On March 13, 2020, the staff of the Division of Corporation Finance (staff) of the U.S. Securities and Exchange Commission (the SEC) issued guidance to assist companies, shareholders, and other market participants affected by the coronavirus disease 2019 (COVID-19) in meeting their obligations under the federal proxy rules for upcoming annual shareholder meetings. In particular, the SEC's guidance includes information for companies contemplating changing from an in-person annual meeting to either a virtual annual meeting (i.e., an annual meeting held exclusively online) or a hybrid annual meeting (i.e., an annual meeting held both online and in-person).
Given the increasing limitations placed on public movement and the size of gatherings, many companies are moving to virtual annual meetings. In addition to the SEC's guidance, there are several other important considerations in moving to a virtual annual meeting, including a review of applicable state law, the company's organizational documents, stock exchange requirements, proxy advisory firm and major investor voting policies, as well as other practical considerations such as logistics and Regulation FD (Fair Disclosure) concerns. We have summarized some of those items in this alert but expect that further developments will be forthcoming, and we will continue to closely monitor this evolving and fluid situation.
In releasing its guidance last week, the staff reminded "all parties to consider their own specific facts and circumstances in determining the need for any additional measures beyond the actions discussed" and also stated that it expects "all market participants to cooperate with one another to facilitate issuers' obligations to hold annual meetings and disseminate timely, accurate, and clear proxy disclosures under the federal securities laws as well as to allow shareholders to exercise their voting rights under state law." The following is a summary of the guidance.
- Changing the Date, Time, or Location of Annual Meeting.
- Prior to Mailing and Filing Definitive Proxy Materials. For those companies that have not yet mailed or filed their definitive proxy materials, the guidance states that these companies "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," which should be "based on each issuer's particular facts and circumstances and the reasonable likelihood of such a change." Noting the possibility of a change in date and location of the meeting should help pave the way to a shift of the venue to a meeting by remote communication. Even in ordinary circumstances, companies should consider defining the "Annual Meeting" in a proxy statement as "including any adjournments and postponements thereof" and to have similar flexibility included in the proxy card.
- After Mailing and Filing Definitive Proxy Materials. The guidance states that "the staff will take the position that an issuer 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:
These actions must be taken promptly after the company has decided to change the time, date, or location of the annual meeting "and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner."
- 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 exchange) of such change."
Notably, this guidance applies to federal proxy rules, not necessarily to state law requirements. For example, Section 213(a) of the Delaware General Corporation Law (DGCL) requires companies to fix a record date to determine the stockholders entitled to notice of any meeting. The record date must be not more than 60 days and not less than 10 days prior to the date of the stockholders' meeting. Accordingly, companies incorporated in Delaware would still need to ensure that the record date for their annual meetings are not more than 60 days nor less than 10 days prior to the annual meeting. In addition, Section 222(b) of the DGCL requires that notice of any stockholders' meeting be given not less than 10 nor more than 60 days prior to the date of the meeting to each stockholder entitled to vote at such meeting as of the record date, and such notice must be mailed unless it can be delivered via electronic transmission under Section 232 of the DGCL. If companies are switching to virtual meetings after mailing and filing definitive proxy materials that contemplated solely an in-person meeting, then, notwithstanding the recent SEC guidance and in order to eliminate any question under Delaware law, new notices should be mailed (or emailed, if permitted in the company's organizational documents) to the record stockholders at least 10 days prior to the annual meeting. If Delaware companies are within this 10-day window or it is impracticable to mail new notices to record holders, there may be certain actions that could be taken to ameliorate the situation in light of the COVID-19 extenuating circumstances; however, we recommend working with legal counsel to discuss and understand the alternatives and risks associated with such an approach.
- Virtual Annual Meeting. The guidance provides that if companies plan to have a virtual or hybrid annual meeting, then "the staff expects the issuer 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."
- Prior to Mailing and Filing Definitive Proxy Materials. Companies that have not yet filed and mailed their definitive proxy materials should include the disclosures discussed above (i.e., their plans and logistical details) in their proxy materials.
- After Mailing and Filing Definitive Proxy Materials. As long as companies follow the steps outlined above for changing the date, location, or time of the annual meeting, the guidance states that 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[.]"
- Presentation of Shareholder Proposals. Rule 14a-8(h) of the Securities Exchange Act of 1934 requires shareholder proponents (or their representatives) to appear and present their proposals at the annual meeting unless the company holds the annual meeting in whole or in part via electronic media and permits the shareholder proponent (or its representative) to appear through electronic media. In addition, under Rule 14a-8(h)(3), if the shareholder proponent or its representative fails to appear and present the proposal, without good cause, then the company can exclude all of that shareholder proponent's proposals from its proxy statements for any meetings held in the following two calendar years.
- Virtual or Telephonic Participation. In light of COVID-19, "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."
- Good Cause. Also, the staff provides that if the "shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel and other hardships related to COVID-19, the staff would consider this to be 'good cause' under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years."
State Law and Organizational Documents
A company's ability to hold a virtual or hybrid annual meeting is governed by state law and its organizational documents (typically, its bylaws).
Stock Exchange Listing Requirements
In making the change to a virtual or hybrid annual meeting, companies should also keep in mind any stock exchange listing requirements. The New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) each require listed companies to hold annual meetings of shareholders.1 As of the date of this Alert, the NYSE has not provided any written guidance on virtual or hybrid annual meetings. Nasdaq explicitly permits the use of webcasts instead of, or in addition to, physical stockholders' meetings, assuming virtual meetings are permissible under state law, but states that "[i]t is important…that shareholders have the opportunity to ask questions of management."2 This may be an important consideration in determining the logistics of a virtual or hybrid annual meeting.
Proxy Advisory Firm and Major Investor Voting Policies
Another key consideration in transitioning to a virtual or hybrid annual meeting is the voting policies of the proxy advisory firms and global asset managers and institutional investors with significant holdings in the company.
- ISS. The 2020 ISS United States Proxy Voting Guidelines do not include guidelines for virtual or hybrid shareholder meetings.
- Glass Lewis. The 2020 Glass Lewis United States Proxy Guidelines are generally supportive of hybrid meetings but state that Glass Lewis believes "that virtual-only meetings have the potential to curb the ability of a company's shareholders to meaningfully communicate with the company's management." When analyzing companies that hold virtual-only meetings, Glass Lewis looks "for robust disclosure in a company's 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." These disclosures could include:
"(i) addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
(ii) procedures, if any, for posting appropriate questions received during the meeting and the company's answers, on the investor page of their website as soon as is practical after the meeting;
(iii) addressing technical and logistical issues related to accessing the virtual meeting platform; and
(iv) procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting."
Absent such disclosures, and if companies plan to hold a virtual-only meeting, Glass Lewis will generally recommend voting against members of a company's governance committee.
- Global Asset Managers / Institutional Investors. Companies should also be cognizant of the voting policies of their major investors, some of which may not be supportive of virtual-only annual meetings. For example, under the Vanguard funds' 2020 policy, it will generally vote against a proposal to conduct "virtual-only" meetings, but it may vote in favor of proposals to conduct "hybrid" meetings. Additionally, the New York State Common Retirement Fund's 2020 policy provides that it believes that a hybrid meeting is a best practice and that companies using a virtual component in its annual meeting should do so to broaden, not limit, shareholder participation. Moreover, the policy states that it "will withhold support from governance committee members when a company conducts a virtual-only meeting, and will vote against proposals that mandate or request virtual-only meetings."
We expect that in the current environment proxy voting advisory firms and their clients, and major investors, including global asset managers and institutional investors, may be more lenient in regards to virtual annual meetings in light of the COVID-19 pandemic, particularly where companies provide disclosure about the rationale for the change, limit the change in meeting structure to the 2020 proxy season, and provide logistical support for meaningful shareholder participation.
Practical Considerations. In addition to the considerations discussed above, companies wanting to change to a virtual or hybrid meeting should also consider several other factors. We note that virtual annual meeting providers, in particular Broadridge, can help companies navigate logistics and other "backbone" considerations.
- Logistics. There are several third-party vendors that can assist companies in implementing a virtual or hybrid meeting; however, with an expected significant rise in virtual meetings over the next couple of months, companies should consider reaching out to vendors now to discuss options, costs, timing, and other matters. Other important logistical issues may include:
- Regulation FD. Assuming questions or comments are permitted, companies should expect that investors will ask questions, at a minimum, relating to COVID-19. Management and the board should keep in mind that annual meetings are not investor or media days and are subject to Regulation FD unless the meeting qualifies as broad dissemination by being open to the public (beyond just record holders and proxy holders) and widely publicized prior to the meeting. Management and the board must take care to ensure that in presenting any slides or responding to questions or comments, they are not sharing any material nonpublic information. Unless publicly disclosed in a press release or an SEC filing, the annual meeting is not the time to update or confirm financial or operational guidance or speculate about the impacts of COVID-19 on the company, its peers, or its industry. Any responses to questions and comments should be consistent with what has already been disclosed in the company's annual report on Form 10-K and any subsequent public filings or other Regulation FD compliant disclosures. While a company may be able to remedy unintentional disclosures by filing a subsequent Form 8-K promptly after disclosure, such remedy should be for truly unintentional disclosures.
- Rules of Conduct. Regardless of whether companies previously implemented rules of conduct for in-person annual meetings, companies should consider developing new rules of conduct for the virtual or hybrid meeting. These rules should include rules relating to participation by shareholders and others (if permitted to attend), including, for example, whether questions are allowed and how they can be asked, time limitations on comments and questions, limitations on the number of questions that may be asked, procedures for when questions or comments are out of order, and so forth.
- Annual Meeting Script. In addition to preparing and revising the rules of conduct, companies changing to virtual or hybrid meetings must also make tweaks, albeit generally not significant, to their annual meeting script.
- Costs and Attendance. While some public companies, particularly those with greater name recognition or famous CEOs or directors, may have well-attended shareholder meetings with rented auditoriums and other bells and whistles, most public company annual shareholder meetings are not well-attended, and, in some cases, no one other than the board and management are in attendance, and are held on-site in a conference room. For companies that expend resources on booking external meeting rooms, flying in management and directors, and other expenses, moving to a virtual annual meeting may result in cost savings. In light of the relative ease of attendance by remote communication, companies that move to a virtual or hybrid meeting may see increased attendance by shareholders and should prepare for this possibility, including for the potential for questions and comments. In addition, companies should prepare for shareholders who do not see the change in meeting location to virtual and may arrive at the previously designated location. Notifying security or any staff on hand how to manage such arrivals may be prudent.
- Prevalence of Virtual Annual Meetings Slowly Increasing. Companies should also keep in mind that virtual and hybrid meetings are not new. According to our 2019 Silicon Valley 150 Corporate Governance Report, in 2019, 42 companies in the Silicon Valley 150 held virtual annual meetings and 11 companies held hybrid annual meetings. In addition, in 2019, Broadridge hosted 326 electronic annual meetings, of which 92 percent were virtual-only and 8 percent were hybrid, an overall increase of 15 percent from 2018.3
What to Do Now?
For companies incorporated in states that permit virtual meetings and whose organizational documents do not prohibit or inhibit virtual meetings, we urge you to act now if you are contemplating transitioning to a virtual meeting. Contact one or more providers of virtual meeting services to discuss options, costs, and timing, and consider unique state law requirements that might apply alongside this SEC guidance.
In addition, when disclosing the transition to a virtual meeting, companies should include the disclosures set forth in the SEC guidance, including the logistical details of the meeting, such as a clear step-by-step explanation of how shareholders can attend, participate in, and vote at the annual meeting, and an explanation of the logistics of shareholder participation in the virtual meeting. Also, in light of the SEC's guidance, companies should also consider expressly permitting shareholder proponents (or their representatives) to present their proposals remotely by telephone or otherwise. Aside from the required disclosures, companies should also consider providing additional disclosures to assuage investor or proxy advisory firm concerns regarding the potential limitations of virtual annual meetings on shareholder participation, including, for example, the reasons for the transition in 2020 to a virtual meeting, whether this transition to a virtual meeting is currently intended to be a permanent transition or not, and a more fulsome explanation of the logistics of shareholder participation in the virtual meeting, such as rules and procedures for submitting and responding to questions and comments.
 See NYSE Listed Company Manual Rule 302.00; See also Nasdaq Listing Rule 5620(a).
 Nasdaq Listing Center Reference Library, FAQ 84 located at https://listingcenter.nasdaq.com/Material_Search.aspx?cid=1,22,45,52,108,71,69&mcd=LQ (last accessed on Mar. 16, 2020).
 See “Virtual shareholder meetings 2019 facts and figures,” Broadridge 2020 located at https://www.broadridge.com/_assets/pdf/broadridge-virtual-shareholder-meetings-2019-facts-and-figures.pdf (last accessed on Mar. 16, 2020).