During the past several weeks, the spread of the new coronavirus, or COVID-19, has had an almost unprecedented effect throughout the U.S. economy. The World Health Organization has officially declared it a pandemic. In addition to COVID-19’s devastating effect on public health, reactions to it and the many uncertainties surrounding it have caused enormous fluctuations in U.S. markets. Public officials and industry leaders have responded by implementing various measures intended to calm the public and lessen the virus’ effects.

Amid the myriad efforts to combat the spread of COVID-19, several public companies, including Starbucks[1] and Berkshire Hathaway,[2] have decided to confront the virus and protect their shareholders and communities by holding their annual shareholders’ meetings in a virtual meeting format only. Most companies hold their annual shareholders’ meetings in-person, gathering a group of people in a physically confined space. Some groups of shareholders are small, some are large, depending on the shareholder base and the particular company. In either case, that approach runs counter to the current advice of health authorities to adopt social distancing. As a result, companies are evaluating whether to hold their meetings entirely online or in a “hybrid” format that combines the features of an in-person meeting and a virtual meeting.

Adding to or perhaps escalating companies’ evaluations, the SEC, late on Friday afternoon, March 13, 2020, weighed in with helpful advice[3] for upcoming annual meetings. The SEC’s advice applies to companies that have decided to conduct a virtual or hybrid meeting or are considering doing so, including companies that already have distributed their proxy materials in connection with their annual meetings.

Format of Annual Shareholders’ meetings

Annual shareholders’ meetings can, in general and if state law permits, be held in one of three ways: in-person, virtually, or a in a hybrid format. Each of these formats has advantages and disadvantages that a company should analyze in connection with its particular circumstances—now including COVID-19 or other potential pandemics or health and safety issues—when deciding which meeting format to adopt.

In-Person

Traditionally, most public companies hold in-person annual shareholders’ meetings. With an in-person meeting, shareholders, unless they vote by proxy, must travel to a single, physical location to attend the meeting. This format allows shareholders to have face-to-face communication with management, the members of the board of directors, and other shareholders regarding the items to be considered at the meeting. Offsetting these advantages, however, are the traditional costs in holding an in-person meeting, including the costs of rental space, catering and travel expenses. For companies that have very few attendees, particularly smaller companies, these costs may not be justified by the benefits gained if a more cost-effective approach is available.

The spread of COVID-19 has now highlighted this high cost/benefit ratio and has presented companies with additional factors to consider when weighing the advantages, disadvantages, and risks of an in-person meeting. These risks include:

• the risks to public health in having numerous people in one room, some of whom may have traveled to the meeting via airliner or public transportation;
• the potential health risks to the company’s senior management and directors who could be exposed to dangerous health conditions;
• the possible risks to the company’s operational and financial performance if the company’s senior management and directors do become infected; and
• the costs associated with any steps the company may take to diminish those risks, such as sanitizing the meeting space or providing all attendees with personal sanitation products (which may be unavailable).

Virtual

Virtual annual shareholders’ meetings are held entirely online, with shareholders attending the meeting via an online platform. Even before the outbreak and spread of COVID-19, the virtual format for annual shareholders’ meetings was an increasingly popular choice, in part due to developments in communications technology. The outbreak and spread of COVID-19 has made the virtual meeting an even more attractive format because a virtual meeting eliminates the risks of physical contact in an in-person meeting cited above.

Under normal circumstances, the virtual format may provide a number of benefits, including:

• lower costs;
• increased accessibility; and
• better communications between the company and its shareholders.

In addition, virtual meetings can avoid the traditional expenses of an in-person meeting that are cited above. By eliminating the need to travel and by providing a flexible meeting format, virtual meetings can increase shareholder attendance. In the virtual format, shareholders can submit questions beforehand, which allows the company to consider and address the questions more comprehensively[4]. Depending on the precise format of the meeting, shareholders can also submit questions in real time through a variety of available mediums. These mediums can range from a dedicated phone line through which shareholders can dial in to the meeting and ask questions orally to a third-party operated virtual meeting platform that shareholders can log in to and submit questions electronically. An additional benefit of the virtual Q&A mechanism is that questions can remain anonymous, which may allow shareholders to be more comfortable asking questions, thus potentially increasing participation. The virtual format, however, also poses some disadvantages, including elimination of face-to-face contact between shareholders and management.

The elimination of face-to-face contact between shareholders and management deprives the shareholders from being able to confront management directly, in person, regarding questions or grievances. Although avoiding an unpleasant confrontation is not a negative feature of a virtual meeting for the members of management or directors who would be on the receiving end of such interactions, it does deny the shareholders from an opportunity they may find beneficial. Of course, in the current environment, the need to avoid the coronavirus may entirely outweigh these other considerations.

Hybrid

A hybrid annual shareholders’ meeting format combines the features of an in-person meeting and a virtual meeting—providing for a physical meeting location while also allowing shareholders to participate via an online platform. This format provides the benefits of each of the other formats and seeks to mitigate the disadvantages of each. The smaller the group of shareholders who are present in person, the lower the risk of transmission of COVID-19 among those present.

State Law

In addition to considering the advantages and disadvantage of each meeting format, a company must also consult state law and the company’s governing corporate documents to ensure that a virtual or hybrid meeting is permitted. Most states, including Delaware, allow a corporation incorporated in those states to hold a purely virtual shareholders’ meeting. Other states, including Georgia and South Carolina, do not. New York amended its corporate law in October 2019 to permit hybrid meetings. Procedural restrictions imposed by states that theoretically allow virtual and hybrid meetings may, in practice, preclude the use of a virtual or hybrid meeting format. For example, California corporations must obtain unanimous shareholder consent to hold a virtual meeting, which means as a practical matter that only private California corporations can hold a virtual meeting. Some states, such as Tennessee, require that all parties be able to simultaneously hear each other at all times, which would appear to preclude a solely “streamed” meeting.

Companies considering a move from a traditional in-person meeting to a virtual or hybrid meeting should consult their counsel to discuss any limitations imposed by the laws of their state of incorporation. Companies should also ensure that they have the technological infrastructure in place to hold a virtual or hybrid meeting and that the infrastructure is capable of complying with any state-specific procedural requirements for the logistics of the meeting. Companies and their infrastructure providers should thoroughly test the infrastructure before the date of the meeting to limit potential disruptions.

SEC Advice on March 13, 2020

On March 13, 2020, the SEC’s Division of Corporation Finance and Division of Investment Management published guidance on conducting annual shareholders’ meetings in light of the outbreak and spread of COVID-19. Notably, the SEC staff recognized that many companies are considering making logistical changes to their annual shareholders’ meetings due to concerns over COVID-19, noting that some companies were considering changing the meeting format from an in-person meeting to a virtual or hybrid meeting.

Given the threat posed by COVID-19, the SEC staff advises that, if a company has already mailed and filed its definitive proxy materials, it may notify shareholders of a change in the date, time, or location of its annual shareholders’ meeting, including a change in format, without mailing additional soliciting materials or amending its proxy materials, so long as the company:

• 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 and other relevant market participants of such change.

The SEC expects companies to take these actions promptly after making a decision to implement such a change to its annual shareholders’ 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 mailed and filed its definitive proxy materials and has not decided whether to hold a hybrid or virtual meeting, the company should consider whether to include disclosures in its proxy statements regarding the possibility that the date, time, or location of the annual meeting will change due to COVID-19.

If a company has not yet mailed and filed its definitive proxy materials and has decided to hold a hybrid or virtual meeting, the SEC staff expects the company:

• to notify its shareholders, intermediaries in the proxy process, and other market participants of its plans in a timely manner and
• to disclose in its definitive proxy statement and other soliciting materials “clear directions as to the logistical details of the virtual or hybrid meeting, including how shareholders can remotely access, participate in, and vote at the meeting.”

The SEC’s March 13, 2020 guidance also includes advice regarding how companies should handle shareholder proposals (e.g., the requirement that the proponent appear and present the proposal in person).

These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.