Over the past week, several measures have been implemented to assist public companies impacted by the COVID-19 pandemic in meeting their disclosure and governance obligations. These measures include, among others:
- Updated guidance from the Division of Corporation Finance (Division) of the U.S. Securities and Exchange Commission (SEC) for conducting shareholder meetings in light of COVID-19;
- Temporary relief by the State of Delaware from certain stockholder notice requirements for annual meetings currently noticed as an-person meetings but transitioning to virtual-only meetings;
- New compliance and disclosure interpretations (C&DIs) from the Division relating to the SEC's Order providing conditional relief from reporting and proxy delivery requirements;
- Temporary relief by the New York Stock Exchange (NYSE) from certain shareholder approval requirements in relation to stock issuances in order to provide companies with additional flexibility to raise funds in private placement transactions;
- Informational memorandum from Nasdaq for Nasdaq-listed companies about the impact of COVID-19; and
- Policy guidance updates from Institutional Shareholder Services (ISS) for the impacts of the COVID-19 pandemic.
SEC – Updated Guidance on Shareholder Meetings
On March 13, the Division issued guidance to assist companies, shareholders, and other market participants affected by COVID-19 in meeting their obligations under the federal proxy rules for upcoming annual shareholder meetings. For more information on this guidance, please see our prior Alert. On April 7, the Division updated this guidance as follows:
- Application of Guidance Relating to Changing the Date, Time, or Location of a Shareholder Meeting. The Division clarified that its guidance relating to changes to the date, time, or location of a shareholder meeting applies not just to annual meetings but also to special meetings.
- Delays in Printing and Mailing of Full Set of Proxy Materials. The Division added guidance for companies that may be experiencing delays in printing and mailing the "full set" of their proxy materials due to the impact of COVID-19 on their proxy service providers and transfer agents. As an alternative to the "full set" delivery option, companies may furnish their proxy materials through the "notice-only" delivery option; however, Rule 14a-16 of the Securities Exchange Act of 1934 (Exchange Act) requires companies utilizing the "notice-only" delivery option to send the notices to shareholders 40 calendar days or more prior to the meeting date. The Division noted that some companies have indicated that they would like to change from the "full set" delivery option to the "notice-only" delivery option but that these companies have expressed "concerns about their ability to comply with certain provisions of the rule[,]" including requirements for 1) sending notices at least 40 calendar days prior to the meeting, 2) providing information to intermediaries (e.g., brokers and banks) so the intermediaries can send notices to beneficial owners at least 40 calendar days prior to the meeting, and 3) responding to shareholder requests for paper copies of proxy materials in a timely manner.
The Division stated that "[t]he primary goal of the proxy process is [to] 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." Moreover, the guidance encouraged companies "to use all reasonable efforts to achieve this goal without putting the health or safety of anyone involved at risk[,]" which "may mean delaying a meeting in accordance with state law requirements" and other relevant guidance. Notwithstanding the foregoing, the Division provides that "[i]n circumstances where delays are unavoidable due to COVID-19 related difficulties, the staff would not object to an issuer using the 'notice-only' delivery option 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 [in the guidance] for announcing a change in the meeting date, time, or location." In addition, the Division stated that affected companies and intermediaries should "use their best efforts to send paper copies of proxy materials and annual reports to requesting shareholders, even if such deliveries would be delayed."
Therefore, companies that are experiencing difficulties in printing and mailing "full sets" of proxy materials due to the impact of COVID-19 and that would like to change to the "notice-only" delivery option within 40 calendar days of their annual meeting, should, at a minimum: 1) carefully review any applicable state law requirements for delivery of meeting materials and 2) follow the same steps laid out in the SEC guidance for changing the date, time, or location of the meeting, including (a) issuing a press release announcing the change, (b) filing the announcement as definitive additional soliciting material on EDGAR, and (c) taking all reasonable steps necessary to inform other intermediaries in the proxy process and other relevant market participants of such change.
Delaware – Temporary Relief from Stockholder Notice Requirements for Annual Meetings
On April 6, Delaware Governor John Carney executed a new modification to Delaware's state of emergency orders providing, among other things, temporary relief for public companies that have already filed and mailed their definitive proxy materials contemplating solely an in-person annual meeting but that now desire to transition to a virtual-only annual meeting.
The modified order applies solely to public companies incorporated in Delaware and provides that if, as a result of the COVID-19 pandemic, the board of directors wishes to change a currently noticed in-person meeting to a virtual-only meeting, then the company may notify its stockholders of the change solely by 1) making a filing with the SEC pursuant to Section 13, 14, or 15(d) of the Exchange Act and 2) issuing a press release, which must be promptly posted on the company's website after release.
In effect, this temporary relief means that these companies will not be required to send out new notices via mail or electronic mail (if permitted) as may otherwise be required under Delaware law, and aligns the Delaware state law requirements with the recent guidance from the SEC, discussed above.
Companies that have not yet provided notice of their annual meeting may not rely on the modified order. In the event such companies give notice of an in-person meeting and later switch to a virtual-only annual meeting, they may need to send out a new notice of meeting unless Delaware provides further relief, although they should discuss various related considerations with counsel. Companies may also consider giving notice of both an in-person and virtual-only meeting, such as: "The annual meeting will be held at [location], or in the event that the board determines that it will not be possible to hold the meeting at this location and circulates a press release to that effect prior to the meeting, then the meeting will instead be held in a virtual meeting format only at [website of virtual meeting]." This may prove a tipping point for more companies to choose to hold a virtual meeting this year and provide notice of a virtual meeting in their initial notice to stockholders.
SEC – New C&DIs Relating to Conditional Relief from SEC Filing Requirements
Following the issuance of the SEC's initial Order granting conditional relief from certain requirements to file or furnish materials with the SEC on March 4, and its amended Order on March 25 (as amended, the Order), the Division issued a series of C&DIs clarifying certain matters relating to the Order. The Order provides, among other things, temporary relief in the form of a 45-day extended deadline, for certain SEC filings that are due on or before July 1, 2020, subject to the satisfaction of the conditions set forth in the Order. The C&DIs, summarized below, relate to this temporary relief.
- Question 135.12 – Question 135.12 provides that companies that 1) are unable to file a report of the type covered by Rule 12b-25 (e.g., Form 10-Q and Form 10-K) on a timely basis due to the COVID-19 pandemic, 2) are uncertain as to whether they will be able to file the required report within the applicable Rule 12b-25(b)(2)(ii) period, and 3) may need to rely on the Order to extend the due date for such filing for 45 days, must furnish a report on Form 8-K (or Form 6-K, as applicable) by the later of March 16, 2020, or the original due date of the report. The filing of such Form 8-K (or Form 6-K) is a condition to a company's use of the exemption in the Order. Therefore, if a company only files a Form 12b-25 by the original due date of the required report, then it will not have met the condition of the Order and the 45-day relief period will be unavailable.
- Question 135.13 – Question 135.13 provides that a Form 12b-25 filing does not extend the original due date of the required report; and therefore, a company that filed a Form 12b-25 cannot subsequently rely on the Order to extend the filing deadline for the report unless the company also furnished a Form 8-K (or Form 6-K, as applicable) by the later of March 16, 2020 or the original due date of the report. Conversely, if a company is relying on the Order and has satisfied the conditions of the exemption, then the due date of the required report is extended for 45 days; and therefore, the company would be permitted to subsequently rely on Rule 12b-25 if it was unable to file the report on or before the extended due date.
- Question 104.18 – Form 10-K allows Part III information to be incorporated by reference from a company's proxy or information statement or filed as an amendment to the Form 10-K, in any case, not later than 120 days after the end of the applicable fiscal year. Question 104.18 provides that companies that are unable to file their Part III information by the 120-day deadline may use the relief from the Order as long as the 120-day deadline falls within the relief period specified in the Order and the company satisfies each of the conditions in the Order. As of the date of this Alert, the Order applies to filings due on or before July 1, 2020. This C&DI highlights three different scenarios relating to filing Part III information:
- Form 10-K Timely Filed Without Reliance on Amended Order. In this case, companies should furnish a Form 8-K with the disclosures required by the amended Order by the 120-day deadline, and then provide the Part III information within 45 days of the 120-day deadline by including it either in a Form 10-K/A or definitive proxy or information statement.
- Relief Required for Both Form 10-K and Part III Information. In this case, a company may furnish a single Form 8-K by the original deadline for the Form 10-K that provides the disclosures required by the Order, indicates that the company will incorporate the Part III information by reference, and provides the estimated date by which such information will be filed. The Part III information must then be filed no later than 45 days following the 120-day deadline.
- Relief Used for Form 10-K but Form 8-K Silent on Part III Information. In this case, a company may 1) include the Part III information in its Form 10-K filed within 45 days of the original Form 10-K deadline, or 2) furnish another Form 8-K with the disclosures required in the Order by the original 120-day deadline and then file the Part III information no later than 45 days following the 120-day deadline either on a Form 10-K/A or definitive proxy or information statement.
For more information on the Order, including a summary of the conditions for eligibility to use the exemptions, please see our Alert on the initial Order and our Alert on the amended Order.
NYSE – Temporary Relief from Shareholder Approval Requirements
The SEC approved the immediate effectiveness of the proposal filed by the NYSE on April 3 to waive the application of certain of the shareholder approval requirements set forth in Section 312.03 of the NYSE Listed Company Manual, subject to certain conditions.
In its proposal, the NYSE stated that it "believes that it is likely that many listed companies will have urgent liquidity needs in the coming months due to lost revenues and maturing debt obligations[,]" and that these companies "will need to access additional capital that may not be available in the public equity or credit markets."
In addition, the NYSE likened current conditions to those conditions that existed after the financial crisis of 2008-2009, noting that following that crisis it "observed that many companies sought capital by selling significant amounts of equity in private placement transactions to a single investor or small group of investors, in many cases limited to or including existing major shareholders in the company." However, in seeking to raise capital in that manner, the NYSE also noted that these companies "were often limited by the NYSE's shareholder approval requirements with respect to the size and structure of the transactions they were able to undertake."
Thus, in an effort to provide flexibility to companies that may experience urgent liquidity needs, the NYSE has provided the following temporary relief:
- Issuances to Related Parties.
- General Rule. Section 312.03(b) of the NYSE Listed Company Manual generally requires shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, to a director, officer, substantial security holder of the company, or any affiliate thereof, if the number of shares of common stock to be issued (or into which the securities may be convertible or exercisable), exceeds 1 percent of the number of shares of common stock or 1 percent of the voting power outstanding prior to the issuance. Notwithstanding the foregoing, if 1) the related party involved in the transaction is a related party solely by virtue of being a substantial security holder and 2) the issuance relates to a sale of stock for cash at a price that is at least as great as the "minimum price," i.e., the lower of (a) the official closing price immediately preceding the signing of the binding agreement or (b) the average official closing price for the 5 trading days immediately preceding the signing of the binding agreement,1 then shareholder approval is not required unless the number of shares of common stock to be issued (or into which the securities may be convertible or exercisable) exceeds 5 percent of the number of shares of common stock or 5 percent of the voting power outstanding before the issuance.
- Temporary Relief. The NYSE has waived the shareholder approval requirement for related party transactions set forth in Section 312.03(b) of the NYSE Listed Company Manual through and including June 30, 2020, provided that: 1) the transaction involves the sale of the company's securities for cash at a price that meets the "minimum price" requirement and 2) the transaction has been reviewed and approved by the company's audit committee or a comparable committee comprised solely of independent directors. As a result of this waiver and during the applicable relief period, companies may engage in transactions with existing investors that would exceed the applicable 1 percent and 5 percent limits in Section 312.03(b) without obtaining shareholder approval, subject to the conditions set forth above. Notably, however, if shareholder approval for the transaction is required under any other applicable rule (e.g., equity compensation requirements, change of control requirements), then the transaction will still require shareholder approval, notwithstanding this waiver.
In addition and consistent with the shareholder approval requirements in Nasdaq Marketplace Rule 5635(a), the waiver is not applicable "to any transaction involving the stock or assets of another company where any director, officer or substantial security holder of the company has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5% or more…."
- Transactions of 20 Percent or More.
- General Rule. Section 312.03(c) of the NYSE Listed Company Manual generally requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, if the number of shares of common stock to be issued is equal to or in excess of 20 percent of the number of shares of common stock outstanding prior to issuance or the common stock has voting power equal to or in excess of 20 percent of the voting power outstanding prior to issuance. There are a few exceptions to this shareholder approval requirement, including for an issuance involving any "bona fide private financing," if the financing involves a sale of common stock (or securities convertible into or exercisable for common stock) for cash at a price at least as great as the "minimum price." A bona fide private financing is a sale in which either 1) a registered broker-dealer purchases the securities from the company with a view to the private sale of the securities to one or more purchasers or 2) the company sells the securities to multiple purchasers, and no one purchaser (or group of related purchasers), acquires more than 5 percent of the shares of the company's common stock or more than 5 percent of the company's voting power prior to the sale.2
- Temporary Relief. The NYSE has waived, for purposes of the "bona fide private financing" exception in Section 312.03, 1) the 5 percent limitation for sales to individual investors and 2) the requirement that a company must sell to multiple purchasers, through and including June 30, 2020, provided that the transaction involves the sale of the company's securities for cash at a price that meets the "minimum price" requirement. As a result of this waiver, companies may engage in private placements with one or more purchasers and regardless of the amount of securities purchased by any single investor (or group of related purchasers) without obtaining shareholder approval, subject to the conditions set forth above. Notably, however, and consistent with the waiver for sales to related parties, if shareholder approval for such a transaction is required under any other applicable rule, then the transaction will still require shareholder approval, notwithstanding this waiver.
Nasdaq – Memorandum Regarding Impact of COVID-19
On March 26, Nasdaq released a memorandum entitled Information for Nasdaq Listed Companies About the Impact of Coronavirus (COVID-19), providing information on resources that may be helpful for Nasdaq listed companies impacted by the COVID-19 pandemic. Some of the key takeaways from this memorandum include the following:
- Periodic Reporting Obligations. As discussed above, on March 25, the SEC issued an Order granting temporary relief from certain SEC filing obligations. Nasdaq confirmed that "Nasdaq-listed companies impacted by the COVID-19 outbreak that satisfy the conditions in the [SEC]'s Order and are eligible for the 45 day extension to file will not be deficient under Nasdaq Rule 5250(c) for failing to file Exchange Act reports by the existing deadlines and will not receive a deficiency letter from Nasdaq." To the extent that companies are ineligible to rely on the Order, Nasdaq states that these companies "can submit a plan to Nasdaq Listing Qualifications describing how they intend to retain compliance and, under the Listing Rules, Listing Qualifications' staff can allow them up to six months to file."
- Annual Meetings and Proxy Statements. The Order also exempts companies, subject to the satisfaction of certain conditions, from the requirement to furnish proxy and information statements, annual reports, and other soliciting materials to security holders whose mailing address is located in an area where, as a result of COVID-19, mail delivery service has been suspended. Nasdaq provides that companies that satisfy the conditions set forth in the Order "will satisfy Nasdaq Listing Rule 5250(d), which requires companies to make available their annual, quarterly and interim reports to shareholders, and Nasdaq Rule 5620(b), which requires that a company solicit proxies and provide proxy statements for all meetings of shareholders."
- Shareholder Approval Rules. Nasdaq rules generally require companies to obtain shareholder approval prior to certain issuances of securities. At this time, Nasdaq is not proposing any temporary relief from its shareholder approval requirements; its rules do not require shareholder approval in the circumstances under which the NYSE provided temporary relief (and discussed above). However, Nasdaq reminds companies that an "exception is available for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company." In order to request such an exception, companies "should attach a letter addressing how a delay resulting from seeking shareholder approval would seriously jeopardize its financial viability and how the proposed transaction would benefit the company." Nasdaq notes that while use of this exception may involve a "difficult standard to meet, Nasdaq will consider the impact of disruptions caused by COVID-19 in its review of any pending or new requests for a financial viability exception." Also, Nasdaq reminds companies that reliance on this exception "must expressly be approved by the company's audit committee and the company must obtain Nasdaq's approval to rely upon the financial viability exception prior to proceeding with the transaction[,]" and companies must provide at least 10 days' notice prior to issuing securities in the exempted transaction.
- Continued Listing Rules. While Nasdaq has not suspended any continued listing rules at this time, it encourages companies to contact Nasdaq's Listing Qualifications for guidance, and notes that companies that are "deficient with the bid price, market value of listed securities, or market value of public float requirements have at least 180 days to regain compliance and may be eligible for additional time."
ISS – Policy Guidance for the Impacts of the COVID-19 Pandemic
On April 8, ISS issued its ISS Policy Guidance – Impacts of the COVID-19 Pandemic, providing guidance on several of its voting policies that may be impacted by the COVID-19 pandemic. ISS notes that it will update this guidance, as needed, throughout the 2020 proxy season. Some of the key takeaways from this guidance include the following:
- Virtual-Only Meetings. In most countries (including the U.S.), ISS does not have a benchmark policy to recommend against virtual-only annual meetings or board or committee members of companies that hold virtual-only annual meetings. However, in those few markets where ISS discourages virtual-only meetings, ISS will alter its policy to not make "adverse vote recommendations related to companies holding 'virtual-only' meetings until such time that it is safe to hold in-person meetings again." However, ISS provides that for boards opting to hold virtual-only meetings, ISS encourages "them to disclose clearly the reason for their decision (i.e., that it is related to the COVID-19 pandemic) and to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish." In addition, "boards are encouraged to commit to return to in-person or 'hybrid' meetings (or to put that matter to shareholders to decide) as soon as practicable."
- Poison Pills. ISS believes that its existing policy in regards to poison pills and other defensive measures is "appropriately flexible to take account for the adoption of poison pills in the face of genuine, short-term potential threat situations such as during the current pandemic[,]" and that with respect to poison pills with a duration of less than one year, ISS's policy "is to consider the situation on a case-by-case basis considering the disclosed rationale for adopting the plan and other relevant factors (such as a commitment to put any future renewal of the pill to a shareholder vote)." ISS states that "[a] severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period."
- Changes to the Board of Directors or Senior Management. ISS believes that its "[e]xisting benchmark policies provide [its] analysts with appropriate discretion and flexibility in applying guidelines related to directors' independence, potential overboarding, board diversity and other attributes." However, ISS also states that it believes "that boards should have broad discretion during this crisis to ensure that they have the right team in place and [ISS] will adjust the application of [its] policies as appropriate for the exceptional circumstances of the current pandemic." ISS cites circumstances where boards may need to fill vacancies due to the disability or incapacity of a director or to add critical expertise to the address the issues raised by the pandemic, or where a director may need to fill a senior executive role on an interim basis due to the disability or incapacity of such senior executive.
- Changes in Compensation Metrics/Shift in Goals or Targets. Although decisions by boards or compensation committees to change short-term metrics, goals, or targets, will be analyzed and addressed by shareholders at next year's annual meeting, ISS encourages boards "to provide contemporaneous disclosure to shareholders of their rationales for making such changes." With regard to changes to long-term compensation plans, ISS states that its benchmark policies "generally are not supportive of changes to midstream or in-flight awards since they cover multi-year periods." Thus, ISS will look at "changes made to long-term awards on case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes." If boards alter the structure of their long-term plans in response to the new economic environment, then "ISS will assess such structural changes under [its] existing benchmark policy frameworks."
- Option Repricing. ISS states that "[i]f boards undertake repricing actions without asking shareholders to approve or ratify their actions in a timely fashion, the directors' actions will remain subject to scrutiny under the U.S. benchmark policy board accountability provisions…." In addition, where boards seek shareholder approval at 2020 annual meetings, ISS will apply its existing case-by-case policy approach, which, in the U.S., means that "ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company's stock price[,]" subject to consideration of several factors.
- Share Repurchases. ISS states that it will "generally continue to recommend in favor of repurchase authorities within customary limits for each market, the board's actions related to repurchases over the course of 2020 will be reviewed in the run up to the time of the next [annual meeting] (generally 2021) to consider if the directors managed risks in a responsible fashion for any repurchases undertaken under the authority."
In addition to the matters discussed above, ISS's policy guidance updates also covered meeting postponements, director attendance, dividends, and capital raising (including share issuances and private placements).
 The definition of “minimum price” is set forth in Section 312.04(i) of the NYSE Listed Company Manual.
 The definition of “bona fide private financing” is set forth in Section 312.04(g) of the NYSE Listed Company Manual.