•One or more
members of the bid evaluation committee cannot be regarded as independent based on ISS criteria for independence; or
•The trigger
threshold is set less than 20 percent of shares outstanding; or
•The duration of
the poison pill exceeds three years; or
•There are other protective or entrenchment tools that can serve as takeover defenses, including blocking stakes held by management-friendly shareholders, or setting the maximum board size
to the actual board size to eliminate vacant seats, or tightening of procedures for removing a director from office; or
•The company fails
to release its proxy circular at least three weeks prior to the meeting, to give shareholders sufficient time to study the details of the proposal and question management about them.
(Second stage of
analysis)
•The company has
not disclosed what specific steps it is taking to address the vulnerability to a takeover by enhancing shareholder value.
Summary
ISS recognizes that there
may be circumstances in which a well-designed poison pill may strengthen the board's negotiating position and allow it to obtain more favorable terms from an acquirer. However, this scenario only applies when the
target company's board is more concerned with shareholder value than with protecting its own position. In order for ISS to be able to support a poison pill in Japan, the above-mentioned conditions will have to be met.
Interestingly, most companies which have failed to release proxy circulars at least three weeks before the meeting also failed at least one other criterion as well, implying that how early companies release their
proxy materials is an excellent way to measure overall shareholder-friendliness.
ISS evaluates all poison
pill proposals on a case-by-case basis, but our guidelines specify a number of necessary conditions which must all be met before we can even consider supporting a takeover defense. In the relatively few cases in which
each of these necessary conditions is met, ISS will proceed to the second stage of the analysis, which is to assess the company's plans to enhance value. The implementation of a poison pill is an admission that the
board sees the company as vulnerable to a takeover, so shareholders will need to see a plan to increase the share price, not merely a plan to entrench an underperforming management team.
Notwithstanding
management fears, some of the companies implementing pills are in fact not especially vulnerable, because founding families, business partners, or other insiders own more than a third of outstanding shares. This is
enough to veto any special resolution, such as an article amendment or a merger – meaning that even if a hostile bidder is able to accumulate a sizable stake in such a company, that bidder will be unable to
force any major restructuring moves opposed by the insiders. It is difficult to see what shareholders of such a company stand to gain from a poison pill.
Importantly, the primary problem at Japanese companies is not the terms of the poison pills themselves – these are often superior to those of U.S. companies due to features such as relatively high trigger
thresholds, clear sunset provisions, and an absence of “"dead hand"” provisions. Rather, the main problem is with Japanese companies' insider-dominated boards and insufficient disclosure. We believe that
the presence of a critical mass of independent directors is essential in order to ensure that a takeover defense is used not merely to entrench management, but to contribute to the enhancement of shareholder value.
Where a company has
implemented a takeover defense without shareholder approval, and that defense allows the board to block the bid without input from shareholders, ISS will consider opposing the reelection of the representative
director(s). This decision will depend on the terms of the defense plan itself, the company's overall governance profile (including board composition and information disclosure practices), and the company's
performance under the current management team.
In evaluating poison pill
renewals, we will apply the same necessary conditions we apply to new pills. At the same time, we will examine the company's share price performance, relative to its peers, since the pill was first put in place. Where
the company has underperformed the market, it will be difficult to argue that shareholders have benefited from the pill, or that they should support its renewal.
14.
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Mergers & Acquisitions, Third-Party Share Issuances (Private Placements)
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Vote CASE-BY-CASE on M&
As and Third-Party Placements taking into account the following:
For every M&A and
Third-Party Placement analysis, ISS reviews publicly available information as of the date of the report and evaluates the merits and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
•Valuation –
Is the value to be received by the target shareholders (or paid by the acquirer) reasonable?
•Market reaction
– How has the market responded to the proposed deal? A negative market reaction will cause ISS to scrutinize a deal more closely.
•Strategic
rationale – Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also
have a favorable track record of successful integration of historical acquisitions.
•Conflicts of
interest – Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? ISS will consider whether any special interests may have influenced these
directors and officers to support or recommend the merger.