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Time to Check Your Shares!

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We are just now starting to get ready for the fall compensation committee meetings cycle for calendar-year companies. If your company’s stock price has been negatively impacted by the COVID-19 pandemic, now is a good time to look at your equity plans. You need to see how many shares are available and figure out how long those shares are likely to last given both current stock prices and potential changes in stock prices that might affect the size of your future annual equity grants.

I have already worked with several companies that undertook this exercise. Several companies have determined they have just enough shares to make it until their 2022 annual meeting, so they will continue on as normal until then. For others, they realized they might not have enough shares available after their 2021 annual grant, so they have started the process of going back to shareholders for approval of additional shares at their 2021 annual meetings.

It is better to test the waters on this before you get swamped with year-end duties. If you find you may need more shares after your 2021 annual grants, you can then calmly start the process for going to shareholders in 2021 for approval of more shares.

ISS Launches Annual Global Policy Survey

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ISS has launched its annual Global Policy Survey. The results inform ISS policy updates for the 2021 proxy season (likely to be effective for meetings on or after February 1, 2021).

While there are compensation-related questions, they appear in the context of COVID-19. Specifically, ISS is asking about expectations generally regarding compensation adjustments as well as adjustments to short-term/annual incentive programs. No questions about adjustments of long-term incentive programs/awards were included. We will need to see how shareholders respond and what ISS does with this for its 2021 policy updates.

The survey is open through August 21, 2020. ISS expects a public comment period on its proposed 2021 policy updates in October 2020.

Link to ISS Announcement, which contains a link to the survey:

SEC Issues Final Rules on Proxy Voting Advice

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On July 22, 2020, the U.S. Securities and Exchange Commission met and adopted final rules, Exemptions from the Proxy Rules for Proxy Voting Advice, SEC. Rel. 34-89732, in a 3-1 vote. These final rules will become effective 60 days after publication in the Federal Register. Of course, that presumes that a lawsuit isn’t filed against the SEC and these final rules by an interested party (such as ISS which filed such a lawsuit with the SEC’s earlier guidance affecting proxy voting advisory firms).

The final rules codify the SEC’s view that proxy voting advice generally constitutes a solicitation under the proxy rules. The SEC Press Release clarifies that the availability of two exemptions often used by proxy voting advice businesses to the proxy rules depends on compliance with tailored and comprehensive conflicts of interest disclosure requirements. The exemptions also require compliance with two principles-based requirements designed to ensure that:

(1) companies that are the subject of proxy voting advice have such advice made available to them in a timely manner, and

(2) clients of proxy voting advice businesses are provided with an efficient and timely means of becoming aware of any written responses by companies to such proxy voting advice.

ISS Issues Guidance Regarding the Impact of COVID-19 Pandemic

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On April 8, 2020, ISS released Impacts of the COVID-19 Pandemic, which offers guidance on how this crisis may impact and interact with ISS’ existing policies. ISS intends that this guidance be read in conjunction with ISS’ market and region-specific ISS Benchmark and Specialty Voting Guidelines and related FAQs.

Overall, the guidance offered falls into four categories:

  • Annual General Meeting Issues
  • Poison Pills, Shareholder Rights and Boards/Directors
  • Compensation Issues, and
  • Capital Structure and Payouts

Annual General Meetings Issues
The guidance addresses meeting postponements and virtual-only meetings.

Poison Pills, Shareholder Rights and Boards/Directors
The guidance addresses the use of poison pills and other defensive measures (ISS indicates that a stock price drop brought on by the COVID-19 pandemic generally would be sufficient justification to adopt a pill of less than one year in duration.

As for director attendance, ISS indicates that in countries where telephonic/electronic attendance is not counted, companies should provide adequate disclosure indicating if directors attended telephonically/electronically .

Compensation Issues
With respect to changing metrics or shifting goals or targets, noting that many companies may not be obligated to provide disclosure of such events until the 2021 proxy is filed, ISS encouraged boards to provide contemporaneous disclosure to shareholders of their rationales for making such changes. With respect to long-term compensation plans, ISS noted that its general policies generally are not supportive of changes to midstream or in-flight awards since they cover multi-year periods. ISS also indicated that if companies make structural changes to their long-term plans to take account of the new economic environment, it will assess such changes under its existing policies.

ISS also reminds companies of its policies with respect to option repricing, which it found still to be appropriate during the circumstances of the COVID-19 pandemic. Basically, ISS is looking for any option exchange to comply with the following four requirements:

  1. The design is shareholder value neutral, i.e., a value-for-value exchange
  2. Surrendered options are not added back to the share pool
  3. Replacement awards do not immediately vest
  4. Executive officers and directors are excluded.

Capital Structure and Payouts
ISS states that where its market-specific policies look for dividend payout ratios to be within a certain range, it will support Board discretion this year that seek to set payout ratios that may fall below historic levels or customary market practice. In considering such proposal, ISS will look at whether a company discloses plans to use any preserved cash from dividend reductions to support and protect its business and workforce.

With respect to share repurchases, ISS simply states that, in effect, it will review what companies do with respect to any share repurchase authority when the 20201 annual meetings come up in deciding whether directors managed risks in a responsible fashion with respect to such authority.

ISS generally evaluates capital raising proposals on a case-by-case basis.