Responding to challenges that issuers are facing during the COVID-19 pandemic, ISS has published policy guidance with regard to its global benchmark policies for the 2020 proxy season.
In its global policy document, Impacts of the COIVD-19 Pandemic: ISS Policy Guidance (the Global Policy Guidance), ISS discusses a number of issues facing public companies around the world and addresses how it will apply its benchmark proxy voting policies in the 2020 proxy season in light of COVID-19. ISS acknowledges the challenges and uncertainties that issuers and investors are facing, and that this unprecedented situation requires flexibility in approach. ISS will update the Global Policy Guidance through the proxy season as new issues, impacts and regulations are brought to ISS’ attention by investors and issuers. For Canadian reporting issuers, the Global Policy Guidance should be read in combination with the applicable Canadian benchmark policy and any related FAQ, including in the case of issuers listed on the Toronto Stock Exchange (TSX), ISS’ Canadian Proxy Voting Guidelines for TSX-listed Companies (the Benchmark Policy). ISS’ other benchmark policies can be found here.
In the Global Policy Guidance, ISS acknowledges that, for the 2020 proxy season, health and safety concerns will be paramount and thus “virtual-only meetings may be both necessary and desirable.” Issuers are reminded to follow regulatory requirements and guidance under their applicable laws and only hold physical in-person shareholder meetings if and when safe to do so. Where issuers are not permitted to hold virtual-only meetings as a result of their governing statute and/or constating documents, it may be necessary to postpone meetings to a time when a physical meeting is safe and permitted. ISS will look positively on the use of webcasts, conference calls and other mediums of electronic communications used for shareholder and investor engagement, even where meetings have been postponed.
Unlike other proxy advisory firms, institutional investors and shareholder advocates, ISS’ Benchmark Policy does not include a policy position with respect to virtual-only meetings in Canada. However, the Global Policy Guidance suggests that ISS has historically tended to favour physical or hybrid meetings over those that are virtual-only. For the 2020 proxy season, issuers who are holding virtual-only meetings should clearly identify the rationale behind holding a virtual-only meeting. ISS also advises that such issuers should strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate in the meeting as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish.
Poison Pills and Defensive Measures
The Benchmark Policy allows for the adoption of a poison pill (or shareholder rights plan) provided that it conforms to best practice guidelines and has purposes limited to providing the board with more time to find an alternative value enhancing transaction ensuring the equal treatment of shareholders.
The Benchmark Policy reminds issuers that the TSX requires that shareholder rights plans be ratified by shareholders within six months of adoption. However, the Global Policy Guidance provides that issuers have latitude in adopting short-term rights plans with reasonable triggers in response to active threats. In this regard, ISS will view a severe decline in share prices as a result of the COVID-19 pandemic to be a valid justification for adopting a poison pill with a duration of less than one year. In such cases, ISS advises that issuers should provide detailed disclosure regarding their choice of duration and any decisions to delay or avoid putting a rights plan to shareholders for approval. Shareholder approval requirements under applicable stock exchange rules will still need to be considered.
Board Composition and Attendance
As described in the Global Policy Guidance, ISS is of the view that issuers have broad discretion during the COVID-19 pandemic to make appropriate adjustments to the composition of their boards and management to ensure that the right expertise is available given the exceptional circumstances. The replacement of board members as a result of director disability or incapacity, or the addition of members with relevant expertise related to the COVID-19 pandemic, will be considered on a case-by-case basis based on the issuer’s disclosure of the change in board composition.
Issuers should also feel comfortable holding virtual board and committee meetings by telephone or other electronic means, subject to corporate law and constating documents, as the Benchmark Policy explicitly permits participation by telephone when assessing director attendance.
Boards seeking to materially change performance metrics, goals or targets used in short-term compensation plans as a result of the decline in share prices and the potential pandemic triggered recession are encouraged to disclose their rationale for such changes at the time the change is made. As outlined in the Global Policy Guidance, ISS does not generally support changes to existing awards which cover multi-year periods and will consider such changes on a case-by-case basis.
ISS will continue to oppose stock option repricing without shareholder approval and, where shareholder approval is sought to reprice options, ISS will evaluate the proposal on a case-by-case basis, following the guidelines set out in its Canadian benchmark policy which generally recommends against repricing options.
Under the Benchmark Policy, ISS will make vote recommendations on a case-by-case basis to increase an issuer’s authorized capital and will generally recommend in favour of proposals to increase authorized capital where a company’s shares are in danger of being de-listed or the company’s ability to continue to operate as a going concern is uncertain. The Benchmark Policy also provides that ISS will generally recommend against proposals to create unlimited (or increase) blank cheque preferred shares where the shares carry unspecified rights, restrictions or terms or the shares do not have a specific purpose. ISS will generally recommend in favour of a proposal to create a reasonably limited number of preferred shares where the company has stated in writing and publicly disclosed that the shares will not be used for anti-takeover purposes and the voting, conversion and other rights, restrictions and terms of such shares as specified in the issuer’s articles are reasonable. In light of COVID-19, the Global Policy Guidance suggests that ISS will allow for case-by-case analysis and favourable vote recommendations for proposals that exceed any normal market-specific limits on size and dilution in exceptional circumstances, which would include the COVID-19 pandemic.
ISS will also generally recommend a vote on a case-by-case basis for private placement issuances considering a number of factors, including the rationale for the private placement, dilution, and discount/premium to market price. ISS will generally recommend a vote in favour of a private placement where it is expected that the issuer will file for bankruptcy if the transaction is not approved or the company’s auditor or management has indicated that the company has going concern issues. The Policy Guidance does not propose to deviate from this position in light of COVID-19.
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