News & Analysis from CII

Webinar Speakers Express Differing Views on Virtual Meetings during Covid-19 Pandemic

The rapid spread of Covid-19 has restricted travel across the globe, limiting the ability of companies to hold in-person annual meetings. During a March 26 webinar, "How to Have a Successful Meeting during Covid-19," hosted by Corporate Secretary, IR Magazine and Computershare, speakers discussed best practices when adopting a virtual meeting platform.
 
In view of the dire impact of the global health emergency, even long-time opponents of virtual-only meetings accept this type of meeting as a reasonable solution under current circumstances. Edward Greene, managing director at Georgeson, agreed with CII's recent statement asking companies to make clear that the decision to switch to a virtual-only meeting is a "one-off, tailored for specific circumstances."
 
Two representatives from technology companies, Derek Windham of Hewlett Packard and Julie Silver of Computershare, encouraged companies to view the pandemic as an opportunity to use virtual meetings in the future. They touted the meetings as being more inclusive and promoting shareholder engagement.
 
In 2017, a CII membership-approved policy endorsed the hybrid approach as the model for annual shareholder meetings, to ensure equal access for virtual and in-person participants. "Companies should hold shareowner meetings by remote communication (so-called 'virtual' meetings) only as a supplement to traditional in-person shareowner meetings, not as a substitute," it says. The CII policy specifies that virtual annual meetings should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.
 

SEC Extends Comment Period for NYSE Proposal on Direct Listings

The SEC on March 26 extended the comment period for a proposal by the New York Stock Exchange (NYSE) for a rule change that would allow U.S direct listings to raise new capital similar to initial public offerings (IPOs). The commission invited comments while it considers "grounds for disapproval under consideration," but clarified that "institution of disapproval proceedings does not indicate that the commission has reached any conclusions with respect to any of the issues involved."
 
In an effort to broaden the appeal of direct listings as an alternative to initial public offerings, in late November 2019 the NYSE submitted for approval to the SEC a proposed rule to incorporate an option to raise capital into the existing direct listing alternative. Following its rejection by the SEC, the NYSE revised and resubmitted the proposal.
 
Under the NYSE's proposed model, the shares sold during a direct listing are acquired directly when the company makes its stock market debut. In an IPO, the company going public sells the shares to investment banks acting as underwriters before and the underwriters sell the shares to investors directly following the launch.
 
The commission received 12 comment letters on the revised proposal, only four of which were supportive. CII's January 16 letter expressed concern that shareholders' legal rights under Section 11 of the Securities Act may be particularly vulnerable in direct listings, and that investors in direct listing companies may have fewer legal protections than investors in IPOs. The letter said CII could not support direct listings as an alternative to IPOs if public companies could limit their liability for damages caused by untrue statements of fact or material omissions of fact within registration statements associated with direct listings.
 
The new deadline for receipt of comments is 21 days after publication in the Federal Register.
 

ILPA Urges Feds to Allow Small Businesses Owned by PE Firms to Receive Loans 

The Institutional Limited Partners Association (ILPA) wrote a letter March 31 to Secretary of the Treasury Steven Mnuchin and Administrator of the U.S. Small Business Administration (SBA) Jovita Carranza requesting that they "ensure that venture capital and private equity-backed small businesses are able to access the necessary capital provided under the Paycheck Protection Program provisions of the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act.
 
The letter explains that the Paycheck Protection Program provides federally guaranteed loans up to a maximum amount of $10 million to eligible businesses to retain employees during the Covid-19 crisis. To be eligible, a company must have 500 employees or less. Existing regulations that aggregate the 500-employee threshold across the entirety of a private equity fund portfolio, even when each business in the portfolio is a separate entity, would render small business portfolio companies owned by private equity firms ineligible for the program. The ILPA letter asks the Treasury Department and SBA to issue guidance to permit these small businesses to receive loans under the program. The letter notes that failure to act "will likely result in significant harm, not only to employees that see their hours reduced or jobs eliminated, but also in significantly reduced returns to the institutions providing retirement security through pensions, insurance policies and other investments that serve hundreds of thousands of Americans."
 

Omnibus Economic Stimulus Bill Addresses Accounting Standards, Stock Buybacks, Executive Compensation

The $2 trillion economic stimulus package passed by the U.S. Senate March 25 to help alleviate the economic fallout from the coronavirus pandemic of course has major implications for investors. As the bill is receiving very substantial attention, in this article we focus on several narrow provisions of particular interest to CII members. The House is expected to approve the Senate package as early as March 27.
 
Deferral of FASB accounting standard for loans. The bill allows banks and credit unions temporary relief from the current expected credit losses (CECL) accounting standard. The standard requires businesses to look to the future, consider past experience, and assess current conditions to predict which of their loans will go bad. They then have to report reserves to cover those assumed losses. Big public banks started following the new rules in January. Privately held banks, credit unions, and smaller public companies have until 2023 to overhaul their accounting. The relief in the stimulus package would give them until December 31-or when public health officials declare the pandemic over, whichever comes first-to overhaul how they tally losses on tanking loans. The accounting standard was drafted by the Financial Accounting Standards Board (FASB) in the aftermath of the 2008 financial crisis to bring transparency to bank balance sheets and give investors clearer pictures of looming losses. This marks the first time Congress has blocked or delayed FASB's work. For more details, see this story  from Bloomberg Tax.
 
Restrictions on dividends and stock buy backs. Companies accepting loans from the Treasury Department would not be permitted to pay dividends or repurchase their stock for the length of their loan plus one year.
 
Caps on executive compensation. At companies receiving financial assistance, corporate executives who made more than $425,000 last year are prevented from getting a raise until at least a year after the loan is repaid. For those paid more than $3 million last year, the Senate bill limits their future pay to $3 million plus half the difference between their previous pay and $3 million. The limits apply to bonuses, stock awards and other benefits, rather than just salaries. Similar restrictions apply to airline executives for two years.
 
Fed loans.  The Senate bill also gives the Federal Reserve authority to make loans available to, and purchase obligations of, financial systems that support states and municipalities.
 

Virus Brings Back Poison Pills 

Poison pill takeover defenses appear to be coming back in the wake of market volatility caused by Covid-19 and public health responses. Poison pills, also known as "shareholder rights plans," are triggered by significant accumulation of shares by an investor or group. Pills allow current shareholders to buy additional shares at a discount. They are almost never actually triggered, as they would heavily dilute the share position of the person attempting to acquire shares above the limit, causing steep losses for that person. (At least one pill was triggered accidentally.) Pills are a formidable takeover defense that arose in the 1980s, and (despite referencing "shareholder rights") in practice disempower shareholders. They also can be problematic for large very large asset managers that may acquire substantial share positions in normal course.
 
While poison pills were once prevalent at U.S. companies, investor criticism led to their decline, at least on the surface. In a March 23 report on current developments and the history of pills, Fried Frank said at the end of 2019, only eight S&P 500 companies had pills in place. However, as Fried Frank notes: "many companies have a rights plan 'on the shelf,' ready to be deployed quickly in response to a potential accumulation or takeover threat. Under Delaware law, a rights plan can be adopted by a board of directors, without shareholder approval."
 
The central investor demand over the years has been that poison pills be subject to shareholder approval (as CII Policy stipulates). Investors have tended to then vote for pills put in place for a short period and with "qualified offer" provisions that permit takeover bids that meet certain criteria to bypass the pill. In voting on pills, investors also have tended to support so-called "NOL plans," which protect the ability of a company to use net operating loss (NOL) carryforwards. Tax laws limit the ability of a company to carry NOLs forward if there is a significant change in ownership.
 
Fried Frank discusses four pills adopted in recent weeks, at Williams Companies, Occidental Petroleum, Delek's U.S. Holdings and Dave & Buster's Entertainment. The Occidental Petroleum pill acknowledges the importance of shareholder approval. OXY, which announced the pill on March 13, said it would put the pill to a vote of shareholders at the annual meeting (then expected in May), and the pill would expire immediately if not approved by shareholders. The pill would be triggered at a 15% ownership level, which is traditional (most pills historically are triggered at 15% or 20%.) The company was under pressure even before oil prices collapsed in the wake of Covid-19, and it has faced a challenge by activist investor Carl Icahn. (Occidental and Icahn reached a truce this week, with three Icahn nominees, including two of his employees, going on the board, and former OXY CEO Stephen Chazen returning as board chair.)
 
The Williams, Delek's and Dave & Buster's pills appear more worrisome as precedents. They are not subject to shareholder approval. The Williams pill is triggered at 5% ownership, which suggests the board believes the company is particularly vulnerable to an opportunistic bid, as Fried Frank notes. Williams said: "We are witnessing a unique dislocation in equity market valuations, with particular impact to Williams' equity value. We do not believe the best interests of shareholders are served by allowing those only seeking short-term gains to take advantage of current market conditions at the expense of the company and its long-term investors."
 
The Delek pill has a 15% trigger, and was prompted by Icahn, who has taken a 14.8% stake in the company. It includes a qualified offer provision. Dave & Buster's pill has a 15% threshold for some investors, and 20% for institutional investors.