April, May and June are typically the most popular months for public companies to host their annual meetings of shareholders. This year, the unprecedented public health concern resulting from the coronavirus or COVID-19 pandemic is causing companies to re-evaluate how they approach this annual rite of spring given the need to focus on preserving the health and safety of shareholders, directors and employees and reducing risk to the company’s business operations.
Although participation in annual meetings by remote communication has been permissible for several years under the laws of many states, including in Delaware since 2000, most companies have continued to hold traditional in-person meetings. According to data from Broadridge, in 2019, only 326 companies took advantage of the ability to hold annual meetings using a format that is either virtual-only (i.e., the annual meeting is held solely by means of remote communication, with the ability to fully participate and vote at the meeting by means of remote communication, and with no physical location at all) or hybrid (i.e., when the ability to participate and vote at the annual meeting by means of remote communication supplements a traditional in-person meeting).
Companies that have not yet mailed their proxy materials have several alternatives to the traditional springtime, in-person annual meeting, including:
- Holding a virtual-only meeting
- Announcing a hybrid meeting while indicating in the proxy materials that the physical component of the meeting may be cancelled if necessary or appropriate
- Announcing a traditional physical meeting while indicating in the proxy materials that the company may switch to a virtual-only meeting if necessary or appropriate
- Proceeding with a traditional in-person meeting, but offering a webcast or conference call dial in like those used for earnings calls that allows shareholders to listen to the meeting even though it does not provide them with the ability to fully participate and/or vote as if they were in attendance
- Delaying the timing of the meeting to later in the year
Companies that have already mailed their proxy materials indicating a traditional in-person meeting have similar post-mailing options, including:
- Switching from an in-person meeting to a virtual-only meeting
- Changing the physical location of the in-person meeting to a site that may present less risk to the company
- Adding a webcast or conference call of the scheduled in-person meeting to accommodate shareholders who do not wish to travel to the physical meeting but would like the opportunity to listen in
- Postponing or adjourning the meeting to a later date
There are many legal and investor relations considerations when evaluating these alternatives.
Compliance with applicable state law and the company’s organizational documents. While Delaware law permits virtual-only meetings, that is not true in all states. For example, public corporations organized under Massachusetts or New York law currently only have the option of holding either an in-person or a hybrid meeting. Even Delaware companies need to review their charter and bylaws to confirm that they do not contain any limitations on the ability to hold meetings by means of remote communication. Moreover, companies need to consider the state law requirements around the use of remote communication, such as the Delaware requirement that companies implement reasonable measures to verify that each person deemed present by remote communication is a shareholder or proxyholder. As a result, providing a dial-in number will generally not be sufficient to qualify as a means of remote communication, even though it may be helpful from an investor relations perspective. Companies switching formats must also consider the notice requirements under state law, which vary from the notice requirements under SEC rules, and the company’s organizational documents.
Compliance with SEC rules. While shareholder meetings are largely a creature of state law, SEC rules impact the annual meetings of public companies in numerous ways through disclosure and dissemination requirements and by providing shareholders with the ability to require inclusion of proposals in a company’s proxy materials. On March 13, 2020, the SEC staff put out guidance reducing one possible cause for concern. In this guidance, the SEC staff states that it will take the position that a company that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if it: (1) issues a press release announcing the change; (2) files the press release as definitive additional soliciting material on EDGAR; and (3) 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 does, however, note that they “expect issuers to take these actions promptly after making a decision to change the date, time, or location of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner.” The staff also encouraged companies that have not yet mailed their proxy materials to include disclosures regarding the possibility that changes will be made due to the COVID-19 pandemic. With respect to shareholder proposals, the staff’s guidance “encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 proxy season”.
Investor relations considerations. In prior years, several institutional shareholders and proxy advisory firms have been critical of virtual-only meetings out of a concern that they could impede the exercise by shareholders of their rights at a traditional meeting. Given the circumstances of the COVID-19 pandemic, we do not believe institutional shareholders will penalize companies for changes made to the format of their annual meeting this year. Nevertheless, in order to minimize the risk of adverse shareholder reaction, companies should provide clear disclosure about the reason for the change to the meeting’s format, specifically mentioning the COVID-19 pandemic, and the logistics for remote participation in the meeting, especially as it relates to the ability of shareholders to ask questions during the meeting.
Many of these considerations will be more fully fleshed out over the next few weeks as a large number of companies move to finalize their proxy materials. Please do not hesitate to reach out to any member of your WilmerHale client team or to members of WilmerHale’s Disclosure and Corporate Governance Practice Group to discuss your specific circumstances.