The coronavirus pandemic has had a profound impact on corporate governance, including annual shareholder meetings. Large numbers of companies are moving their annual meetings online this year for health and safety reasons. The question presented by the Covid-19 response is whether the surge in virtual-only meetings is a one-time emergency response or a permanent shift in shareholder engagement.
State Nuts and Bolts
Shareholder meeting requirements come from state law. The Securities and Exchange Commission does not require annual meetings, and the major exchange rules do not require any particular meeting form. Issuers must look to their particular state law provisions and their company bylaws to determine if they may conduct virtual meetings.
Delaware law allows companies to conduct completely virtual meetings, with no physical location. Other states are more restrictive, according to the statutes currently on the books. Note that several states have taken temporary actions to ease their restrictions on remote meetings.
For example, by statute, New York companies may conduct “hybrid” meetings, where investors may participate electronically, with a physical meeting site. Similarly, California’s corporation statute 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 process. Both states have, however, granted coronavirus-related waivers to temporarily allow virtual-only meetings.
A minority of states require in-person meetings only. For example, Georgia statutory law prohibits virtual annual meetings. In March, however, the governor issued an order granting a temporary waiver to allow virtual meetings during the emergency period. South Carolina statutes similarly prohibit virtual meetings, but as of this writing, the state has not acted to permit temporary remote access.
The Virtual Meeting Explosion
According to data from Institutional Shareholder Services (ISS), more than 1,000 U.S. companies have conducted virtual annual meetings so far in 2020. This number represents a sharp increase from 2019, where, according to Michael Laff, an ISS senior associate, there were fewer than 300 virtual meetings for all of 2019.
According to Broadridge, a provider of virtual meeting services, issuers may conduct annual meetings online through streaming audio or video. This statement illustrates an important issue with virtual meetings, however. These service providers facilitate—and some states, including Delaware, permit—the conduct of annual meetings solely through audio communications. In these meetings, shareholders do not have the opportunity to see company management. Broadridge reports that in recent years, as many as 90 percent of virtual meetings have been audio-only. These audio-only meetings deprive investors of the opportunity to see company management as they present at the meeting.
Institutional Investors, Proxy Advisors Cast a Wary Eye
Ken Bertsch, executive director of the Council of Institutional Investors (CII), stated that “it is entirely reasonable that some companies will go to virtual-only annual meetings” this year. CII has regularly opposed virtual-only shareholder meetings, in favor of a hybrid approach. Accordingly, Bertsch advised, that the decision to support virtual-only meetings “is a one-off, tailored for current circumstances.”
Bertsch also urged companies to follow best practices “for making virtual meetings participatory, replicating as much as possible the experience of an in-person meeting.” According to CII, companies that hold in-person meetings should be particularly flexible with shareholder proponents concerning in-person shareholder proposal presentation requirements.
Both major proxy advisory firms, ISS and Glass Lewis, have advised that they will not recommend negative actions for companies that hold virtual-only meetings this year. ISS favors hybrid meetings in normal circumstances, but the firm does not have a policy to recommend votes against companies who hold “virtual-only” meetings for U.S. companies. ISS plans no change to that approach.
Glass Lewis, on the other hand, actively opposes the use of virtual-only meetings in the ordinary course of business if “companies do not provide adequate disclosure concerning the protections afforded to shareholders.” Generally, in the absence of satisfactory disclosures for virtual-only meetings, Glass Lewis recommends votes against members of the governance committees. During this proxy season, however, the firm will not make such recommendations if “the company discloses, at a minimum, its rationale for doing so, including citing COVID-19.” Glass Lewis will resume its standard policy for meetings held after the emergency period ends.
The View From an Investor Advocate
I discussed statements from prominent shareholder advocate James McRitchie about how virtual-only meetings can stifle shareholder communications. McRitchie added that the lack of face-to-face contact between investors and management can adversely impact the governance process. He described how “there are many instances where I have resolved issues with management through face-to-face discussions at a meeting.”
Virtual-only meetings are a necessity in 2020, but will the trend continue after the pandemic passes? As more companies become familiar with virtual meetings, it is likely that there will be significantly more hybrid meetings, where the issuer will afford an online engagement opportunity coupled with an in-person session. Due to the opposition of institutional investors and the hesitance of the proxy advisory firms, it is doubtful that in-person meetings will disappear completely—for now.
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