As explained in our previous Sidley Update (Should Boards Adopt a Poison Pill in the COVID-19 Crisis?) shareholder rights plans or “poison pills” continue to be adopted at a rapid pace. Since March 1, at least 32 U.S. public companies have adopted a poison pill, the highest number of new adoptions in such a short time period in over 20 years and more than the number poison pills of S&P 1500 companies outstanding at the end of 2019 (Source: FactSet).
These pills establish a ceiling on share ownership (typically 10 percent or 15 percent for “regular” poison pills and 4.9 percent for rights plans adopted to protect tax net operating losses (NOLs)). ISS, Glass Lewis and many institutional investors generally disfavor the adoption of poison pills in the absence of a specific activist or takeover threat or significant NOLs to protect. Prior to last week, whether the proxy advisory firms would consider market conditions due to the pandemic the type of threat that may justify the adoption of a poison pill was not known. However, on April 8, 2020, ISS issued guidance indicating that a severe stock price decline would likely be deemed a sufficient “specific threat” to justify the adoption of a pill on reasonable terms and for a reasonably short duration (as discussed in our Sidley Update, ISS Signals More Understanding for Poison Pills and Skepticism for Activist Campaigns During the COVID-19 Crisis).
On April 11, Glass Lewis followed suit and published its own guidance on how its policy will be applied to poison pills during the COVID-19 crisis. In its guidance, Glass Lewis stressed its “contextual” approach and made clear that acceptable justifications for the adoption of a poison pill include “factors like a severe drop in stock price due to a widespread industry or market downturn.” Glass Lewis noted that market conditions surrounding the pandemic and its fallout have “prompted many companies to consider the added risk of opportunistic activism.” While noting its continued skepticism towards poison pills as a general matter, Glass Lewis emphasized that it takes a pragmatic approach to governance, stating:
We consider companies that are impacted by coronavirus and the related economic crisis as reasonable context for adopting a poison pill under the following conditions:
- The duration of the pill is limited to one year or less; and
- The company discloses a sound rationale for adoption of the pill as a result of coronavirus.
If 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. . . . Companies can 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.
While the Glass Lewis framework is similar to that of ISS, Glass Lewis’s framework does not specifically address the ownership threshold at which the poison pill is adopted. On this point, Glass Lewis noted its recent recommendation regarding the board of directors of The Williams Companies, Inc., which recently adopted a non-NOL pill with a 5 percent trigger threshold. Although ISS recommended voting against the chairman of the board, citing the atypically low 5 percent trigger threshold, Glass Lewis did not make any special note of the trigger threshold and recommended in favor of all directors.
Given the similarity in the two frameworks (except for Glass Lewis’s more lenient stance on trigger thresholds), we expect most poison pills that satisfy ISS will also satisfy Glass Lewis. Glass Lewis’s guidance also further emphasizes the need for boards to communicate clearly to investors and other constituencies the rationale for the adoption of a pill and any features of the pill that are outside the norm. However, the positions of proxy advisors and investors are just one factor in a board’s analysis of whether it should adopt a poison pill. As more fully explained in our previous Sidley Updates (referenced above), to fulfill its fiduciary duties under applicable law, a board should consider all the relevant factors before determining to adopt a poison pill.
