It isn’t “Love in the Time of Cholera,” but companies will face significant challenges in corporate governance in the time of coronavirus.
Companies may struggle to hold annual shareholder meetings, conduct board business, engage with investors, compile periodic reports, and engage in business combination transactions. The economic displacement resulting from the pandemic will also likely pose a significant challenge to the stakeholder model of corporate governance announced last summer by the Business Roundtable.
Annual Shareholder Meetings
The coronavirus outbreak has prompted issuers to consider conducting virtual annual meetings due to health concerns over crowds gathering at meeting sites.
Initially, issuers must determine whether state law and their bylaws permit virtual meetings. For example, Delaware law allows companies to conduct completely virtual meetings, with no physical site in place. New York companies may, however, conduct “hybrid” meetings. Investors may participate electronically, but the company must have a physical meeting site. California law allows virtual-only meetings, but companies must comply with the consent provisions of Section 20 of the California Corporation Code, which requires a rather cumbersome shareholder consent “to the use of those means of [electronic] transmission.” A minority of states require companies to hold in-person meetings only.
Under Delaware law, companies must take reasonable steps to ensure that each person participating in the meeting is an eligible stockholder or proxy holder. Companies must also take steps to ensure that eligible participants have a “reasonable opportunity” to participate in the meeting and to vote on matters submitted to the stockholders. Online participants should be able to read or hear the proceedings of the meeting in real time. In addition, companies should maintain records of all stockholder and proxy holder votes or other actions taken at the meeting by remote communication.
If a company changes from a physical to a virtual meeting, it must properly notify its shareholders of the change. In March, the SEC issued coronavirus-related guidance to issuers. The guidance would, for purposes of the federal securities laws, allow affected parties to announce in SEC filings changes in the meeting date or location or the use of virtual meetings. Issuers would not have to incur the cost of additional physical mailing of proxy materials to publicize the changes. The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that the shareholders might face due to the coronavirus outbreak.
The SEC advised that if an issuer has already filed its proxy materials, the company should issue a press release announcing the changes, and should file the announcement as definitive additional soliciting material on EDGAR. Companies should also take 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 relevant securities exchanges) of such changes. If companies have not yet mailed and filed their definitive proxy materials, the SEC advised that they should consider whether to disclose the possible impact of the coronavirus outbreak on the operation of their annual meetings. These determinations should be made on a “facts and circumstances” basis in consideration of the reasonable likelihood of any such changes.
Even with SEC relief, companies will face significant challenges in shifting to a virtual or hybrid meeting. The logistical obstacles and costs of making such a move would likely be significant. Numerous contracts regarding the in-person meeting site would have to be canceled or renegotiated. Companies will also likely have to contract with third-party vendors for meeting technology services. Due to the demand for remote meeting technology services, it may be difficult for companies to find an available vendor in a timely fashion.
Remote Board Actions—Legality and Necessity
Most states allow directors to conduct meetings with members participating remotely. Under Delaware law, "[u]nless otherwise restricted by the certificate of incorporation or bylaws, directors may meet and enage in company business by “telephone or other communications equipment by means of which all persons participating in the meeting can hear each other.”
Companies must check the laws of their state of incorporation, and their charters and bylaws for any restrictions on remote board actions. Boards may meet via conference calls or through video technology. It is important to ensure that each director receives a complete set of materials for the meeting, and that the board produce accurate and robust minutes of remote meetings.
Most boards may act remotely during the coronavirus outbreak. More importantly, boards must act to deal with the impact of the pandemic on their businesses. Management should ensure that their boards are fully apprised of all information concerning the crisis and its impact on their business operations. Item 407(h) of Regulation S-Krequires issuers to disclose the extent of their board’s role in the risk oversight of the registrant, such as how the board administers its oversight function. Boards must take documented steps to assess the risks their companies face and to develop a response plan and a business continuity approach to this novel threat. It will likely not be enough for the board and management to pull an existing plan down from the shelf and assume that they have met their obligations.
On March 4, the SEC issued an order that, subject to certain conditions, gave issuers an additional 45 days to file certain periodic reports that would otherwise have been due between March 1 and April 30. Among other conditions, companies must file a Form 8-K (or, if applicable, a Form 6-K for foreign issuers) with a summary of why the relief is needed. Companies must make the request by the original filing deadline, and include an estimate of the date when the reports will be filed.
The virus outbreak will complicate the process of compiling periodic reports, and issuers should build this expected delay into their reporting timelines. While much of the information-gathering process is automated, the relocation to home settings of company workforces, as well as those of auditors, law firms and financial advisors, will make the compilation of required data more time-consuming and costly.
Issuers should consider including coronavirus risk factors in their Form 10-K reports. To date, more than 2,100 issuers have included such disclosures in 2020. Companies should tailor these disclosures to specific risks they face, and not include generic statements or merely add the outbreak to a list of potential adverse consequences. The same is true for the Management’s Discussions and Analysis (MD&A) section of the financial statements. MD&A should allow investors to see the company through the eyes of management, and include a tailored discussion of the virus’s disruption on the company’s operations.
Companies will also continue to make earnings calls with analysts, and to discuss the outbreak impact with their large institutional investors. According to the SEC, “when companies do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly.” Depending on each company’s circumstances, the SEC advised that issuers should consider whether they “need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.” In addition, the SEC advised that “where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.”
Business Combinations and Capital Markets, From the Experts
I recently discussed the impact of the virus outbreak on the M&A markets with my Bloomberg Law colleagues, Grace Maral Burnett and Eleanor Tyler, with regard to information-gathering and disclosures in mergers and acquisitions (M&A) transactions during the outbreak. Tyler advised that she would not want to conduct due diligence “without actually sampling inventory, checking VIN numbers and serial numbers on equipment, and conducting actual real site visits.” She noted that the auditors involved would also want this information. Much of the rest of due diligence, she said, could be done over the internet, such as reviewing compliance manuals and financial statements, or through telephone conversations. The phone aspect becomes problematic, she noted, because permanent and temporary virus-related work displacements can make information gathering over the phone difficult. “So much of what constitutes real information is in people’s heads,” she concluded. There is also the very real problem of privilege and keeping information secured over long communications chains.
Burnett echoed that there would be problems in the early stages of deals. “The stages where you would go out and take a first look at the restaurants or shops or factories, those visits are likely not happening,” she observed. In the case of deals with large sophisticated parties, much of the due diligence could still get done entirely remotely, if the information has been digitized and moved into a virtual data room. “Social distancing could really put a wrench into important negotiation meetings on the terms of the contracts and closings,” she stated. While much of the back-and-forth between lawyers happens on calls, “important negotiation meetings where they bring the clients to the table are, in my experience, often held in person.”
Burnett noted that deals involving smaller, less sophisticated parties can be particularly problematic under current circumstances. For many of these transactions, in the early stages, documents have not been fully digitized, and remote workforces could complicate the sharing of this information. She also observed that in some large auction deals, sensitive documents are made available in physical due diligence rooms for bidders to review. “That is probably not happening,” she concluded.
I also spoke with J.W. Verret, associate professor of law at George Mason University’s Antonin Scalia Law School. He agreed that much of due diligence has been automated, and noted that companies could do more in this area by utilizing blockchain-based data storage applications. The lack of in-person contact may hinder the process in his view, however. Information sources are likely to be more forthcoming in face-to-face discussions, than in discoverable emails, web-based conferences, or other electronic communications that can be recorded, he observed.
With regard to the capital markets, the coronavirus-related stock market has obviously dampened the enthusiasm for new public equity offerings. Prof. Verret suggested that this may be a good time for companies to look into public debt offerings. Interest rates are low, investors are looking for security, and the SEC recently adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees.
Coronavirus and the Business Roundtable Mission Statement
Last fall, the Bloomberg Law analysts took a look into our collective crystal balls for a glimpse into what 2020 had in store. Naturally, none of us saw a crippling pandemic coming down the pike. We did question, however, what kind of impact the Business Roundtable’s (BRT) corporate purpose statement would have in practice. That pandemic is crashing directly into the BRT’s aspirational statement on stakeholder governance.
In August 2019, the BRT, an organization of large company CEOs, stated that its member companies “share a fundamental commitment to all of our stakeholders,” including employees, suppliers, their communities, and the environment. The signatory companies committed to “protect the environment by embracing sustainable practices across our businesses. These are rational long-term objectives for a sustainable corporate model.
The problem now is that rational long-term objectives are often forgotten in cases of global crisis. Companies shift from looking 10 years down the road to surviving the next week of the pandemic. A commitment to employees shifts to a focus on controlling labor costs in times of reduced demand, and communities and the environment may well become mere backdrops for businesses to do what they must do to survive. A significant economic downturn will in all likelihood push these elements far down on the list of corporate priorities.
We will need to keep those crystal balls handy to see if the BRT’s aspirational statement and its lofty goals will survive into a post-coronavirus world.
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