of shareholders despite the fact that it adopted the pill on the same date it filed its proxy statement with the SEC and an alleged failure to consider alternative terms, such as a shorter-term pill or an initially higher trigger level with later shareholder ratification to effect the desired 5% trigger. ISS’s action was taken despite Williams Companies’ pointing to the combined effects of the coronavirus pandemic and the recent decline in oil prices as a rationale for its pill. Its recommendation illustrates that although the current environment may provide valid justification in many cases, each poison pill should be tailored to the facts in order to avoid a negative reaction by ISS.
We continue to believe that properly tailored poison pills play an important role in takeover defense. Well-prepared companies should consider having a poison pill “on the shelf,” and in some circumstances, the adoption of a poison pill may be warranted. As always, companies that endeavor to implement a pill should take pains to show their work and disclose the rationale justifying the plan and other relevant factors. This new guidance reminds companies that, although current depressed share prices may provide a valid rationale for adopting a poison pill to prevent abusive takeover practices, ISS will continue to scrutinize their terms and adoption.
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