Across the globe, the coronavirus pandemic (COVID-19) is causing governments, companies, associations and colleges and universities to take unprecedented steps to address the spread and transmission of COVID-19. These steps include imposing restrictions on travel and public life; closing physical offices or campuses; canceling conferences, meetings and other scheduled group activities; restricting the size of gatherings; and encouraging or requiring employees and students to telecommute.
With increasing COVID-19 concerns in the United States and proxy season underway, public companies, including those that have already mailed proxy materials, may need to consider alternatives to conducting in-person shareholder meetings in light of the emerging public health crisis posed by the COVID-19 pandemic. Specifically, companies should assess whether or not a virtual meeting format is a viable alternative to the customary in-person meeting. Virtual meetings are generally divided into the following two categories:
- Virtual-only meetings conducted solely using remote communication.
- Hybrid meetings conducted in-person with concurrent participation by remote communication.
State Law Landscape
States have taken a variety of approaches regarding virtual meetings. A majority of states, including Delaware, Tennessee and Maryland, permit virtual-only meetings. Several additional states, including New York and North Carolina, permit hybrid meetings, but not virtual-only meetings. Applicable state law imposes certain conditions, some more burdensome than others, within these alternatives to the traditional in-person meeting. For example, California permits virtual meetings but requires prior shareholder consent. Importantly, several other states, including Georgia and South Carolina, do not permit virtual or hybrid meetings and require in-person meetings.
Utilization of Virtual Meetings
Virtual meetings have historically represented a minority practice, although there has been an increase in their popularity. According to ISS Analytics, approximately 8.50% of Russell 3000 Companies held virtual meetings during the period from July 2018 to June 2019 (with approximately 7.70% of those meetings being virtual-only and the remaining 0.80% being hybrid), which is up from approximately 4.30% during the period from July 2014 to June 2015 (with approximately 4.00% of those meetings being virtual-only and the remaining 0.30% being hybrid).
Review of Applicable State Law and Organization Documents (Charter/Bylaws). Determine what form of virtual meeting, if any, is permissible under applicable state law and the company’s organizational documents. As described above, the permissibility of virtual meetings varies by state, and conditions imposed by certain states may make virtual meetings impractical. Confirm that the company’s charter and bylaws provide the board of directors with broad authority for setting venue and format for the annual meeting.
Consider Views of Institutional Shareholders/Proxy Advisory Firms. Historically, virtual meetings, specifically virtual-only meetings, have been criticized and opposed by certain institutional shareholders (such as The Council of Institutional Investors, CalPERS and the New York City Pension Funds) as limiting shareholder engagement and participation. Additionally, Glass Lewis has historically recommended a vote against governance committee members when a company intends to hold a virtual-only meeting and does not provide robust disclosure in their proxy statement, which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. To date, Institutional Shareholder Services (ISS) has not adopted a formal policy for virtual-only meetings. However, we anticipate that shareholders (including institutional shareholders) and proxy advisory firms will be more sympathetic to a virtual-only or hybrid meeting concept this year as a result of current circumstances.
Timing Determination (Pre-Proxy Filing). A key gating issue companies face is determining whether the proxy statement would provide for a virtual meeting (hybrid or virtual-only) or whether the proxy statement would continue to contemplate a physical meeting, while expressly reserving the right to change the meeting format following the filing of the proxy statement in light of COVID-19 considerations (the “wait-and-see approach”). An advantage of the wait-and-see approach is that it provides greater flexibility. However, a downside of the wait-and-see approach is that, if a company utilizing this approach ultimately elects to hold a virtual or hybrid meeting, it may result in a scramble to put in place the various logistical, disclosure and legal items since the decision was not made earlier in the process. Included below is example language that was included in General Electric’s proxy materials (filed March 12, 2020) implementing the wait-and-see approach:
We intend to hold our annual meeting in person. However, we are sensitive to the public health and travel concerns our shareholders may have and recommendations that public health officials may issue in light of the evolving coronavirus (COVID-19) situation. As a result, we may impose additional procedures or limitations on meeting attendees (beyond those described above) or may decide to hold the meeting in a different location or solely by means of remote communication (i.e., a virtual-only meeting). We plan to announce any such updates on our proxy website (www.ge.com/proxy), and we encourage you to check this website prior to the meeting if you plan to attend.
Timing Determination (Post-Proxy Filing). If a company has already filed its proxy statement contemplating a physical meeting, any subsequent determination to hold a virtual or hybrid meeting must be communicated to shareholders. To put the company’s shareholders on notice of any changes to the previously announced meeting, the company should issue a press release announcing the changes and file supplemental proxy materials with the U.S. Securities and Exchange Commission, which should also be made available where the company previously posted its proxy materials (there is generally no need to re-file the proxy statement or amend the proxy card to reflect a change in location or meeting format). The company must also comply with applicable state law notice requirements (from a state law perspective, it will be preferable to file these supplemental proxy materials announcing the change in the meeting format within the period for providing notices of annual meetings (10-60 days in Delaware)). For an example of a company adopting a hybrid approach by filing supplemental proxy materials, click here.
Logistical Matters. With the continuing evolution of the COVID-19 pandemic and the passage of time, the decision-making window for many companies continues to compress. As a result, companies that are exploring the potential to hold a virtual-only or hybrid meeting should promptly engage with their platform provider to ensure they have current information as the COVID-19 pandemic continues to develop. Following a decision to move forward with a virtual-only or hybrid meeting, while many logistical matters will be resolved in consultation with a company’s platform provider, companies should remain vigilant with respect to potential issues and work with their platform provider to ensure any issues are addressed and resolved. Issues a company should consider include:
- How shareholders participate in the meeting (for example, at some meetings, questions must be submitted in advance, and in other cases, they may be asked during the meeting).
- The medium of the meeting (audio or live video webcast).
- Establishing general rules of procedure (timelines/limits for questions, addressing ordering of questions, etc.).
- The process for dealing with technical difficulties (e.g., establishing a technical support hotline for shareholders).
The landscape for the 2020 proxy season continues to evolve as a result of the COVID-19 pandemic, and public companies are encouraged to consider alternatives to the traditional in-person annual meeting, particularly if conditions concerning this pandemic continue to worsen. Public companies with a calendar year-end still have time to evaluate the merits of a virtual meeting, but action should be taken quickly as time is of the essence.
If you have any questions, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
About the Bass, Berry & Sims Corporate & Securities Practice
Public and private companies of all sizes across a variety of industries turn to Bass, Berry & Sims for counsel on a wide range of corporate matters, including mergers, acquisitions and dispositions; capital markets transactions; executive compensation issues; corporate governance; and shareholder activism. We serve as primary corporate and securities counsel to more than 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years. Click here to learn more about the Corporate & Securities Practice at Bass, Berry & Sims.