SEC, ISS Issue Guidance on Corporate Disclosures, Annual Meetings and Governance Amid COVID -19

April 17, 2020

Public companies, proxy advisors, government agencies and market participants collectively are responding to the economic and market disruption caused by the coronavirus (COVID-19) pandemic. Read on for a discussion of the following new and updated guidance from the Securities and Exchange Commission and Institutional Shareholder Services:

  • A joint public statement by Securities and Exchange Commission (SEC) Chairman Jay Clayton and Division of Corporation Finance Director William Hinman on the importance of high-quality corporate disclosures to investors during this critical time.
  • SEC updates on how companies should conduct their annual meetings in light of COVID-19.
  • SEC guidance on using “notice-only” delivery of proxy materials rather than “full-set” delivery.
  • Policy updates from Institutional Shareholder Services (ISS).

SEC Leadership Stresses Importance of High-Quality Corporate Disclosures to Investors

On April 8, 2020, Chairman Clayton and Director Hinman issued a public statement regarding the importance of high-quality, forward-looking disclosures by public companies, given the economic contraction and market volatility caused by the COVID-19 pandemic. They emphasized that, when issuing earnings releases and conducting analyst and investor calls in the coming weeks, public companies should provide as much information as practicable regarding their current financial and operating status, as well as their future operational and financial planning.

Chairman Clayton and Director Hinman noted that upcoming earnings reports and related analyst and investor calls will not be routine and historical information regarding financial performance will be less significant to investors. They emphasized investors’ and analysts’ desire to know where companies stand today, and how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis. In particular, they encouraged companies to provide additional guidance to the marketplace on the following:

  1. The current liquidity position and expected financial resource needs of the company.
  2. The impact of company actions and policies to protect worker health and well-being and customer safety on operations.
  3. If the company is receiving financial assistance under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) or other programs, then the nature, amounts and effects of such assistance on the financial condition or results of operations of the company.

Chairman Clayton and Director Hinman acknowledged that providing such forward-looking disclosure in the midst of an evolving and unpredictable situation will be difficult, but observed that such robust, forward-looking disclosures will benefit investors and markets and give them greater confidence in providing financing or credit to the company and, ultimately, will “substantially contribute to our nation’s collective effort to fight and recover from COVID-19.” Regarding this last point, the pair noted that the great interconnectedness of the economy as a whole makes it necessary for there to be broad dissemination of information from public companies regarding the challenges and responses to the COVID-19 crisis. Chairman Clayton and Director Hinman’s statement appears to characterize a company’s forward-looking disclosures about its plans as a key public service in the COVID-19 recovery. It notes that “the exchange of forward-looking information is essential” to the “broad and extensive coordination across workers, firms, investors and governmental officials” that will be critical to successfully emerge from the pandemic.

Chairman Clayton and Director Hinman stated that the SEC remains committed to investor protection and market integrity, and focused on identifying bad actors that attempt to use the current uncertainty to prey on investors. Recognizing that companies would be concerned about the legal risks of providing forward-looking disclosures, and particularly specific estimates, that may prove to be incorrect, Chairman Clayton and Director Hinman concluded by assuring companies that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”

Finally, they stressed the importance of good corporate hygiene, particularly with respect to the protection and distribution of material non-public information. Here, companies and their investors are well-served when the kind of current and forward-looking financial and operational information they are advocating to be disclosed is held closely until disclosed and, when disclosed, broadly disseminated. For an update on potential insider trading concerns related to COVID-19, please see this Subject to Inquiry blog post by McGuireWoods lawyers.

SEC Staff Updates Guidance on Conducting Shareholder Meetings in Light of COVID-19

On April 7, 2020, the Staffs of the SEC’s Division of Corporation Finance and Division of Investment Management (the “Staff”) updated previously issued guidance regarding shareholder meeting issues related to the COVID-19 pandemic. The updated guidance concerned the manner in which an issuer should alert investors that it has changed the previously disclosed date, time or location of its annual meeting, and the issuer’s ability to use “notice-only” delivery to satisfy its proxy mailing requirement.

The Staff has already noted that, in light of difficulties related to COVID-19, an issuer may want to change the date, time or location of its annual meeting after it has mailed its proxy materials. Prior guidance noted that issuers could notify shareholders of such change without mailing additional soliciting materials or amending previously filed proxy materials if the issuer: (1) disseminates a press release announcing the change; (2) files such announcement as additional soliciting material with the SEC on EDGAR; and (3) takes all necessary steps to notify intermediaries in the proxy process and other market participants of the change to the meeting’s date, time or location.

In its updated guidance, the Staff noted that it expects issuers to take those actions “promptly after making a decision to change the date, time or location of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner.” The Staff further advised that issuers who have not yet mailed or filed their definitive proxy materials should consider including a disclosure in their proxy materials regarding the possibility that COVID-19 may necessitate a change in the date, time or location of the annual meeting. An issuer’s determination of whether to include such a disclosure should be based on its particular facts and circumstances and the reasonable likelihood that such a change will be needed.

SEC Discusses Delays in Printing or Mailing a “Full Set” of Proxy Materials

The updated guidance also provided advice for issuers who are experiencing delays with printing and mailing of their proxy materials. The Staff noted that COVID-19 may cause delays or staffing difficulties at the facilities of an issuer’s proxy service provider or transfer agent that could delay an issuer’s ability to print or mail a “full set” of proxy materials. A full set generally includes a proxy statement or information statement, an annual report if required by either Rule 14a-3(b) or 14c-3(a) under the Securities Exchange Act of 1934 as amended, and a proxy card. Given the potential of these delays, issuers may want to take advantage of the “notice-only” delivery option allowed under Securities Exchange Act Rule 14a-16 — an option many issuers commonly use.

Under the “notice-only” delivery option, rather than delivering physical copies of the full set of proxy materials, an issuer posts its proxy materials to a website and sends a notice of internet availability of proxy materials to shareholders at least 40 calendar days before the meeting. The issuer is still responsible for providing hard copies of these materials to any shareholder who requests them. In its updated guidance, the Staff recognized that an issuer who wants to use this “notice-only” option may have concerns about its ability to comply with the technical requirements of the rule. For example, an issuer may not be able to send the notice of internet availability of proxy materials at least 40 calendar days prior to its meeting date, or an issuer may not be able to respond to a shareholder’s request for hard copies of the proxy materials in a timely manner.

The Staff stated that “[t]he primary goal of the proxy process is allow shareholders to receive material information about the matters to be presented at a shareholder meeting in a timely manner so they can make informed voting decisions.” If an issuer is affected by a delay in printing or mailing process, the issuer should use all reasonable efforts to meet this primary goal of the proxy process without jeopardizing the health or safety of anyone involved. The Staff acknowledged that this may mean delaying a meeting (in accordance with state law and SEC procedures) to ensure that it can provide investors proxy materials on a timely basis.

The Staff agreed, however, that where COVID-19 delays are unavoidable, it will not object to issuers using the “notice-only” delivery method “in a manner that, while not meeting all aspects of the notice and timing requirements of Rule 14a-16, will nonetheless provide shareholders with proxy materials sufficiently in advance of the meeting to review these materials and exercise their voting rights under state law in an informed manner and so long as the issuer announces the change in the delivery method by following the steps described above for announcing a change in the meeting date, time, or location.”

Issuers, therefore, would need to issue a press release announcing this change, file such announcement as additional soliciting material on EDGAR and take all necessary steps to notify intermediaries in the proxy process of the switch to “notice-only” delivery. Finally, the Staff stated that issuers and intermediaries impacted by COVID-19 should still continue to use best efforts to send paper copies of proxy materials and annual reports to shareholders who request them, even if delivery of these materials will be delayed.

ISS Issues Guidance on Its Policy Applications in Light of COVID-19

On April 8, 2020, ISS released guidance on how it intends to apply its proxy voting policies in light of the difficulties caused by the COVID-19 pandemic. The ISS guidance focused on four key areas: (1) annual meeting concerns; (2) poison pills, shareholder rights and boards/directors; (3) compensation issues; and (4) capital structure and payouts.

Annual Meeting Issues

  1. Meeting Postponements
  • ISS noted that in jurisdictions where virtual meetings are not permitted, companies will need to follow their markets’ regulatory guidance and hold physical meetings only when safe to do so. ISS noted that shareholders expect companies to use standard disclosure documents (e.g., proxy statements), press releases and websites to keep all constituencies informed about material events or developments with respect to the timing of the annual meeting.
  • ISS stated that it will positively note when companies and boards use webcasts, conference calls and other forms of electronic communication to engage with shareholders and investors even if company meetings have to be postponed.
  1. Virtual-Only Meetings
  • Given the importance of social distancing, ISS advised that it may be necessary for companies to have virtual-only annual meetings, even if in the past institutional investors generally and ISS in particular preferred in-person or “hybrid” meetings where the meeting is held at a physical location but shareholders may participate by virtual means.
  • In most markets where it provides proxy voting policies (including the United States), ISS does not have a policy to recommend votes against companies that have virtual-only meetings. There will be no change to that approach.
  • In the limited markets where ISS policy discourages virtual meetings and where virtual-only meetings are allowed by law without amendment to a company’s bylaws, ISS will alter its policy in such a way that it will not make an adverse vote recommendation against companies holding “virtual only” meetings until such time that it is safe for companies to hold in-person meetings again.
  • If a board opts to hold a virtual-only meeting, ISS encourages the board to disclose clearly the reason for its decision and strive to provide shareholders with a meaningful opportunity to participate as fully as possible in the meeting, including by being able to ask questions of directors and senior management and engage in dialogue.
  • Boards are encouraged to commit to return to in-person or hybrid meetings — or put the decision regarding meeting format to shareholder vote — as soon as practicable.

In addition to ISS’ guidance on virtual-only meetings, it should be noted that Glass Lewis has also issued guidance that between March 1, 2020, and June 30, 2020, it will generally not vote against members of a nominating committee of a company that holds a virtual-only annual meeting provided that the company discloses its reasons for holding a virtual-only annual meeting and cites COVID-19 as one such rationale.

Poison Pills, Shareholder Rights and Boards/Directors

  1. Poison Pills. Noting that boards are being advised to consider adopting poison pills and other defensive measures to fend off opportunistic takeover bids based on recent stock price shocks, ISS will continue to evaluate poison pill plans on a case-by-case basis, which includes examining whether directors appear to have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team. A severe stock price drop as a result of COVID-19 is likely to be considered a valid justification for adopting a poison pill plan that lasts less than one year; however, boards should provide detailed disclosure regarding their choice of duration or decisions to avoid or delay putting the plan to a shareholder vote beyond that period.
  1. Director Attendance. In markets that do not routinely count directors to be “present” at meetings if they participate telephonically or by other remote means, in examining directors’ attendance in accordance with its existing policies, ISS will look for disclosures that provide adequate explanations of the directors’ alternative form of attendance and that allow shareholders to make “informed judgments and considered voting decisions if relevant about directors’ attendances and any absences from board and committee meetings.”
  1. Changes to Board of Directors or Senior Management. Boards may need to replace a director or senior executive due to such person’s disability or incapacity during the pandemic, or need to urgently add critical expertise to their ranks to address concerns created by the pandemic. ISS will evaluate such changes on a case-by-case basis and assess any explanation provided by the company regarding the changes to the boardroom roster. ISS noted that its primary concern is that “boards should have broad discretion during this crisis to ensure that they have the right team in place and we will adjust the application of our policies as appropriate for the exceptional circumstances of the current pandemic.”

Compensation Issues

  1. Change in Metrics/Shift in Goals or Targets
  • Short-Term Compensation Plans: To the extent boards are announcing plans to materially change the targets or metrics used in short-term compensation plans to respond to the drop in the market and the possible recession in the wake of the COVID-19 pandemic, boards are encouraged to provide “contemporaneous disclosure to shareholders of their rationales for making such changes.” This is required even though shareholder “say-on-pay” votes with respect to these changes will not take place until 2021.
  • Long-Term Compensation Plans: Although ISS policy guidelines do not support changes to midstream or in-flight awards that cover multiyear periods, ISS will consider these changes on a case-by-case basis to determine if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for changes.
  • To the extent boards consider altering the structure of long-term plans to take into account the new economic environment, ISS will consider such changes under its existing benchmark policy frameworks.
  1. Option Repricing. ISS will review any proposals to reprice existing “out-of-the-money” options on a case-by-case basis. In the United States, ISS will generally recommend opposing any option repricing within one year of a precipitous decline in the company’s stock price.

Capital Structure and Payouts

  1. Dividends. Since some boards are determining that, given the uncertain economic environment, it might not be advisable to pay dividends as expected, ISS will support broad discretion for boards to make dividend payments that fall below historic levels or customary market practices, and will analyze these proposals based on whether boards disclose plans “to use any preserved cash from dividend reductions to support and protect their business and workforce.”

  2. Share Repurchases. Given the current economic situation due to COVID-19, boards may expose themselves to reputational, regulatory and business risks by continuing share repurchase programs. While “ISS will, in the absence of barring regulation or serious concerns related to the company, generally continue to recommend in favor of repurchase authorities within customary limits for each market,” ISS will review the decisions of a board to engage in share repurchases during 2020 before a company’s next annual meeting (generally, in 2021) to consider if directors “managed risks in a responsible fashion for any repurchases undertaken” in 2020.

  3. Capital Raisings. ISS will continue to review share issuances and private placements on a case-by-case basis, taking into account company-specific factors, including the exceptional circumstances of the COVID-19 pandemic.

Next Steps for Public Companies

  • For upcoming earnings releases and analyst calls, develop robust, forward-looking disclosures about the company’s current operating status and future operating plans under various COVID-19-related mitigation conditions, including detailed disclosures about (1) the company’s current liquidity position and expected financial resource needs, (2) the impact of efforts to protect workers and customers on a company’s operations, and (3) if financial assistance under the CARES Act or other programs have materially affected, or are reasonably likely to have a material future effect on, the company’s financial conditions or results of operations, then the nature, amount and effects of such assistance.
  • When making these forward-looking disclosures, provide information about the assumptions, risks and scenarios that affect the company’s plans.
  • Keep forward-looking and other material, non-public information closely held to avoid any potential insider trading concerns.
  • Consider whether to change the format of the annual meeting from in-person to virtual and, if necessary, ensure that disclosures of this change are adequately disseminated to shareholders and comply with SEC guidance and applicable state law.
  • Consider switching from full-set to notice-only delivery of annual meeting materials to reduce the impact of delays or difficulties by printers or transfer agents in printing and mailing proxy materials.
  • Take into account the guidance of ISS, Glass Lewis and other proxy advisors with respect to any significant corporate actions (such as financings or dividends), as well as any changes to a company’s executive compensation plans. Provide explanations for actions and decisions that will support the proxy advisors’ evaluation processes.

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For additional guidance on the information in this alert, please contact any of the authors below, any member of McGuireWoods’ securities compliance, securities enforcement or employee benefits teams, or your primary McGuireWoods contact.

McGuireWoods’ securities and compliance team assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.

McGuireWoods is a national leader in securities enforcement defense. The firm’s securities enforcement and litigation team is part of an elite Government Investigations and White Collar Litigation Department that has been twice recognized as a Law360 Practice Group of the Year. We are comprised of former senior SEC enforcement attorneys and litigators, as well as high-level federal prosecutors, and  are experienced at managing every stage of complex securities investigations. Our team builds upon decades of experience of practicing before government agencies and regularly represents audit committees, public companies, and their members, professionals and executives in internal and government criminal and civil investigations involving financial reporting, disclosures and internal controls.

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McGuireWoods’ COVID-19 Response Team helps clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic. For assistance, contact a team member listed or send an email to [email protected].

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.