[co-author: Kai Xi Wang]*
Stock exchange-listed public companies in the United States are required to hold annual shareholder meetings, which are traditionally held in person. Virtual annual shareholder meetings — where shareholders participate remotely via internet — have been increasingly used in recent years as an alternative or as an adjunct to the traditional in-person setup. In light of the recent coronavirus (COVID-19) outbreak, more companies are expected to adopt a virtual format for their annual shareholder meetings in the upcoming proxy season to minimize travel and gathering of large crowds. Below we provide practical information and best practices for public companies that are considering a virtual annual shareholder meeting.
What Is a Virtual Annual Shareholder Meeting, and What Are Some of the Legal Concerns?
Virtual annual shareholder meetings allow shareholders to attend the meeting via online broadcast. Most virtual annual meetings are audio-only broadcasts, while a small percentage include video. At a virtual annual meeting, attendees are certified as shareholders electronically through a unique control number, can post questions to the board and management team electronically, and can cast votes online in a secured manner during the meeting.
When considering whether to hold a virtual annual shareholder meeting, a company must comply with the laws of its state of incorporation, all applicable rules and regulations promulgated by the Securities and Exchange Commission (SEC), and the company’s own organizational documents (charter and bylaws).
State laws: State corporate laws govern the requirements for annual shareholder meetings for companies incorporated in each state. While many states, including Delaware1 and Pennsylvania,2 allow virtual annual meetings, some states, including South Dakota3 and South Carolina,4 do not. A public company must check the applicable laws of its state of incorporation to understand the rules regarding annual shareholder meetings and ensure that its proposed virtual annual shareholder meeting is compliant with all such laws.
SEC rules and regulations: Public companies that solicit proxies for their annual shareholder meetings must file a proxy statement with the SEC on Schedule 14A. A proxy statement provides certain information to shareholders regarding the annual meeting, including the date, time and location of the annual meeting, as well as the proposals to be voted on at the annual meeting. In a proxy statement for a virtual annual shareholder meeting, the company should also include specific instructions to the shareholders about how to join the virtual meeting electronically and how to cast their votes electronically.
Organizational documents: Public companies must also ensure compliance with their charters and bylaws regarding the applicable notice period to shareholders as well as any restrictions that might prohibit the company from holding a virtual annual shareholder meeting.
Investor Concerns About Virtual Annual Meetings Outweighed by Current Public Health Considerations
While virtual shareholder meetings have been an available option for more than a decade, only a small percentage of public companies have utilized this virtual format — although the trend has been growing over the past several years. This limited adoption may be partly attributed to criticism from shareholder advisory firms and institutional shareholders. These groups contend that virtual meetings eliminate shareholders’ ability to communicate one on one with management and board members, and risk allowing companies to avoid difficult shareholder questions by cherry-picking questions in their favor.
Despite these criticisms, and in light of increasing concerns regarding the risk of coronavirus exposure posed by large public gatherings, many companies are expected to conduct their annual shareholder meetings in a virtual format this proxy season. As governmental agencies, business organizations, universities and other institutions are increasingly advising against nonessential travel, we expect that shareholder advocacy groups will be sympathetic to companies that choose to conduct their annual shareholder meetings this spring in a virtual format, assuming that companies conduct the meetings in line with best practices, such as those described below.
Best Practices for Virtual Annual Meetings
A well-run virtual annual shareholder meeting should aim to protect shareholders’ best interests, provide equal access for shareholders to participate in the annual meeting, and provide shareholders with a similar amount of interaction as an in-person shareholder meeting. A public company should consider the below when making the decision to hold a virtual annual shareholder meeting.
Provide ample communication about the procedures for participating in the virtual shareholder meeting.
The company should provide sufficient notice and explanation to its shareholders as to how to attend the meeting online, how to vote on matters being submitted to shareholders at the meeting, and how to ask questions of management during the meeting. This information would be contained in the company’s proxy statement, which can be supplemented by a press release or letter to shareholders. As with in-person meetings, companies will want to encourage shareholders to vote before the meeting by mail, internet or telephone in accordance with the instructions on the proxy card or voting instruction form in order to ensure the presence of a quorum at the meeting.
Meeting format; video versus audio.
Most virtual annual shareholder meetings are held in an audio-only format due to cost concerns and technological simplicity. However, some companies may prefer to broadcast the meeting by video to provide shareholders with an experience that better emulates an in-person meeting. Virtual meeting service providers can offer an intuitive platform and the technology required to “conduct annual meetings online via streaming audio or video, authenticate attendees, and enable validated shareholders to submit questions and vote their shares online at the annual meeting.”5
Technological support and capability.
Public companies must have the technical capability to verify that participants attending the virtual annual shareholder meeting are either shareholders or valid proxy holders that are eligible to vote in order to maintain an accurate record of votes. Furthermore, public companies must provide adequate cybersecurity and safeguards for the meeting and voting process. Most public companies will need to engage a third-party platform provider to ensure the necessary shareholder authentication processes are in place, and that technical support helplines are set up and made available to all participants before and during the virtual meeting. Before the virtual meeting, public companies should consider providing shareholders with some time to test their access and ensure that they can participate so that technological issues can be resolved ahead of the planned meeting time, if at all possible.
Board and management attendance.
The company’s management team and board of directors should be virtually present at the meeting to answer shareholders’ questions and to strengthen shareholders’ engagement with the company’s leadership. Similarly, when permitted by a company’s bylaws, a company can indicate a strong board presence by allowing an independent director or board chair to lead the meeting.
Engagement between shareholders and directors.
Public companies should provide shareholders with ample opportunity to participate and ask questions at the virtual annual meeting. Shareholders may be allowed to ask questions during the virtual meeting, or a company may set up a platform for shareholders to submit questions before the meeting. While most companies limit questions to those placed through the online platform, companies may consider providing a toll-free number for shareholders to call in during the meeting.
Provide detailed instructions and rules of conduct before the virtual meeting.
Public companies should provide guidelines in advance regarding shareholder questions, rules, the timeline to post questions, and the method by which questions and comments will be addressed and disclosed to meeting participants.
A public company may consider posting any unanswered shareholder questions and answers on the company’s website within 72 hours after the meeting so that all shareholders are able to see the questions that management did not choose or did not have enough time to answer.
Considerations for the Switch From a Physical to a Virtual Annual Shareholder Meeting
If the company has not yet filed its proxy statement with the SEC.
Review the company’s organizational documents and applicable corporate law in its state of incorporation to ensure that a virtual annual shareholder meeting is allowed.
The company’s management team should discuss the logistics of switching to a virtual annual shareholder meeting and consider the technology required, including weighing the costs and benefits of a video versus audio-only virtual meeting.
Clearly disclose the format of the virtual annual shareholder meeting and participation instructions in the proxy statement.
If, at the time a company plans to file a proxy statement for an in-person annual shareholder meeting, it anticipates a potential switch to a virtual meeting after the filing, the company may disclose the possibility of the switch in the proxy statement, provide a reason for the possible switch, and provide details on how and when shareholders should expect to receive notice of the switch.
If the company has already filed its proxy statement with the SEC to hold a physical annual shareholder meeting.
Review the company’s organizational documents and the applicable corporate law in its state of incorporation to confirm that virtual annual shareholder meetings are permissible.
Update the proxy statement by filing a notice of the change with the SEC, stating the date and time of the virtual annual shareholder meeting, indicating the reason for the change, and providing a detailed description of how shareholders can attend, vote and otherwise participate in the virtual meeting.
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1 See 8 Del. C. § 211(a)(2).
2 See Pa. Bus. Corp. L. §§ 1704, 1708.
3 See S.D. Codified Law § 47-1A-701.
4 See S.C. Code § 33-7-101.
5 See Broadridge’s website, https://www.broadridge.com/financial-services/corporate-issuer/issuer/build-your-brand-and-engage-shareholders/virtual-shareholder-meeting.