Poison Pills and Coronavirus: Understanding Glass Lewis’ Contextual Policy Approach

Companies around the world are grappling with the substantial challenges of the COVID-19 pandemic, which continues to wreak havoc on our daily lives and the global economy. The financial outlook changes daily, with an unprecedented number of companies impacted by supply chain disruption, suppressed revenues, limited cash flows and sharply depressed stock prices. These dire conditions have prompted many companies to consider the added risk of opportunistic activism.

Many companies and their advisors are now considering the adoption of shareholder rights plans (“poison pills”) as an effective mitigator of unsolicited and potentially damaging corporate takeovers. While Glass Lewis remains generally skeptical of poison pills, our current policy is designed to apply a nuanced, contextual assessment of these provisions.

In our ongoing market engagements, it has come to Glass Lewis’ attention that some are misinformed or incorrect in their assertions about Glass Lewis’ position on poison pills. In this policy note, we seek to clarify our existing policies on poison pills and how they will be applied during the current unprecedented circumstances.

We also provide an example of our policy in action with our support of the poison pill and the company’s directors at The Williams Companies., Inc. in our report published to clients on April 6, 2020. This is our existing approach and is demonstrably different to the approach of other proxy advisors.

As stated previously, Glass Lewis acknowledges that some believe in a prescriptive approach to governance that favors ideological purity over pragmatic principles. We do not believe that discouraging pragmatism, discretion and context serves the interests of shareholders or companies—particularly during a crisis.

Glass Lewis-Our Efforts to Help You Navigate Unprecedented Times

Glass Lewis has been providing weekly public updates on a range of topics since the start of March to provide the market with certainty and transparency on our established approach during the coronavirus pandemic. For example we have quickly updated our policy guidelines on virtual meetings and created a helpful annual meeting date change tracker that we update on a regular basis. We have provided additional useful links at the end of this post.

Glass Lewis’s contextual approach is already built for extenuating and unusual circumstances such as this pandemic. Our guidelines ensure we can apply the appropriate discretion and pragmatism to prioritize timing, certainty, disclosure and voting on such proposals. We generally intend to rely on this cornerstone feature of our guidelines as opposed to continuously updating them for new issues or novel approaches we encounter throughout the season.

In addition, we announced that companies can now include their unedited opinions with our report under the Report Feedback Statement (“RFS”), so investors can compare Glass Lewis’ view with that of the company in advance of making or changing their vote decisions. Some companies are now using the RFS to add additional context to the impacts coronavirus is having on items being considered at their shareholder meeting. You can learn more here.

If you would like Glass Lewis to provide clarity about our approach on other matters impacted by the coronavirus please contact us at [email protected].

Adoption of Poison Pills During Coronavirus

Glass Lewis generally opposes the adoption of poison pills, as these provisions carry the potential to reduce management accountability by substantially limiting opportunities for corporate takeovers.

However, we are supportive of poison pills that meet certain conditions, particularly those that are limited in scope to accomplish a particular objective. This objective may include the closing of an important merger, managing a clear and present hostile takeover threat, or other contextual factors like a severe drop in stock price due to a widespread industry or market downturn.

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.

If the company fails to put the pill up for shareholder approval in the future to renew it, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s renewal.

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.

For an illustration of what Glass Lewis will support, see an excerpt of our report for The Williams Companies, Inc. (NYSE: WMB), published on April 6, including analysis of the company’s proposed poison pill and our reasons for supporting its adoption and not recommending against the company’s directors on that basis. The Williams Companies example is also discussed in depth in the “Policy in Action” section, below.

As with most issues in corporate governance, context is everything. 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.

As the COVID-19 crisis continues to unfold, and the sweeping fiscal impacts become more apparent, Glass Lewis will continue to apply our contextual approach with the appropriate discretion and pragmatism in making our recommendations.

In-Depth Policy and Background

Glass Lewis generally opposes the adoption of poison pills, as these provisions carry the potential to reduce management accountability by substantially limiting opportunities for corporate takeovers. In some circumstances, they do not serve shareholders’ interests because they may entrench incumbent directors and prevent shareholders from receiving a buy-out premium for their stock.

The issue of a potential buyout is one in which the interests of management may be different from those of shareholders. Therefore, we typically recommend that shareholders vote against poison pills in order to protect their financial interests and ensure that they have the opportunity to consider any offer for their shares, especially those priced at a premium.

As described in greater detail in our United States policy guidelines, we are supportive of poison pills that meet certain conditions, particularly those that are limited in scope to accomplish a particular objective (see page 44 of our 2020 U.S. guidelines). This objective may include the closing of an important merger, a clear and present hostile takeover threat, or other contextual factors like a severe drop in stock price due to a widespread industry or market downturn. We believe boards should always disclose a sound rationale when implementing provisions that impact the rights of shareholders.

When boards adopt a limited poison pill to accomplish a particular objective, we expect the pill’s duration to also be limited to one year or less, with shareholder approval required for any renewals of the pill after the first year. When boards adopt a pill of one year or less, publicly disclose a convincing rationale for its adoption, and seek shareholder approval of any renewals of the pill, Glass Lewis will refrain from recommending that shareholders oppose the board members serving at the time of adoption on the basis of this issue (see clause 5, page 18 of our 2020 U.S. guidelines).

However, if the board adopts a poison pill without a convincing rationale, and without shareholder approval of a duration longer than one year, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s adoption. The duration of the poison pill, the stated rationale, and subsequent shareholder approval are the key considerations for Glass Lewis when boards adopt a poison pill outside of the annual meeting.

Putting Poison Pills up for Vote

When companies put a poison pill up for vote, Glass Lewis applies a case-by-case approach in examining the features of the plan. We will consider supporting poison pills that include an expansive “qualifying offer” clause that meets all of the following criteria:

• The form of offer is not required to be an all-cash transaction;
• The offer is not required to remain open more than 90 days;
• The offeror is permitted to amend the offer, reduce the offer, or otherwise change the terms;
• There is no fairness opinion requirement; and
• There is a low to no premium requirement.

While we recognize that the qualifying offer clause described here sets a high bar that many standard pills kept “on the shelf” do not meet, we believe these components of the qualifying offer clause protect shareholder interests by ensuring that possible buyouts are not unfairly deterred.

NOL Poison Pills

We are also generally supportive of NOL poison pills, which are narrowly crafted pills designed to preserve a company’s ability to carry forward its Net Operating Losses (NOLs) in the case of a change in control. These pills generally feature a duration of three years or less and a trigger threshold that is lower than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.

For proposals seeking approval of a NOL poison pill, Glass Lewis reviews these on a case-by-case basis and is generally supportive of the proposal provided that the pill is limited in duration (typically three years or less) and requires shareholder ratification for each renewal, and that the company provides a sound rationale for its adoption. A sound rationale includes citing a legitimate need to preserve existing NOLs and disclosing why the company’s current circumstances warrant such a provision.

Policy in Action: The Williams Company, Inc. (NYSE: WMB)

On March 20, 2020, The Williams Company adopted a shareholder rights agreement with a 5% trigger threshold and a term of one year. As disclosed in a supplement to this year’s proxy statement on March 30, 2020, the board determined that the rights agreement was appropriate in light of the extreme market dislocation that has resulted in the company’s stock being fundamentally undervalued. The conditions stemming from the impact of COVID-19 on the economy and the volatility of the oil market have resulted in significant declines in Williams’ stock price.

The rights agreement is intended to enable all shareholders to realize the full value of their investment and reduce the likelihood of those seeking short-term gains taking advantage of current market conditions at the expense of the long-term interests of shareholders or of any person or group gaining control of the company through open market accumulation or other tactics (especially in volatile markets) without paying an appropriate control premium.

Williams states that it also reached out to all of its major shareholders regarding the rights plan, most of whom informed the company that they understand the need for the adoption of the rights plan in the context of the highly unusual and extreme circumstances that led to the current severe market conditions and the need to protect the interests of Williams and its long-term shareholders.

Given this, Glass Lewis determined that this case warranted an exception as is discussed above and provided under our existing policy on poison pills. This also meant, absent any unrelated concerns, Glass Lewis supported the election of all directors. We noted:

“We are encouraged by the rights plan’s limited duration, as well as by the Company’s disclosure regarding the need for such a plan at this time and its communication with shareholders. We believe it would be in shareholders’ best interests for the board to seek shareholder approval prior to extending or renewing the rights plan in the future. However, we do not believe action against any directors is warranted at this time. We will monitor this issue going forward.”

You can read our full comments and support of The Williams Company’s poison pill adoption here.

Conclusion

As with most issues in corporate governance, context is everything. 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.

Glass Lewis strongly believes that our existing policy approach with its emphasis on pragmatism, discretion and context is aligned with the interests of shareholders and companies—particularly during a crisis. As the COVID-19 crisis continues to unfold, and the sweeping fiscal impacts become more apparent, Glass Lewis will continue to apply our contextual approach with the appropriate discretion and pragmatism in making our recommendations.