Shareholder Rights Plans

Following a company’s stock price being impacted by the COVID-19 pandemic, executive management teams should discuss any potential strategic implications on the company’s strategy with the board. As a result of a stock price dislocation driven by circumstances and factors outside the scope of management’s decision making, a company may become vulnerable to an undesired advance by a strategic suitor or shareholder activist. In the current environment, most stock prices do not reflect the longer-term outlook; rather, they are anchored on the uncertainty of near-term business. Whether an approach is made by a strategic suitor or shareholder activist, the opportunistic overture seeks to take advantage of a temporary dislocation between the stock price and a company’s long-term fundamentals.

Several investment banks and law firms have advised public companies to implement shareholder rights plans, otherwise known as poison pills, following a significant stock price decline experienced over the past two months. Leading proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis have historically held negative opinions about shareholder rights plans. Proxy advisory firms have traditionally viewed shareholder rights plans to be self-serving of management and a tactic used to entrench board members when external change had been advocated by external parties. Historically, proxy advisory firms advised shareholders to withhold support for management-led proxy initiatives and board member re-election when a shareholder rights plan had been adopted without shareholder approval.

However, on April 8, 2020, ISS published an updated policy guidance document in response to COVID-19,. ISS highlighted in the updated guidance that a shareholder rights plan, not put to a shareholder vote, may be in the best interest of current shareholders. As with any shareholder rights plan, ISS recommended that the plans be implemented with purpose and pre-defined terms. Specifically, ISS opined that if a company were to enact a shareholder rights plan in response to the impact of COVID-19, the plan should 1) be in limited duration, recommended to be no longer than 12 months, and 2) follow traditional shareholder ownership thresholds for different shareholder groups.

Healthcare company executives and board members should actively consider implementing a temporary shareholder rights plan if the company is at risk of becoming the target of any hostile activity in the current environment. For most healthcare companies, particularly businesses that are dependent on procedures or physician office visits, the long-term prospects of the business are likely unchanged as a result of the COVID-19 pandemic. Unfortunately, the public equity markets are focused on a variety of issues during this period, some of which may have nothing to do with individual company fundamentals or prospects, where current stock prices may inadvertently expose a company to the risk of hostile activity.

By proactively deploying a shareholder rights plan, management can reduce the risk of hostile activity at a time when the company is particularly vulnerable, while still protecting the long-term value creation opportunity for current shareholders. When a shareholder rights plan is adopted, it is imperative that management discloses and explains the decision to implement the plan. Often, a simple explanation to shareholders regarding current circumstances, management’s confidence in the long-term outlook and transparency related to financial planning will go a long way towards convincing shareholders that the shareholder rights plan is in their best interest.

When communicating the how and why of a shareholder rights plan, management conveys to employees that they are proactively working to preserve the company’s culture and reduce the potential for significant distraction during an already challenging time. At the same time, a shareholder rights plan can signal to business partners and suppliers that the company is confident in its long-term prospects and is focused on preventing disruption towards a return to normal operations.

In conclusion, a shareholder rights plan, when communicated effectively, signals a commitment to the company’s strategy, customers, employees, partners and shareholders that management has confidence in its ability to execute the long-term plan and create value for all interested parties. If you have questions about your shareholder right plan or are looking to readjust it during this time, contact our team today.

David Deuchler, Managing Director

Navigating Investor Meetings During A Crisis

Many aspects of the business world have been affected by the COVID-19 pandemic, and plans for investor interactions in 2020 is no exception. Planning for scheduled investor interactions, such as non-deal roadshows, generally takes place well in advance. This gives you time to reserve windows for travel during times when there are no quiet period restrictions that might limit discussions or events that might occupy a large portion of the investment community’s attention (investment bank conferences, industry events, etc.). Given the current scheduling challenges, we expect most companies to simply change these meetings to phone calls, but, before your company makes a decision, consider an alternative option in this new business landscape.

Old vs. New Ways of Meeting 

Beginning in March, essentially all investment bank conferences and industry events scheduled in the near future were either canceled outright, postponed, or moved to a virtual setting to abide by federal and local mandates and company policies. Unfortunately, this takes in-person meetings out of the picture, at least for the foreseeable future, which means management teams and the investors lose out on valuable time to build relationships. In-person meetings have been for many years and will likely remain the preferred meeting type for many reasons, including the nature of the meeting and the opportunity to build a rapport. This is especially true when meeting with an investor who is looking to make an initial investment and has not yet met the management team in person. Luckily, video communication platforms offer creative ways to mitigate this issue.

COVID-19 and the travel restrictions that came with it have undoubtedly sped up the adoption curve for video communication platforms. With in-person meetings out of the picture, the question remains: should companies schedule phone calls in place of in-person meetings or should they join the trend of hosting investor meetings on WebEx, Zoom, Microsoft Teams, etc.?

A New Option in a New Environment

Video calls combine the face-to-face interaction of in-person meetings with the flexibility of a phone call. Both of these things have become increasingly imperative as investors navigate a highly volatile stock market and fluid economic outlook and essentially all employees are required to work from home.

Before COVID-19, it was standard practice to limit non-deal roadshows to one city per day or possibly two depending on the proximity, but video calls negate that limitation. Instead of being constrained to a select group of investors based on your location, you now have the liberty to expand your outreach. This allows for a much more targeted approach and increases the convenience of meetings with funds located outside of an investor “hotspot,” where dedicating a day of travel would have previously been difficult to justify. Similarly, without the requirement of travel, it now becomes very realistic to include a physician, KOL, or a member of senior management on the video call. Such attendees can add much needed clarity, and they most likely would have been unable to attend an in-person meeting due to the logistics and scheduling required for a full day of travel and meetings.

Lastly, reviewing a deck during an investor meeting is much more convenient on a video call, due to the ability to share your screen with the rest of the group.

Go Virtual or Wait for Clarity?

Given the widespread guidance suspensions and the fluidity of COVID-19 developments, it is fair to consider postponing the majority of your investor interactions until you have more clarity surrounding your business and market outlook. However, it is important to remain opportunistic now that there is no burden of dedicating an entire day to back-to-back meetings and red eye flights. In the vast majority of cases, business fundamentals remain intact for the long term, so despite an unclear outlook for the remainder of 2020, it is still worthwhile to share your story with new investors. With the first quarter 2020 earnings season underway, it is a great time to revisit your meeting history and peer ownership to determine ideal target funds for the remainder of your 2020 investor interactions.

Keep in mind that the vast majority of investors are likely in the same position as you— working from home—so take advantage of the flexible schedules and the unique opportunities presented during this unprecedented time.

If you need a partner in your investor outreach or investor targeting, contact our team today.

Hunter Cabi, Analyst

Virtual Annual Meetings

Annual meetings are a regulatory requirement for most public and private companies. While many retail investors may think a company’s annual shareholder meeting is like the extravaganza put together by Berkshire Hathaway, typical annual meetings are administrative and follow a specific format. Investors who own shares in a public company will receive a notification about that company’s annual meeting. This notification will include the meeting’s agenda, the election of the company’s board of directors, selection of independent registered public accounting firm, and the ability to vote on any proposals that are put before the board, either by shareholders or company management. These meetings also allow shareholders to ask questions to representatives of the company. Unlike Berkshire Hathaway’s five-hour question and answer session with Warren Buffet and Charlie Munger, most annual meetings last no longer than an hour.

Over the past several years, some small- and mid-size companies have made the switch to virtual annual meetings from physically-hosted annual meetings. While this trend was starting to gain momentum, we believe the COVID-19 pandemic will drive most companies to host virtual annual meetings in 2020.

Below are some of the top reasons why virtual annual meetings may be right for your company:

  • Logistics and cost. Physically-hosted annual meetings are usually scheduled during working hours and held in large conference rooms in hotels or meeting centers. Listed below are just some of the staffing and material requirements needed to host an in-person annual meeting.
    • Staff, typically company employees
    • Computer with an internet connection
    • Reliable audio and video capabilities
    • Hard copies of shareholder materials, e.g., current SEC financial documents and proxy statements
    • Refreshments

Virtual annual meetings do not have these requirements, as corporate management will make their presentations and answer shareholder questions via a teleconference or webcast, saving both time and money in the process.

  • Scalability. A virtual annual meeting can be infinitely scalable. If more shareholders than expected participate in a virtual annual meeting, the telecommunications provider can easily add more lines to accommodate as many shareholders as possible, which compares favorably to cramming more chairs into a crowded hotel conference room.
  • Limitless location. Management and shareholders can present and attend a virtual annual meeting from anywhere, as long as there is a good telecommunications connection.
  • Increased shareholder turnout. Annual meetings are typically scheduled during the workweek, which can limit the number of attending shareholders. With a virtual annual meeting, shareholders can simply log in to the meeting without having to travel to a specific location.
  • Multiple vendors. With the rise in popularity of virtual annual meetings, the number of quality vendors has also increased. Transfer agents, proxy solicitors, earnings call hosts, and webcasters have all recently begun to offer virtual annual meeting services.
  • Real-time voting. Most virtual annual meeting vendors also offer real-time, live-meeting voting. This service typically includes tabulation and inspectors of election services.

Over the past several years, virtual annual meetings have become more popular with small- and mid-size companies, as this switch from a physical annual meeting can save time and money. In the wake of the COVID-19 pandemic, we believe companies of all sizes will shift to a virtual annual meeting in 2020. Due to the reasons we pointed out, we feel the adoption of virtual annual meetings will continue to become more popular as companies of all sizes begin to embrace them.

If you would like to discuss how your company can transition from physical to virtual annual meetings, contact our team today.

Greg Chodaczek, Managing Director

How is the Coronavirus Impacting Biotechs?

As the global number of confirmed COVID-19 cases soared past the one-million-mark last week, the United States has slowly climbed to the top of the list of most affected countries. While it is difficult to comprehensively detail the full breadth of the virus’ far-reaching consequences, this blog takes a look at the effect the pandemic is having on biotechs and what, if anything, such companies can do to weather the storm.

Trials
The social distancing guidelines blanketing most of the U.S. (and wider world) are heavily impacting health care centers, which typically conduct randomized trials in partnership with biotechs/Contact Research Organizations (CROs) and are now instead filled with patients seeking medical care. As per a recent entry in the Journal of the American Medical Association, these efforts interfere with all aspects of a successful clinical trial: “efficient accrual and randomization, intervention adherence and delivery, and outcome collection.”

Furthermore, Clinical Research IO recently conducted a survey of 73 research sites across a range of therapeutic indications between March 19-23, 2020. 24% of those polled were no longer enrolling new patients due to safety concerns. 37% of the remaining 76% of survey participants were considering pausing new patient enrollment. Therefore, it is not too far-fetched to infer that the number of sites no longer enrolling new patients will increase as the U.S. continues to see a rising number of cases and fatalities. Trial delays will in turn lead to slower drug development as well as delays in the eventual commercialization of new treatments.

Funding
With the Nasdaq Biotech Index (NBI) dropping around 10% in March (and individual biotech names falling much more), public and private-focused funds will likely tread conservatively in deploying unallocated capital. Anecdotally, recent outreach efforts on behalf of a number of public and private companies have underscored a common thread–a near-term focus on existing portfolio companies. PitchBook recently published a research report echoing that sentiment: “For private equity—in many ways a bet on future economic growth—that means first looking to secure current investments before sourcing new deals.” New deals may not be a complete non-starter, but they face significant challenges in the current environment.

IPOs
As uncertainty over the spread and full implications of COVID-19 rattles the markets, it also creates a volatile and risk-averse environment for new entrants. Consequently, a number of companies are delaying their IPOs. Renaissance Capital characterized this volatility in mid-March as having “essentially shut down the spring IPO market.” Furthermore, the IPO research firm wrote that it anticipates a “narrower IPO window” in the summer (assuming some kind of recovery), with hopeful companies instead looking to the fall for their IPOs.

Employees
Today’s biotechs are essentially lean, virtual companies with minimal staff, made possible by outsourcing a number of functions. Having to work remotely is presenting collaborative challenges, as internal communication and momentum become harder to execute. Limitations on travel preclude networking opportunities at conferences, which are either being cancelled or changed to a (less than ideal) virtual format.

Partners
The outsourcing of studies and trials to CROs is common nowadays, but the coronavirus pandemic has diminished CROs’ ability to conduct and manage these studies (much in the same way that biotechs own internal structures are being affected), with some companies “hearing crickets” from their previously attentive partners. As of April 2, the FDA urged CROs to take a virtual approach to clinical trials in response to COVID-19, advising of “potential challenges” with the closure of clinical sites and interrupted supply chains. Additional recommendations suggest alternatives for safety assessments such as: “phone contact, virtual visit(s), [and] alternative location(s) for assessment, including local labs or imaging centers.”

How much longer will the current situation last?
The short answer: no one knows. Successful containment largely depends on citizens’ adherence to mitigation guidelines, such as social distancing. Some U.S. states have not yet issued stay-at-home orders, further underscoring the potential of interstate travel to become a vehicle for a second wave of infection.

Additionally, expectations of a “summer lull” in the pandemic (the idea that COVID-19 may be seasonal like flu) may not fully bear out. Dr. Marc Lipsitch, professor of epidemiology and director of Center for Communicable Disease Dynamics at Harvard, recently cited the hot and humid climates of Australia, Singapore and Hong Kong when stating: “It’s really clear that warmer weather does not stop the transmission or growth of the virus.” His projection went on to describe a slower growth of transmissions during summer, but not to a level that would decrease the number of cases.

Meanwhile, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID), has warned of a second wave of coronavirus infections hitting the U.S. in the fall of 2020.

All of the above certainly underscores the possibility that the new conditions under the COVID-19 crisis could persist for a long time to come, at least until a vaccine is developed.

When will a vaccine come?
Not any time soon. In the U.S., Johnson & Johnson and Moderna, Inc. appear to be at the front of the race to move forward with human trials of their respective coronavirus vaccines. The Biomedical Advanced Research and Development Authority (BARDA) announced their support for both programs on March 30th in hopes of speeding up the timeline.

J&J’s vaccine candidate will begin its Phase 1 clinical trial by September 2020 at the latest, with a goal of making the vaccine available for emergency use in the U.S. in early 2021. While Moderna is looking at the possibility of utilizing the vaccine under emergency use protocols this fall, a commercially available vaccine is unlikely to be available for widespread use for at least 12-18 months.

German biotech companies BioNTech and CureVac are also leading COVID-19 vaccine development efforts. BioNTech will begin a 150-person trial later in April, while CureVac’s timeline for human testing starts in June. Both have asked governments to ease regulations for late-stage clinical trials in order to expedite development.

Once successfully tested, the widespread distribution and delivery of a coronavirus vaccine will also take time. Production ramp-up could be problematic given the sheer demand for product. Thus, given current projections, large-scale vaccinations in 2020 are unlikely.

Given all the above, what strategy should biotechs follow?
In short: stay the course. Faced with unexpected operational challenges and market volatility, biotechs should focus on fundamentals and long-term value. In other words, continue developing your assets as best as you can so as to create value and ride out the storm. Companies might be tempted either to shut up shop or slash costs (and some employees may be tempted to see working from home as “extended vacation”), but in truth a biotech’s survival path is dependent upon furthering the development of its assets as best it can in any situation.

Having said that, now is a good time to keep your friends close. By “friends” we mean supportive shareholders, strategic partners, and the providers of grants and other forms of non-dilutive funding. This means maintaining communication with your top stakeholders. Remember that other companies are in the same situation you are–facing trial delays and funding moratoriums. Delaying an IPO or funding round and adjusting your timeline due to market conditions is understandable, and best accompanied by clear and transparent messaging. To that end, be sure to communicate only what is known and continue trying to always “under promise and over deliver.” If you would like any guidance during this time, contact our team today.

Serge Yusim, Analyst

Guidance Considerations for COVID-19

The everchanging news cycle has been accelerated with COVID-19 and the associated onset of daily, if not hourly, updates related to this global pandemic. Feeding into the news has been a set of dynamic considerations that are also continuously changing, such as COVID-19 testing details and evolving guidelines established at levels that stem from global and national to state and local. Furthering the complexity of this situation is the uncertainty of having enough resources to treat the increasing cases of COVID-19, especially with insufficient settings for treatments and broad-based shortages of healthcare providers and equipment.

To say the least, it is difficult and daunting for companies to navigate these times, let alone consider how to effectively communicate the impact of this health crisis (see Managing the Crisis: IR Considerations for Managing your COVID-19 Response). As highlighted in last week’s blog and as part of a company’s response, management teams should reassess their guidance, determine how certain or uncertain they are on the guidance they have provided and develop a plan of communication to update the Street. In this blog, we will look at a few factors to contemplate in deciding whether to update your guidance.

Update or Suspend Guidance

One consideration is whether to update or entirely suspend guidance. A few companies have provided qualitative updates to outlook, announcing general performance effects expected to result from this pandemic, such as, changes to supply chain, impacts to global operations, delays to clinical trials or disruptions to procedures. Some have also reduced guidance, attributing the reduction to the general impact of COVID-19, or pointing to more specific areas affected.

We have also seen more companies within the healthcare sector suspend guidance, which is an understandable response. Each company’s outlook is predicated on a multitude of unpredictable factors, including broad implications of COVID-19 to the economy on a macro-level and the timing of elective procedures coming back in line on a micro-level. Investors and analysts are in the same boat during this evolving crisis, and they do not appear to expect companies to have a quantitative update to guidance readily available.

Consequently, in this period of uncertainty, companies may want to consider retracting guidance altogether rather than risk having to provide multiple revisions.

Timing Guidance Updates

There are no specific rules governing when companies need to provide updated guidance, outside of the normal cadence of earnings cycles. It may behoove some companies to take a wait-and-see approach and suspend their guidance during their next reporting of quarterly earnings, which is right around the corner for many. In other cases, and following suit with predecessors, some may consider pre-announcing updates. In fact, this past month, we saw a number of healthcare companies pre-announce their suspension of guidance. The majority of these companies provided such announcements through press releases, while others did so through 8-Ks.

As timing considerations are made, companies should keep company counsel informed and think through Reg FD obligations, any financing requirements or access needed to capital markets, and the timing of insider trading, particularly in terms of when management developed an understanding of the impact of COVID-19.

Finally, as companies work through next steps on guidance, management teams should consider all available information on the impact of COVID-19, especially since variables are changing day to day.

For more information on guidance and how best to respond amidst this evolving crisis, please contact our team today.

Ji-Yon Yi, Associate

IR Considerations For Managing Your COVID-19 Response

In many ways, a crisis such as COVID-19 demands immediate action. Since January, and particularly over the past few weeks, we have seen a tremendous mobilization of government and private resources in response to the novel coronavirus that has upended society and markets around the globe. This mobilization, along with the implementation of mitigation policies like social distancing and the deferral of elective procedures, have forced healthcare companies to grapple with how to best respond operationally. In turn, it has become obvious that expectations and messaging for 2020 need to be reassessed. Therefore, from an IR perspective, while transparency is key, immediate action, or reaction, is likely not the best prescription for this situation.

In our view, companies should consider the following when planning their response to COVID-19:

  • Don’t hide. Focus investors on the fundamentals and your long-term value proposition. As investors have made a lurch toward cash, there has been immense pressure on the share prices and relative valuations of SMID cap companies. Management teams should remain in close touch with their investors, particularly top holders, as they assess their portfolios and make difficult decisions in the weeks and months ahead. Consider providing high level context around how your company is managing these unprecedented headwinds while dispelling misguided concerns and reasserting that the fundamentals of your business are intact. Executives should also convey that nothing about their business model has changed and that they remain optimistic about the durability of their business. This is especially true for generally countercyclical healthcare companies, which are more likely to emerge as buying opportunities for well-positioned investors. While most elective procedures are being postponed, many physicians and hospital administrators are signaling their belief that a relatively small proportion will be lost indefinitely. This means that healthcare companies will likely benefit later in 2020 and into 2021 from pent-up demand as we emerge from the worst of the crisis. Keep in mind that current valuations may have created a buying opportunity for institutional investors who have been eagerly awaiting a liquidity event or more reasonable valuation to enter a name.
  • Communicate your commitment to both your employees and shareholders. In times such as these, strong leadership is critical. As you engage with various stakeholders, be sure to convey confidence while making your priorities clear. In the nearest term, your company will be focused on the health and safety of your employees. While this may translate into higher than expected cash utilization despite a decrease in revenues, human capital will remain critical to weathering the storm and ensuring shareholder value in the medium to longer term. That said, make it known that tough decisions may need to be made in the months ahead and that you are willing to make them. Remaining transparent about these realities and your priorities will help maintain credibility internally and externally while also levelling expectations from a financial perspective.
  • Avoid quantifying specific short-term impacts. The impact of COVID-19 on global supply chains and on the demand for medical procedures and products is constantly evolving and will impact every business differently. Investors and analysts understand this. While some investors may pressure you to quantify short-term impacts, most understand that a comprehensive assessment takes time and will likely not be possible until the worst of the initial outbreak of the virus has passed. While providing context on mitigation strategies (assuming they are already in the implementation phase) is encouraged, avoid commenting on and/or quantifying specifics.
  • Contemplate suspending FY 2020 guidance. A number of mid and large caps in the healthcare space have already either suspended or signaled their intent to suspend their full year 2020 guidance. Just as investors and analysts have demonstrated their willingness to hold tight for commentary on the specifics of the virus’s impact, they also seem willing to accept guidance suspension. This forgiveness is atypical—companies of all sizes should take advantage.
  • Consider a letter to stakeholders. As investors, customers, patients, and employees all seek information related to your expectations and response to the crisis, a simple letter to all stakeholders may be the most appropriate channel to communicate broadly. Unless there is a need to disclose material information, a letter outlining your latest thinking can be immensely helpful while avoiding the formality of a typical press release. Some key messages could include:
    • “We are watching the global policy responses closely and working with our suppliers and customers to work through this difficult, transitory period.”
    • “We are following the direction of local authorities with regard to public gatherings, and we are working to ensure our employees are compliant but operational.”
    • “As we learn more about the direct and indirect impact from policy decisions and macroeconomic developments around the globe, we will be more informed about the ultimate impact on our business operations and will communicate them appropriately.”
      A letter like this conveys transparency and proactivity while providing reassurances that you are focused and able to tackle the hurdles ahead.   
  • Carefully consider the extent to which you will provide prepared remarks and/or Q&A on your next earnings call. If you are still processing the impact of COVID-19 to your business and contemplating your response, it may make sense to keep your next quarterly earnings call short and sweet. Now there is more flexibility to delay the timing of your quarterly reporting—see SEC guidance here. Discuss your options with company counsel and your IR team to ascertain the best strategy for your company. Sometimes less truly is more.
  • Don’t forget Reg FD requirements. As executives and communications professionals at public companies continue to respond to external audiences, it is critical to keep Reg FD requirements in mind. Carefully plan your talking points to avoid disclosing any material non-public information (MNPI), and keep company counsel looped in. Operating and messaging through evolving times of uncertainty creates even more opportunities to unwittingly provide MNPI and selective disclosure. Remain particularly cognizant of SEC regulations as you continue to engage with key stakeholders.
  • Wash your hands and stay safe. This one should be self-explanatory!

For more information on best practices for responding to this crisis, or if you would like for us to review your COVID-19 response strategy, contact our team today.

Brian Johnston, Vice President