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