Introduction

As the global pandemic of the new coronavirus disease (COVID-19) spreads across the United States, many public companies are beginning to reevaluate the format of their April, May or June annual stockholder meetings. The Centers for Disease Control and Prevention (CDC) has recommended against gatherings of more than 50 people; however, many other medical and industry professionals believe that gatherings, if held, should consist of far fewer people. These recommendations, along with public health considerations and concerns for preserving the health and safety of management, directors, employees and stockholders, have resulted in many public companies considering whether in-person annual stockholder meetings should be replaced with virtual annual stockholder meetings this year. The format that can be used for a virtual meeting is subject to state law and any requirements set forth in the company’s governing documents. Virtual-only meetings could include meetings via live webcast, hybrid meetings with an option to attend in-person or virtually, or audio-only meetings in the form of conference calls.

State Law and Charter Documents

A company evaluating options for its annual meeting should first examine the law of its state of incorporation, as the approaches taken by states vary with respect to virtual or hybrid stockholder meetings. For example, Delaware permits companies to hold virtual (or remote) meetings, as well as hybrid meetings, provided certain conditions are met. These conditions include (1) the implementation of reasonable measures to verify that each person deemed present and permitted to vote at the virtual meeting is a stockholder or proxyholder; (2) the implementation of reasonable measures to provide those stockholders and proxyholders with a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with the proceedings; and (3) the maintenance of a record of any vote or other action taken by a stockholder or proxyholder during the meeting.

As a result, certain meeting formats, including meetings held via telephonic conference calls, present obstacles that may be difficult for companies to overcome. For example, companies may be unable to verify that participants on a telephonic conference call are, in fact, stockholders or proxyholders. Additionally, companies may be unable to ensure that each participating stockholder has a reasonable opportunity to participate in the meeting when there may be tens, hundreds or even thousands of participants on the telephonic conference call. Finally, companies may be unable to track and record the actions of stockholders during telephonic conference calls. The failure to meet any of these conditions would result in a company failing to meet the virtual meeting conditions required by Delaware law.

Other states that allow for virtual meetings include Ohio, Pennsylvania and Texas. Conversely, New York permits companies to hold hybrid or in-person meetings; however, virtual meetings are not an option. California allows companies to hold virtual meetings so long as shareholder consent has been obtained.

Next, if state law permits virtual or hybrid stockholder meetings, a company should examine its governing documents to determine whether a virtual or hybrid stockholder meeting is permissible. Typically, the governing documents grant the board of directors the discretion to determine a meeting’s venue and format, including the decision to hold the meeting virtually. If a company’s bylaws do not allow for virtual stockholder meetings but state law does, an amendment to the bylaws may be possible if the bylaws authorize the board of directors to amend the bylaws.

Notifying Stockholders

Companies must also consider the requirements of the U.S. Securities and Exchange Commission (SEC), applicable state law, governing documents, and exchange requirements for notifying stockholders of a decision to hold the annual meeting virtually rather than in person.

On March 13, 2020, the SEC released guidance to assist public companies, investment companies, stockholders and other market participants that are being impacted by COVID-19 with respect to their upcoming annual stockholder meetings. The SEC guidance provides information for companies that have already filed their proxy statements and delivered proxy materials indicating that they will hold in-person meetings but have now decided it would be prudent, given the recommendations from the CDC and other health organizations, to hold virtual meetings. The SEC advises that these companies should issue a press release disclosing the change in meeting format and then file the press release as definitive additional soliciting material with the SEC. Companies should then take all reasonable and necessary steps to inform other intermediaries in the proxy process and other relevant market participants of such change. Further, although it is not required, these companies may want to consider filing a Form 8-K with the SEC with the updated meeting information.

However, the SEC’s guidance relates to federal proxy rules, not necessarily state law with respect to notice requirements. For example, Section 222(b) of the Delaware General Corporation Law (DGCL) requires companies to provide notice of any stockholders’ meeting not less than 10 days nor more than 60 days prior to the date of the stockholders’ meeting to each stockholder entitled to vote at such meeting as of the record date. Further, such notice must be mailed unless it can be delivered electronically pursuant to Section 223 of the DGCL. Accordingly, companies will have to take a closer look at their opportunities for electronic delivery to determine whether some form of mailing is needed.

Companies that have yet to file their proxy statement have several options available to them. One option is to file its proxy statement and disclose the possibility of switching from an in-person annual meeting format to a hybrid or virtual meeting format at a later date due to COVID-19 concerns. Alternatively, a company can decide to hold its meeting virtually and disclose this decision in its proxy statement. Those companies that still desire to hold an in-person meeting can also encourage stockholders to vote by proxy but arrange for either a webcast or teleconference of the meeting, which furthers stockholder engagement without the necessity of companies addressing some of the potential issues of a virtual meeting. Regardless of how a company decides to proceed, the SEC’s guidance indicates that companies should timely notify their stockholders, intermediaries in the proxy process and other market participants of such plans and provide clear details about the logistics of the virtual or hybrid stockholder meeting, including how stockholders can remotely access, participate in and vote at such meeting. These disclosures should be included in the company’s definitive proxy statement and other proxy materials.

Further, the SEC’s guidance states that, to the extent permitted by state law, companies should provide stockholder proponents or their representatives with the ability to present their proposals at the virtual stockholder meeting by alternative means, such as by telephone. For purposes of Rule 14a(h) promulgated under the Securities Exchange Act of 1934, as amended, the SEC staff will consider the inability of a stockholder or representative to present a proposal due to hardships associated with COVID-19 to be “good cause” such that a company would not be permitted to exclude on this basis such stockholder’s proposals from proxy materials for meetings in the following two calendar years.

Practical Considerations

The change from a traditional in-person meeting to a virtual meeting carries additional practical considerations. While a virtual meeting will potentially allow for greater participation by stockholders, state law conditions – such as Delaware’s requirement that companies take “reasonable measures” to ensure that those participating are entitled to that participation as stockholders – impose technical requirements that may be difficult to address. Thus, companies will be looking to service providers that offer these capabilities, and this will add expense and complexity to the meeting process. There is also some lead time required to get these services set up and enable voting by those present at the meeting, if required, so companies that take a wait-and-see approach will need to plan their timelines accordingly. Companies deciding to switch to virtual or hybrid stockholder meetings will need to consider the following types of issues:

• Board of Directors Involvement. A company’s board of directors should be involved in the discussions of whether to change from an in-person meeting format to a virtual or hybrid meeting format. The board of directors should also formally approve the format of the meeting.
• Audio or Video Components. Companies will need to decide whether the live webcast of the meeting will be audio-only or will also include video. Companies deciding to proceed with the video portion generally will need to hire a production and video vendor and consider the logistics and location of the meeting.
• Verification of Stockholders. Companies will need to discuss with their service provider how stockholders will be verified for purposes of attending and participating in the virtual or hybrid meeting. Companies should also consider whether guests will be permitted to attend the virtual or hybrid meeting and how these individuals gain access to the meeting.
• Technical Support. Companies should discuss with their service provider whether technical support will be available the day of the meeting. If so, companies should provide this information in their proxy statements, if possible, or if not, should include the information in the press release disclosing the change in the meeting format.
• Question-and-Answer Format. Companies will need to determine whether and how stockholders will be able to ask questions during the meeting. One option is to permit a live question-and-answer session during the meeting via a text box. Stockholders who have access to the virtual meeting submit questions via the text box. These questions are accessible solely by the companies. Another option is to permit stockholders to ask questions verbally via telephone by using a telephone line that is dedicated solely to the meeting. Companies could also permit stockholders to submit questions in advance of the meeting so that companies can plan their answers. Of course, companies can also choose a hybrid approach of allowing more than one option. The logistics of how stockholders can submit or ask questions should be discussed with the meeting service provider to ensure that the appropriate steps are taken to permit this type of stockholder participation.
• Recording and Archiving. Companies should also consider whether they want to record and archive the meeting and, if so, whether the public and non-stockholders will have access to the recording.
• Contingency Plans. Companies should discuss contingency plans with their virtual meeting service providers to plan for the possibility of technological issues the day of the meeting.

Companies should also ensure that management and staff fully understand the logistics of the virtual or hybrid meeting and how the format change impacts their annual meeting tasks.

Alternatively, companies that traditionally have very few stockholders in attendance may determine to go forward with an in-person meeting but explore the option of providing stockholders the ability to follow the proceedings of the meeting via telephone or webcast. Stockholders would have to vote by proxy to be represented at the meeting for corporate law purposes, but access to the meeting may further stockholder engagement given the circumstances this year.

Companies should remember that stockholder meetings generally do not constitute a forum for providing adequate public disclosure for Regulation FD purposes, even if held virtually. Thus, management should not provide material nonpublic information in prepared remarks or in response to questions unless sufficient measures are taken to simultaneously make such information publicly available in a manner that does comply with Regulation FD.

Proxy Advisory Firms

Proxy advisory firms have traditionally been critical of virtual-only meetings because they believe the format impedes the exercise of the stockholders’ right to participate. However, in light of the COVID-19 outbreak, ISS expects that institutional investors will likely be more accommodating of virtual meetings. The Council of Institutional Investors (CII) has stated that, although it generally is opposed to virtual-only meetings and more in favor of a hybrid approach, it is reasonable that some companies will consider virtual-only meetings this spring, given the circumstances. However, CII also cautioned that it hopes companies will be clear that the decision to hold a virtual meeting is a “one off” occurrence and will follow best practices for ensuring virtual meetings are participatory.

Likewise, ISS and Glass Lewis expect that companies will provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for stockholders to participate, ask questions, provide feedback to the company and present stockholder proposals. Thus, companies should be clear that the purpose of the change of format is due to public health concerns related to COVID-19, should provide clear instructions as to how stockholders should vote and participate in the meeting, and should provide robust disclosure of the rationale for moving to a virtual meeting format.

Initial Steps

Companies with spring and summer annual meetings should begin to evaluate their annual meeting formats now, with the foregoing considerations in mind. Virtual meeting service providers have indicated that they have the capacity to support companies wanting to transition to virtual or hybrid meeting formats; however, as more companies transition to these formats, it is possible that companies will need to allot more time in their respective annual meeting timelines.

We expect more clarity and best practices to emerge with respect to annual stockholder meetings and the various formats available to companies as more companies begin to navigate these unprecedented times.