On March 13, 2020, the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC”) provided guidance regarding potential changes to the date, time, location, or format of upcoming annual meetings of shareholders. Companies have been considering changes to annual meetings because of the concerns about the coronavirus, and the disease that it causes known as COVID-19. Many jurisdictions have been imposing restrictions on public gatherings, which may make it impossible to hold an annual meeting as planned. Further, travel restrictions and the encouragement of social distancing may make a virtual or hybrid annual meeting more attractive under the current circumstances. The Staff’s guidance addresses the notifications and filings necessary to change the date, time, and location of an annual meeting, as well as transitioning to a virtual or hybrid annual meeting format.
Public companies hold annual meetings of shareholders pursuant to applicable state law and, when they have a class of securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”), they must comply with the SEC’s proxy rules when soliciting proxy authority from shareholders to act at the annual meeting on their behalf. In general, companies are required to file and disseminate definitive proxy materials to shareholders within the timeframes specified by the SEC and applicable exchange rules.
Attendance at annual meetings varies widely for companies, with some companies hosting large groups of shareholders, while others may have few, if any, shareholders to attend the annual meeting. Further, shareholder proponents who have submitted a shareholder proposal for inclusion in the company’s proxy materials under Exchange Act Rule 14a-8 are required to present their proposals at the meeting, either in person or by using a representative.
The COVID-19 pandemic has caused companies to reconsider their annual meetings in light of concerns about public gatherings and calls for social distancing by public health officials. In some jurisdictions, group gatherings are now prohibited or strongly discouraged, which could prevent a company from holding its annual meeting when scheduled. Travel restrictions can also prevent necessary participants from attending the annual meeting in person. As a result, companies may be compelled to delay their annual meeting until the public health crisis subsides, change the location of their annual meeting, or shift to a virtual-only or hybrid annual meeting where shareholders participate online or by telephone instead of in person.
As a result of the public health circumstances presented by COVID-19, companies may choose to postpone or adjourn their annual meeting. Companies should carefully consider these alternatives. When a shareholder meeting is adjourned, the meeting is convened by the company without taking a shareholder vote, and then adjourned to be reconvened at a later date and time. In a postponement, the previously scheduled meeting is not convened at all, and is, instead, postponed to a new date and time. Companies should review their charter and bylaws to assess the ability to adjourn, postpone, or cancel a scheduled shareholder meeting.
The circumstances arising from COVID-19 have focused attention on the option of convening a virtual annual meeting, or a hybrid annual meeting that is both online and in-person. Virtual annual meetings allow shareholders to attend the meeting via online broadcast, generally in an audio-only format, post questions electronically, and vote online. Virtual annual meetings have been gaining in popularity in recent years, but they have faced opposition from some shareholders.
For example, the New York City Comptroller has indicated that the New York City pension funds will vote against directors whose corporations held virtual-only meetings in the prior year. The Council of Institutional Investors (“CII”) has stated that corporations “should hold shareowner meetings by remote communication (so-called ‘virtual’ meetings) only as a supplement to traditional in-person shareowner meetings, not as a substitute.” It appears that CII and the New York City Comptroller may ease their views for the upcoming annual meeting season, provided that companies make clear that the unique situations presented by COVID-19 for this year’s annual meeting are discussed, the companies confirm their commitment to future in-person annual meetings, and follow best practices for shareholder participation at the virtual or hybrid annual meeting.
ISS has indicated that it may make adverse recommendations if a company is using a virtual meeting format to thwart shareholder discussions or proposals. Glass Lewis has expressed its view that virtual-only meetings curb the ability of a company’s shareholders to meaningfully communicate with the company’s management, and will recommend against the election of members of the governance committee at companies planning to hold virtual-only shareholder meetings unless the company provides robust disclosure assuring the same participation rights and opportunities as an in-person meeting.
Over the past several years, companies that have conducted virtual annual meetings have received shareholder proposals calling for them to only hold in-person shareholder meetings, and some companies reverted to in-person annual meetings as a result. In light of these positions, companies should consider that holding a virtual-only annual meeting could result in negative media attention, votes “against” directors, and shareholder proposals requesting that shareholder meetings be held in a physical location.
A company considering whether to hold a virtual annual meeting should consider the applicable law of the company’s state of incorporation and the applicable provisions of the company’s charter and bylaws. For example, Delaware law generally allows for holding a virtual annual meeting, while California law makes it practically impossible due to a consent requirement. Several states, including New York, require in-person annual meetings. Other states permit virtual meetings only if they are hybrid meetings in which the company hosts an in-person meeting with concurrent remote access. State laws may require the company to adopt a bylaw amendment or a board resolution in order to facilitate a virtual or hybrid annual meeting. For remote access to be generally acceptable for a virtual meeting, a company should undertake steps to reasonably verify the identity of shareholders and provide them an opportunity to participate in the meeting and read or hear the proceedings substantially as they occur and vote. Companies should also consider the notice requirements under state law when a change to an annual meeting is announced.
A company planning to conduct a virtual or hybrid annual meeting as a result of COVID-19 concerns should consider the following key steps:
Given the circumstances presented by COVID-19, it is possible that not all companies will be able to retain an adequate service provider in a timely manner or at a cost that is not prohibitive. Companies faced with this situation may want to consider the alternative of holding an in-person annual meeting but adding a more robust remote shareholder access component. As companies have learned through past experience, it is important to develop clear rules of conduct for such remote access and to provide clear information to shareholders regarding the purpose and effect of providing remote access.
If a company decides to hold a virtual or hybrid annual meeting, it should consider the Principles and Best Practices for Virtual Annual Shareowner Meetings that were developed by the The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings.
To address the difficulties that companies are facing in the current environment, the Staff provided guidance that a company that has already filed and mailed its definitive proxy materials may 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 the company:
The Staff expects companies to take the actions described above “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.”
If a company has not yet filed and mailed its definitive proxy materials, the Staff indicates that the company should consider whether to include disclosures regarding the possibility that the date, time, or location of the annual meeting will change due to COVID-19. The Staff notes that this determination should be made based on each company’s particular facts, circumstances, and the reasonable likelihood of such a change.
The Staff notes that “robust disclosures that facilitate informed shareholder voting are just as important for a ‘virtual’ meeting or ‘hybrid’ meeting (i.e., an in-person meeting that also permits shareholder participation through electronic means) as they are for an in-person meeting.”
The Staff indicates that, if a company plans to conduct a virtual or hybrid meeting, the Staff expects the company “to notify its shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the virtual or hybrid meeting, including how shareholders can remotely access, participate in, and vote at such meeting.”
The Staff notes that, for those companies that have not yet filed and mailed their definitive proxy materials, disclosures regarding a virtual or hybrid annual meeting should be included in the definitive proxy statement, and other soliciting materials. With respect to companies that have already filed and mailed their definitive proxy materials, the Staff states that such companies would not need to mail additional soliciting materials (including new proxy cards) solely for the purpose of switching to a virtual or hybrid meeting if they follow the steps described above for announcing a change in the meeting date, time, or location of the meeting.
Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. The Staff notes “in light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff 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.” Companies in this situation should coordinate in advance with shareholder proponents regarding the means of presenting their proposal and any necessary technical requirements or limitations.
The Staff indicates that, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the Staff would consider this to be “good cause” under Exchange Act Rule 14a-8(h)(3) in the event that a company asserts Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by that shareholder for any meetings held in the following two calendar years.
Companies should quickly assess their annual meeting plans in light of the challenges posed by COVID-19 and should communicate any change in plans to shareholders as soon as possible. The Staff has provided helpful guidance that provides companies with flexibility in communicating changes to the date, time, location, or format of the annual meeting that companies should utilize if such a change is contemplated. Virtual and hybrid meetings could present a viable alternative for companies if such meetings are permissible under applicable state corporation laws and a company’s organizational documents, but companies should begin planning a transition to a virtual or hybrid format as soon as possible to ensure the proper functioning of the meeting and to adequately advise shareholders of the change.