The COVID-19 pandemic has created a myriad of problems for all businesses, but one that’s front and center for many public companies is the question of what to do about their upcoming annual shareholders’ meetings? For companies with December 31 fiscal year-ends, the timing of the COVID-19 crisis’s onset has created a perfect storm of potential disruption for their annual meetings. Many companies already have set their annual meeting dates and mailed their proxy statements. Others are in the final stages of their preparations.
Now, with many states imposing bans on large gatherings or outright stay-at-home orders, these companies have to decide what they are going to do. In
order to make an informed decision, they need to know what their options are, and what the consequences of the various alternatives may be to holding a traditional annual meeting in a physical location.
The SEC’s Position: Changing Meeting Logistics Won’t Require Remailing Proxy
Recognizing that many businesses have transitioned to telework and virtual meetings in response to the COVID-19 pandemic, on March 13, 2020, the staff of the SEC’s Division of Corporation Finance issued guidance to companies considering changes in the date, time or location of their annual meetings due to the difficulties arising from COVID-19.
In the case of an issuer that already has mailed proxy materials, the staff’s position is that the issuer may notify shareholders of a change in the date, time or location of its annual meeting without amending its proxy statement or mailing additional proxy materials if it:
- issues a press release announcing such change;
- files the announcement as definitive additional soliciting material on EDGAR; and
- takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.
The staff says that it expects companies to take these steps promptly after deciding to change meeting logistics.
Companies that plan to conduct a virtual or a hybrid meeting must provide timely notification of their plans to shareholders, intermediaries (such as Broadridge), and other market participants. That disclosure also should include clear directions concerning the logistical details of the virtual or hybrid meeting, including instructions on how shareholders may access, participate in and vote at the meeting remotely. The staff says that companies that have not mailed proxy materials should include these disclosures in their definitive proxy statement. Those that already have mailed
proxy materials would not have to send new materials containing this information if they take the steps outlined in the preceding paragraph.
Permissibility of Virtual or Hybrid Shareholders’ Meetings Under State Law
Companies considering a move to a virtual or hybrid meeting need to confirm that they are permitted to hold such a meeting under applicable state law. Delaware and Ohio both permit corporations chartered under their laws to conduct virtual or hybrid annual meetings. Section 211(a) of the Delaware General Corporation Law (DGCL) provides that if the board of directors of a Delaware corporation is authorized to determine the place of a shareholders’ meeting, it may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held “solely by means of remote communication.” The statute also allows shareholders to participate remotely in a meeting held in a physical location.
In the case of meetings conducted virtually or through hybrid means, Section 211(a) requires the company to implement reasonable measures to verify that each person present and permitted to vote by means of remote communication is a stockholder or proxyholder. It also must implement reasonable measures
to provide such persons a reasonable opportunity to participate and vote on matters submitted at the meeting. This includes the opportunity to read or hear the live proceedings of the meeting. The company also must keep a record of votes taken by means of remote communication.
For Ohio corporations, Section 1701.40(B) of the Revised Code provides that, unless prohibited by the articles or regulations, the board of an “issuing public corporation” may determine to hold a meeting solely by “use of communications equipment that enables the shareholder or proxyholder an opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to read or hear the proceedings of the meeting and to speak or otherwise participate in the proceedings contemporaneously with those physically present.”
The term “issuing public corporation” is defined in Section 1701.01(Y) of the Ohio Revised Code (ORC) to mean “a domestic corporation with fifty or more shareholders that has its principal place of business, its principal executive offices, assets having substantial value, or a substantial percentage of its assets within this state, and as to which no valid close corporation agreement exists.” Virtually all Ohio-chartered public companies with operations or a significant presence in the state would likely fall within this definition. For the rare Ohio-chartered public company that might not, a virtual or hybrid annual meeting could only be held if the articles or regulations permitted the board to hold such a meeting.
State Law Notice Requirements
guidance does not address compliance with state law notice provisions. If a company that already has provided notice of a physical meeting decides to change to a virtual or hybrid meeting, the consensus from most lawyers who have considered this issue appears to be that there will be some risk under the Delaware statute if you simply rely on the procedures set forth in that guidance and do not deliver a new notice of the meeting.
The risk exists because of the language of the relevant state statutes. For example, Section 222 of the DGCL requires that notice of a shareholders’ meeting “in the form of a writing or electronic transmission shall be given. . .” Whether a press release or website announcement satisfies this requirement is unclear. For an Ohio corporation, the risk
of not providing a new notice in the event of a transition to a virtual or hybrid format appears greater, because the language of Ohio’s statute appears more restrictive than Delaware’s, and requires authorization from the shareholder to any means of communicating notice other than those set forth in the statute.¹
Some companies have attempted to mitigate the risks associated with not mailing an additional notice by including language in their original notice of meeting similar to this:
As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of remote
communication. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be available at https://www.company.com/proxy.
We recommend the inclusion of this language, and think there is a strong equitable argument that, in an unprecedented time of emergency, alerting shareholders to the possibility of a change to the location of the meeting in the original notice together with information about where the other statutorily required information about virtual or hybrid meeting should be regarded as compliant with the notice requirements under either Delaware or Ohio law. We think that argument is enhanced by compliance with the notice
requirements laid out in the SEC’s guidance.
Nevertheless, we suggest that except in cases where it is not practical to provide lawful notice – such as a change in the meeting location occurring less than 10 days (Delaware) or seven days (Ohio) prior to the meeting – a revised notice of the meeting should be furnished to shareholders by mail or email. Despite the equities of the current situation, strict adherence to state law notice requirements may help to avoid the possibility of challenges to actions taken at the meeting, (e.g., by activist shareholders seeking board representation or by parties challenging compensation plan proposals).
In addition to potential legal concerns, there is a practical consideration that may argue in favor of providing a new notice of
the meeting – a company that does this may well determine that mailing access information to shareholders may be the best way to verify their status and right to participate in a virtual or hybrid meeting. To access a meeting remotely, a shareholder typically must use an individualized “control number,” which is usually included on the shareholder’s proxy card. If the shareholder has already returned (or discarded) the initial proxy card, providing a new notice and proxy card will ensure that shareholders are able to access the meeting.
Alternatives Not Involving a New Notice of Meeting
If the company is not prohibited under the terms of a governmental order from accessing the facility at which the physical meeting is scheduled to be
held, there are procedural alternatives that may be available to it in order to convert to a virtual meeting without the need to provide additional notice to its shareholders.
Hold Meeting But Discourage Attendance. One alternative that a company may consider would be to hold the meeting and discourage attendance. This could be accomplished by issuing a press release or other communication telling shareholders that the meeting will be held as scheduled, and that attendance is discouraged due to public health considerations. At the same time, the company could announce that shareholders will be provided with remote access to the meeting. This is similar to the approach Berkshire Hathaway appears to have taken, although it purports to prohibit shareholders from physically
attending the meeting. Under this scenario, the company could hold the physical meeting in the original location, but ideally only with a single person in attendance while the proceedings are made available online.
Adjourn and Reconvene the Meeting. Companies preferring an alternative that does not involve providing a new notice may find greater comfort in relying on state statutory provisions permitting meetings to be adjourned. Under Section 222(c) of the DGCL, a shareholders’ meeting generally may be adjourned to another location or to a remote location without notice if, “the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are
announced at the meeting at which the adjournment is taken.” Section 1701.41(A) of the ORC contains similar language.
The ability to reconvene an adjourned meeting without further notice is constrained by statutory requirements that the adjourned meeting be held within 30 days thereafter.
Delaware companies that want to preserve their option to adjourn the meeting in favor of a virtual alternative would be prudent to include language in the original notice indicating how shareholders can access a shareholder list if the meeting is held virtually. Section 219(a) of the DGCL requires that information to be included in the notice of any shareholders’ meeting held by means of remote communication, and failure to include it could independently trigger a second notice
requirement that would otherwise not apply. Ohio’s statute does not contain a parallel provision, though it does require that a shareholder list be made available during the meeting.
One important issue for companies considering the adjournment approach to consider is which parties have the authority to adjourn a shareholders’ meeting under applicable law. Many charters also do not contain provisions expressly granting the meeting chairperson or other officers the authority to adjourn the meeting.
The best-case scenario is a bylaw providing directors with express authority to postpone or adjourn a meeting. Companies that have such a bylaw may adjourn the meeting based solely on director action. If such a bylaw provision is not present, the issue becomes much murkier.
Companies often will find that the statute is silent on the topic (as in Delaware) or contains language providing that shareholders have the authority to adjourn the meeting (as in Ohio).
Companies finding themselves in this situation may be able to address it by including a proposal allowing the meeting chairperson to adjourn the meeting for one or more reasons, or in such person’s discretion. It is important to keep in mind that if shareholders do not authorize a specific resolution to that effect, the discretionary authority provided in proxies may not be exercised to vote in favor of an adjournment proposal. That is because the SEC does not view adjourning a meeting as being within the scope of the "matters incident to the conduct of the meeting" encompassed by a proxy
holder's discretionary authority under Rule 14a-4.
The Recess Alternative. The possibility of declaring a "recess" is a potential workaround for the authority issues arising in connection with adjournment proposals. While it has not been legally tested, it does represent an innovative approach to dealing with uncertainties surrounding the board's authority to adjourn a meeting.
The idea behind a recess is that the meeting chairperson has the inherent authority to declare a recess – not adjourn the meeting, but continue it until a later time or date – regardless of statutory or bylaw provisions addressing adjournment. In 2010, Dynegy and its lawyers famously declared a "recess" that lasted several days in order to continue to solicit proxies on a proposed sale of
the company following the bidder's decision to increase its price.
A few other companies have used the recess approach to provide additional time for solicitation. For example, in 2015, Exco Resources recessed its annual meeting to "provide shareholders additional time to consider the proposals. . . ." In 2017, Uni-Pixel recessed its annual meeting for several days for the same reasons.
The recess approach has not been tested by the courts, nor to our knowledge has it been used to address purely logistical challenges to the conduct of a shareholders’ meeting. It is at the very least uncertain whether it is a viable alternative under state law. The companies that have opted to recess annual meetings have not included any disclosure in their proxy statements concerning the
board's authority to do so.
But in light of the SEC's requirement to solicit shareholder approval of an adjournment of the meeting if required under state law, any company considering this particular "road less traveled" would be smart to include disclosure about the possibility of the meeting chairperson declaring a recess in its proxy materials.
Key Takeaways and Conclusion
The right solution to the logistical challenges to upcoming annual meetings resulting from the COVID-19 crisis will depend on the unique facts confronting each individual company. Nevertheless, there are a number of key takeaways to keep in mind.
- Those converting from a physical meeting to a virtual one should review and follow the SEC’s guidance on the disclosure required.
- All companies considering a virtual or hybrid meeting should review the aspects of the SEC’s guidance that relate to disclosure of the meeting logistics and the SEC’s expectations concerning the conduct of the meeting.
- While the SEC’s guidance does not require companies that comply with its terms to mail supplemental proxy materials, that guidance does not address state corporate law issues relating to the permissibility of virtual or hybrid meetings nor as to technical requirements relating to notice.
- We recommend
that companies that can provide a new notice by mail or other traditional channel to shareholders do so, because an approach relying solely on the manner of disclosure contemplated by the SEC’s guidance may not be fully compliant with state law requirements.
- Companies that are not prohibited from accessing the physical location of the meeting may be able to adjourn or recess the meeting and avoid compliance concerns under state law notice requirements.
- Companies considering adjourning a meeting should determine whether they have the ability to adjourn a meeting without a shareholder vote, and if not, to seek appropriate authority by means of including a shareholder resolution granting that authority in their proxy
- Companies that are unable to obtain authority to adjourn the meeting may have another, less certain option – the use of a recess procedure. While this alternative has been used in a handful of situations, there is no express statutory authority for it, and it is as yet untested in the courts.
The COVID-19 crisis presents companies with unprecedented logistical challenges when it comes to their upcoming annual shareholders’ meetings. However, there are a variety of alternatives that will permit companies to navigate those challenges. The key to determining the right solution for each company involves an understanding of the federal and state laws and charter provisions involved in the process, and planning the meeting with those requirements in mind.
¹Section 1701.41(A) says that notice of a shareholders’ meeting “shall be given either by personal delivery or by mail, overnight delivery service, or any other means of communication authorized by
the shareholder to whom the notice is given.”
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