“Caution is appropriate. Preparedness is appropriate. Panic is not.” (~ U.S. Surgeon General Dr. Jerome Adams, commenting on the coronavirus outbreak) [Quote may be modified]
As the coronavirus (specifically, “COVID-19”) outbreak continues to wreak havoc on markets and industries in the U.S. and around the world, businesses are now confronting significant and unique challenges. Successful navigation of these challenges will require thoughtful and comprehensive planning. Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources (see Foley’s Coronavirus Resource Center) and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries, including manufacturing, technology, solar, hospitality and travel, healthcare, food, fashion and apparel, and sports & entertainment. Chief among those challenges is the prospect of new legal requirements for employers during this challenging time.
As the coronavirus outbreak continues to develop, both public and private companies should take time to consider implications for annual meetings – particularly as proxy season is reaching its peak – including whether to depart from the traditional “in-person” meeting format. Indeed, where state law or organizational documents do not preclude options, there are many options because of ever-advancing technology with respect to conducting annual meetings, including: (1) in-person only; (2) in-person with webcast; (3) virtual with in-person possibility; (4) virtual only; (5) starting under one planned approach (i.e., in-person or virtual) and “reserving the right” to shift to another approach before the meeting; and (6) taking a “wait and see” approach before committing to a specific method.
From restrictions on travel, to statewide or local bans of meetings of more than “X” number of people, to the scientific reality of minimizing the spread of disease by avoiding contact with other people, there are many compelling reasons (if not legal mandates, depending on the circumstances) that may lead a company to shift its annual meeting (and other events or meetings, as applicable) to virtual meetings – or to continue to offer in-person meetings while providing a virtual attendance or webcast option. Broadridge, a key service provider offering hosting capabilities for virtual meetings, has indicated that virtual meetings continue to build in popularity, particularly in recent years – for instance, figures from 2018 indicated an increase of 20% in companies using virtual meetings compared to 2017.
Before making any quick shifts to virtual meetings, however, companies should explore relevant considerations and make transitions carefully. Considerations include, but are not limited to: (1) compliance with proxy statement disclosure requirements; (2) requirements or restrictions imposed by state law; (3) the permissibility of virtual meetings under organizational documents (e.g., bylaws and operating agreements) and the ability to amend such documents as needed; (4) requirements or restrictions imposed by stock exchanges; (5) input from proxy-advisory firms and investor groups; (6) matters of general corporate governance and investor relations; and (7) the meeting timing, including the possibility that conditions may improve by the time the meeting is scheduled to occur.
Proxy Statement Disclosure Requirements and Recent Regulatory Relief Due to COVID-19
For the many companies that have yet to host their current year annual meetings, such companies likely already have filed – or will very soon file – definitive proxy statements with the Securities and Exchange Commission (the “SEC”) to provide shareholders with notice regarding the details for their annual meetings. Companies that have yet to file definitive proxy statements have a degree of flexibility (assuming other restrictions – e.g., state law – have been considered and addressed) with respect to taking a “wait and see” approach, planning a hybrid meeting, or hosting a “virtual only” meeting, but such companies – depending on the chosen approach – may need to take extra steps to comply with proxy disclosure requirements. For instance, in taking the “wait and see” approach, companies will later need to “firm up” their annual meeting details and disclose and likely file with the SEC the additional details. For companies that have already filed definitive proxy statements indicating that they will be hosting in-person meetings, the SEC staff has provided recent relief to the effect that such companies who now wish to change the date, time or location of an annual meeting because of COVID-19 may notify shareholders of a virtual meeting approach by: (1) issuing a press release announcing the change; (2) filing the announcement as definitive additional soliciting material on the SEC’s EDGAR site; and (3) taking 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 appropriate stock exchanges) of the change. Under the SEC staff’s guidance, such companies would not need to mail additional soliciting materials or amend their proxy materials to reflect such a change, but there are other issues to consider and there would be other actions to be taken as we discuss below.
State Law Considerations
Although the majority of states – including Delaware – permit virtual meetings, this is not the case for all states. Some states have onerous conditions for virtual meetings, including requiring unrevoked shareholder consent to hold virtual-only meetings, which might make the logistics of a virtual or “hybrid” meeting too difficult. Approximately one-fifth of all states require at least some “in-person” component, thus foreclosing a “virtual only” option and possibly making an in-person meeting with a virtual component (a hybrid meeting) undesirable. Companies desiring to host virtual meetings may find themselves precluded from doing so due to state law (or they may find that state law imposes draconian requirements) and should accordingly conduct state-specific legal research to ensure all necessary requirements are met. Companies should bear in mind that the SEC staff’s recent relief (mentioned above) does not affect state law, which still must be considered and – in the case of a company switching from an in-person meeting to a virtual meeting by taking advantage of the SEC’s relief – may mean that such companies have additional steps to fulfill at the state-level.
Organizational Document Considerations
Companies may find, for instance, that their bylaws or operating agreements do not permit virtual meetings, even though virtual meetings are otherwise lawful under the state law governing the internal affairs of the particular company. In such instances, the solution may be as straightforward as approving an amendment to permit virtual meetings (which may in turn require a filing with the SEC on Form 8-K). For companies vacillating on the approach for hosting an annual meeting, familiarity with organizational documents as early as possible may prove critical, particularly if adjustments or amendments end up being necessary or if a decision is made to take advantage of the SEC’s relief to shift to a virtual-only meeting. Again, the SEC staff’s recent relief does not supplant requirements under organizational documents, which may include the need to mail an amended notice of the meeting to all shareholders if annual meeting details change from details reflected in a notice already sent.
Stock Exchange Considerations
With respect to stock exchanges, although both the New York Stock Exchange and Nasdaq permit virtual annual meetings, both view shareholder engagement as a top consideration. Accordingly, while the two most significant exchanges permit virtual meetings, companies should weigh the pros and cons of virtual meetings with respect to corporate governance and investor relations considerations.
Considerations Regarding Proxy-Advisory Firms and Investor Groups
While there has been no consensus regarding virtual meetings among proxy-advisory firms, COVID-19 may finally catalyze commentary. For example, ISS has not provided any extensive formal coverage regarding its views on or recommendations regarding the use of virtual meetings. Glass Lewis, however, set forth a policy in 2019 whereby it threatens adverse voting recommendations (e.g., voting against director nominees serving on the nominating and corporate governance committees) with respect to companies intending to host meetings only virtually, unless such companies ensure that shareholders will be afforded the same rights and opportunities to participate (for example, the same ability to ask questions) that they would enjoy at an in-person meeting and include disclosure in the proxy statement regarding these matters. COVID-19’s impact may also trigger change among various investor groups, many of which have historically opposed virtual meetings (largely because companies may use such meetings as a means to inhibit shareholder participation).
Some companies may see value in virtual meetings from the perspective that they would actually prefer to limit shareholder access (particularly those companies that may have faced disruptions at past meetings or fear it at their next meeting), but such companies should take care not to impede shareholder access unreasonably. Moreover, in the current context, holding a virtual meeting may provide for access greater than through an in person meeting, which a company may or may not see as desirable.
Matters of Corporate Governance and Investor Relations
Companies able to hold virtual meetings – i.e., not facing any direct restrictions or requirements preventing them from doing so – should still be mindful of fulfilling their responsibilities (including, e.g., proxy statement disclosure compliance and the views of proxy advisory firms, like ISS and Glass Lewis, as well as key investor groups). They should also consider a host of practical questions about holding meetings virtually (even if the motivation is solely to avoid the complications of COVID-19), including:
(1) What technological infrastructure would the company use for this purpose? We have heard that at least one vendor may be overwhelmed with requests for this, which suggests that it may be advisable for companies to contact vendors now to determine if there is hosting availability at the time of the meeting being discussed.
(2) Is the technological infrastructure that the company plans to use sufficient to enable all people to participate, including shareholders and management?
(3) Is shareholder engagement curtailed or hampered, or enhanced (desirably or undesirably), by hosting a meeting exclusively virtually, where permissible — even if COVID-19’s global impact might reduce the likelihood of negative attention or opposition to a virtual annual meeting?
(4) Where a hybrid meeting is undertaken, will in-person and virtual participants be given equal participation rights, including the right to ask questions (and receive answers), and will all participants be adequately informed “how” to participate (e.g., for virtual attendees, will locating the host website and participating be reasonably easy and user-friendly)?
(5) Does the public, and do key shareholders (including, perhaps most saliently, prospective shareholder activists and institutional shareholders), understand the reasoning behind selecting a hybrid or purely virtual meeting?
(6) Are shareholders’ interests, and (to the extent permissibly considered) other constituents’ interests, best served by a virtual or hybrid meeting?
We know that companies are acting now to mitigate the risks and realities of negative impacts from COVID-19. Reviewing the variety of approaches to annual meetings, including with respect to compliance considerations and virtual (or hybrid) options, is a good exercise. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the global spread of the coronavirus, you may wish to visit the CDC and the World Health Organization.
Foley will continue to keep you apprised of relevant developments. Click here for Foley’s Coronavirus Resource Center for insights and resources to support your business during this challenging time.