Virtual Annual Meetings and Coronavirus

Michael Albano, Sandra Flow, and Francesca L. Odell are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Albano, Ms. FLow, Ms. Odell, Mary Alcock and Jina Davidovich.

With rising concerns around the spread of COVID-19 (“coronavirus”) in the United States and globally, in order to mitigate health risks, many public companies may consider adding a virtual component to the format of their annual shareholder meetings. In the United States, state law generally governs the availability of a virtual meeting format. At the federal level, the SEC regulates the filing and mailing of proxy solicitation materials. While we have not seen direct guidance from state legislatures on virtual or hybrid meetings in the context of the coronavirus pandemic, on March 13, 2020, the SEC released guidance (“SEC Coronavirus Guidance”) addressing annual shareholder meetings [1] in light of recommendations by the Centers for Disease Control and Prevention (“CDC”) and other public health officials to cancel, or explicitly state policies that prohibit, large, in-person gatherings [2] in an effort to prevent the spread of coronavirus. [3] Set forth below are various considerations that a company should take into account when determining whether to move from an in-person to a virtual or hybrid [4] annual meeting

Key Considerations

In determining whether to move to a virtual or hybrid meeting, in response to a situation like the coronavirus threat, a company should carefully consider each of the following questions:

(1) Is a virtual meeting permitted under the company’s state law of incorporation and its bylaws?

(2) In the event of a change from an in-person to virtual or hybrid meeting, what steps must a company take to properly notify its shareholders?

(3) What are the practical considerations associated with holding a virtual or hybrid meeting?

State Law and Bylaws

Prior to the coronavirus outbreak and the SEC Coronavirus Guidance, the SEC affirmed from time to time its position that the decision of whether to host an annual meeting in-person or virtually rests with management, subject to state law requirements. Neither NYSE nor NASDAQ rules are prescriptive with respect to the format of annual shareholder meetings; rather, they require only that companies listed on their exchange hold such meetings, and in addition, NASDAQ specifies that the meeting must permit shareholders to address company affairs with management.

A company should first look to the law of its state of incorporation relating to virtual shareholder meetings. States have taken a variety of approaches on the issue. Delaware law generally permits companies to hold virtual-only as well as hybrid annual meetings provided that certain conditions are met. Other states, such as New York (following an October 2019 rule change), permit a virtual component (again subject to certain conditions) while still requiring an in-person meeting be held. Some states allow virtual meetings but impose more onerous conditions. For example, California permits virtual meetings provided that prior consent from shareholders is obtained. Still other states, such as Georgia, do not currently permit meetings to be held virtually, with or without an in-person meeting.

Assuming that a virtual meeting is permitted under state law, a company should then examine its bylaws to determine whether they would permit holding a virtual or hybrid meeting. In most cases, management and/or the board of directors will have discretion in determining the proper venue and format for the annual meeting.

Notice and Filing Requirements

Moving from an in-person annual meeting to a virtual or hybrid meeting, assuming such a change is permitted by state law and the company’s bylaws, requires the company to take additional steps to properly notify shareholders and comply with SEC filing and state law obligations, taking into account the SEC Coronavirus Guidance.

  • Proxy Statement Has Already Been Filed. [5]
    • As noted in the SEC Coronavirus Guidance, if a company has already filed its proxy statement and has therefore notified shareholders of the location and timing for its annual meeting, any change needs to be communicated. The company should issue a press release disclosing the change in format, file the release with the SEC as supplemental proxy materials and add it to posted proxy materials. There is no need to re-mail the proxy statement or amend the proxy card to reflect the change in venue or format of the meeting.
    • While practice is mixed, most companies that change the location of their annual meetings do not take the position that filing a Form 8-K with the updated information is necessary. This position is in line with the SEC Coronavirus Guidance, which does not mention filing a Form 8-K as one of the necessary steps in postponing or moving from an in-person to virtual or hybrid meeting.
    • The company should ensure that it is complying with all necessary notice requirements under its bylaws and relevant state law. Some states (such as Delaware, New York and California) require that companies notify their shareholders of any changes to annual meetings within a certain number of days prior to such meeting. [6] Compliance with these laws should not require the company to send all shareholders the full proxy statement with the new meeting information; rather, the company should only need to send notice of the change of venue or format.
  • Proxy Statement Has Not Been Filed. Per the SEC Coronavirus Guidance, if a company has yet to file its proxy statement and is considering the possibility of moving to a virtual or hybrid meeting (but has not yet decided), disclosure indicating the possibility of a change, and the reason for such a change, should be included in the proxy statement, both in the meeting notice (which may help avoid a need to send a subsequent notice of the change) and in the meeting logistical information. Companies should consider specifically highlighting the importance of shareholders retaining the control numbers set forth on the proxy card or voting instruction form in order to verify their identity when accessing a meeting virtually.

Practical Considerations in Moving to a Virtual or Hybrid Shareholder Meeting

In addition to the legal considerations noted above, there are several practical considerations that companies should consider in determining whether to move to a virtual or hybrid shareholder meeting:

  • Differences Between Physical and Virtual Meetings. Companies should assess the overall benefits and costs of moving to a virtual or hybrid meeting. Virtual annual meetings allow shareholders to attend and actively participate in the meeting where they may otherwise have been unable to do so and often result in reduced costs for both the company and shareholders. However, companies will need to consider the fact that certain meeting elements, such as the presentation of shareholder proposals, may be more cumbersome. Virtual meetings may also create more uncertainty in shareholder vote counts because shareholders can more easily attend and change their vote at the last minute and may diminish companies’ ability to resolve hostile or otherwise challenging questions as effectively as in physical meetings. While some companies may opt for a middle ground with a hybrid meeting, a hybrid meeting may be less desirable in light of the risks posed by the coronavirus.
  • Ongoing Assessment of Risks. Companies that determine to move forward with an in-person or hybrid meeting should be conscious of ongoing public health developments, including any local regulations on holding gatherings given the risks posed by the coronavirus. They should also have a plan in place in the event that board members or seniors executives are unable to attend a physical meeting. If an in-person meeting is necessary, it is also possible that a company may need to consider whether the meeting could be postponed or adjourned.
  • Logistical Considerations. Companies should consider whether they have the necessary infrastructure, procedures and conduct rules in place to host a virtual annual meeting. Most likely, they will need to rely upon outside vendors, though they should remain cognizant of potential issues and work with vendors to make sure they are addressed. For example, how will the company allow for shareholder participation in the meeting? What remote technologies are necessary in order to successfully hold the meeting and do those technologies provide sufficient security for participants? Further, companies should ensure that the virtual forum permits shareholders to exercise all rights and privileges guaranteed to them under both federal and state securities laws. Companies should also consider how shareholders will be able to ask questions, make comments that can be heard by others and receive answers during the virtual meeting and ensure that shareholders are aware of the procedures with which they must comply to access any information and participate fully in such meetings. A technical support line should be available for shareholders who experience technical difficulties prior to or during the virtual meeting.
  • Logistics Relating to Eligibility to Attend. To the extent that participation in a virtual meeting requires shareholders to enter the control number set forth on their proxy or voter instruction form, a company should be prepared to address the reaction of shareholders who have not retained this information and to work with their virtual meeting vendors regarding possible solutions.
  • Timing Considerations. As companies move closer to the scheduled time of their annual meetings, and if more risks arise from the current coronavirus outbreak, it may be more difficult to secure vendors and ensure that the proper logistics are in place to hold a virtual meeting. Companies should remain in constant communication with vendors and any relevant contacts at the location at which any in-person meeting will (or may) be held in order to ensure they have the latest information as circumstances change.
  • Presenting Shareholder Proposals. Given public health warnings and restrictions, some shareholders may be unable or unwilling to attend an in-person meeting as a result of the impact of coronavirus. Generally, Exchange Act Rule 14a-8(h) requires a shareholder proponent, or his or her representative, to attend an annual meeting to present a proposal. The SEC Coronavirus Guidance allows shareholders to present their proposals by remote means. If a shareholder proponent does not attend the meeting (or send a representative), whether in person or virtually, under Rule 14a-8(h), the company may refuse to submit that proposal to a vote at the meeting. Furthermore, if such absence was without “good cause,” companies could exclude proposals from this shareholder for two calendar years thereafter. In the SEC Coronavirus Guidance, the SEC has clarified that the failure of a shareholder to attend an annual meeting to present a shareholder proposal due to coronavirus concerns will be considered for “good cause,” and therefore, will not allow the company to exclude shareholder proposals by the shareholder in future years. A company should also carefully consider whether it wants to remove a shareholder proposal from the current year agenda due to the failure of the shareholder proponent to attend, as it may attract criticism from shareholders and others.
  • Shareholder Engagement. Virtual meetings may also impact the extent to which management and the board are able to engage meaningfully with shareholders. In light of this consideration, companies may wish to increase their shareholder engagement efforts prior to and following the annual meeting to ensure that shareholders have had a genuine opportunity to connect with, and express any concerns or questions to, management and the board. When engaging with shareholders on these topics, companies should be prepared for the possibility that shareholders will want to engage more broadly on the coronavirus and its potential impact, not only on the logistics of the shareholder meeting but on the company’s business more generally. When having those conversations, company representatives must be aware of their obligations under Regulation FD.
  • Response from Proxy Advisory Firms. Recently, there have been published reports of conversations with Glass Lewis and ISS where the proxy advisory firms have reportedly provided additional color as to how they will receive virtual shareholder meetings in 2020 in light of coronavirus. [7]
    • Glass Lewis: Consistent with its current 2020 proxy voting guidelines, Glass Lewis has recently indicated that it will continue to review an issuer’s proxy materials regarding virtual shareholder meetings. Pursuant to its 2020 guidelines, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in their proxy statement assuring shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. [8] Glass Lewis notes that examples of effective disclosure include: (i) addressing shareholders’ ability to ask questions during the meeting, as well as time guidelines for shareholder questions and rules around which questions will be permitted and how they will be disclosed to participants, (ii) procedures for posting appropriate questions received during the meeting and the company’s answers to such questions on the company’s website as soon as practical after the meeting, (iii) addressing technological and logistical issues related to accessing the virtual meeting platform and (iv) procedures for accessing technical support during the virtual meeting. In light of Glass Lewis’s policy, companies should provide adequate disclosure in any supplemental proxy materials regarding policies and procedures they are planning to implement in connection with the virtual meeting. In addition, Glass Lewis has recently stated that, in the context of coronavirus, companies that have already filed their proxy statements and provided information for an in-person meeting but are now moving to a virtual-only meeting should provide public disclosure explaining the reason for the change. Such disclosure should specifically state that the change is due to the coronavirus outbreak, include complete information about access to the meeting and confirm that shareholders will have the same opportunities to participate in the virtual meeting—as they would have at an in-person meeting.
    • ISS: Though it has not previously adopted a formal policy on virtual shareholder meetings, ISS recently stated that, although many of its institutional clients have not had a favorable view of virtual shareholder meetings, in light of the coronavirus outbreak and the rapidly changing environment, ISS expects that institutional investors will likely be more accommodating of virtual meetings this year. Like Glass Lewis, ISS has stated that it will require companies to provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for shareholders to participate, ask questions, provide feedback to the company and present shareholder proposals. ISS also indicated that it anticipates that the way in which companies manage virtual meetings this year will impact its position on virtual shareholder meetings in the future.

Endnotes

1 SEC Press Release 2020-62, SEC Staff Provides Guidance to Promote Continued Shareholder Engagement, Including at Virtual Annual Meetings, for Companies and Funds Affected by the Coronavirus Disease 2019 (COVID-19) (March 13, 2020), press release available at https://www.sec.gov/news/press-release/2020-62 and guidance available at https://www.sec.gov/ocr/staff-guidance-conducting-annual-meetings-light-covid-19-concerns?auHash=zrsDVFen7QmUL6Xou7EIHYov4Y6IfrRTjW3KPSVukQs.(go back)

2 CDC, Interim Guidance for Coronavirus Disease 2019 (COVID-19), available at https://www.cdc.gov/coronavirus/2019-ncov/community/large-events/mass-gatherings-ready-for-covid-19.html.(go back)

3The SEC had previously released guidance providing conditional regulatory relief and assistance for companies impacted by the coronavirus by allowing such companies to delay filings and the furnishing of proxy soliciting materials when mail delivery is unavailable because the company’s shareholder has a mailing address located in an area where the common mail carrier has suspended delivery service as a result of the coronavirus. SEC Release No.34-88318 (March 4, 2020), available at: https://www.sec.gov/rules/other/2020/34-88318.pdf.(go back)

4A “hybrid” meeting refers to an annual meeting in which shareholders can choose to either attend in-person or join remotely.(go back)

5[This discussion assumes the proxy statement was filed without disclosure of possible changes due to coronavirus concerns./ref]

[ref no=6]Delaware, New York and California require that the notice of the annual meeting be given no less than 10 and no more than 60 days before the date of the meeting. In addition, New York requires that if the notice is sent by third-class mail, it must be given at least 24 days prior to the meeting date, and certain California corporations may be permitted to give notice by third-class mail, but such notice must be sent at least 30 days before the meeting.(go back)

7[Kingsdale Advisors, Proxy Advisors Views on Virtual Meetings, available at: https://mailchi.mp/kingsdaleadvisors/hlibt2xqzu-1071635?e=5bbb8b827b./ref]

[ref no=8]The Glass Lewis 2020 proxy voting guidelines are available at https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf.(go back)


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