In an effort to limit exposure and contain Coronavirus Disease-2019 (COVID-19), public companies are monitoring developments in the outbreak and announcements from public health authorities and federal, state, and local governments. For many public companies, this process involves establishing contingency plans for annual meetings and describing such plans in proxy statements. These plans typically include preparing for alternative arrangements such as changing the location or date of the annual meeting or holding annual meetings solely by means of remote communication. Following are some legal considerations for companies contemplating changing to a virtual annual meeting in response to the COVID-19 outbreak.
- Review state law. The first step is determining whether a company’s state of incorporation provides for flexibility on annual meeting locations. Many states, such as Delaware, allow meetings to be held solely by remote communication, or as a “virtual-only” meeting, if authorized by the board of directors. Other states permit companies to hold a “hybrid” meeting, where remote communications supplement the required in-person element. Other states, however, strictly require meetings to occur in a physical location. State law should also be reviewed for determination of quorum and voting requirements for virtual-only meetings.
- Review governing documents. Even for companies located in a state that allows virtual-only or hybrid style meetings, articles or bylaws may restrict their ability to host such a meeting. Be sure to confirm there is no applicable restrictive language in the governing documents. It is also helpful if such governing documents grant the board the authority to designate such a meeting.
- Add contingency language to proxy statement, if not already filed. Companies have begun advising shareholders in their proxy statements that their annual meetings may transition to a virtual-only or hybrid style rather than taking place in their usual physical location. Language regarding the possibility of converting to a virtual-only or hybrid meeting, in addition to a possible change in location or date of the meeting, should be considered for companies who have not yet filed and mailed their proxy statements. The Securities and Exchange Commission (SEC) issued a press release and staff guidance for conducting annual meetings in response to the COVID-19 concerns on March 13, 2020, and specifically noted in the guidance that such disclosure should be made in light of each issuer’s facts and circumstances and reasonable likelihood of a meeting change.
- Announce change in advance and file additional soliciting material. Fortunately, the SEC’s March 13 guidance has made the process clear for announcing a change in meeting location or form. The SEC stated that if an issuer has already filed and mailed its definitive proxy materials, “companies can notify shareholders of a change in date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if:”
o the company announces a change in the location or meeting format via a press release;
o the company files the announcement as definitive additional soliciting material on EDGAR, which supplements its proxy statement; and
o the company informs any and all intermediaries involved in the proxy process, including the proxy service provider and other market participants such as the appropriate national securities exchange of any change. - Board authorization and timing. The appropriate board authorization should be obtained in advance of a public announcement regarding a change to the annual meeting. The announcement should also be issued sufficiently in advance of the meeting to comply with any notice requirements in the governing documents or under state law (for example, Delaware requires at least 10 days’ notice prior to the meeting date). In its guidance, the SEC also notes that an announcement should be promptly made with sufficient time in advance of a meeting for the market to be alerted timely.
- Considerations for announcements as additional soliciting materials. The announcement to be filed as additional soliciting material should, among other things, include the rationale for the change, describe how shareholders may vote, submit questions, and how the annual meeting will proceed. In its guidance, the SEC specifically stated that there should be “clear directions as to the logistical details of the ‘virtual’ or ‘hybrid’ meeting, including how shareholders can remotely access, participate in, and vote at such meeting.” The SEC did provide clear guidance that as long as a company follows the three requirements noted above, it would not need to mail additional soliciting materials (including new proxy cards) if it changes its meeting to a virtual or hybrid (in-person meeting that also provides participation by shareholders through electronic means) meeting.
- Effect on shareholder proposals. It is important to note that SEC provided additional guidance regarding the handling of shareholder proposals during this time. The SEC advised that companies should provide shareholders or their representatives an opportunity to present their proposals if they are unable to attend a meeting in person. For example, as long as state law permits, such persons may present their proposals via telephone. In addition, the SEC stated that if a proponent or representative is unable to attend a meeting as a result of hardships related to COVID-19, the staff “would consider this to be ‘good cause’ under Rule 14a-8(h) if companies attempt to exclude a proposal under Rule 14a-8(h)(3) for the following two calendar years.”
As a practical matter, companies should also consider reaching out to virtual meeting vendors now to explore options should the need arise to convert to a virtual meeting. If not already the case, we expect these vendors may become inundated with requests for their services. Moreover, there are some concerns that changing to a virtual meeting may result in unintended consequences related to the extent of shareholder voting. Thus, companies should also consider reaching out to significant shareholders and, as necessary, proxy solicitors to ensure that the required votes will be obtained at the annual meeting.
Ballard Spahr’s Securities and Capital Markets Group advises companies on compliance with public reporting, proxy, and disclosure obligations. The Group’s attorneys are monitoring COVID-19-related developments in regulatory compliance and corporate governance, and are advising clients on the best path through the challenges created by the worldwide pandemic.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.