Alert
Alert
03.18.20
Many U.S. public companies and investment funds are facing the same situation—the proxy statements have been printed, perhaps mailed, for an annual meeting that now can’t be held because of COVID-19 concerns. What to do? Way back on March 3, Starbucks Corporation changed its annual meeting from one held at a physical location to a “virtual only” format. The following day, The Bank of New York Mellon Corporation announced that it would proceed with its in-person meeting but advised that it might change the format to a virtual-only meeting. Most notably, on March 13, Berkshire Hathaway announced that while its annual meeting would proceed as scheduled, “we will not be able to allow shareholders to physically attend the meeting.”
SEC guidance. On Friday, March 13, the SEC staff issued new guidance intended to help issuers navigate their annual meeting in light of the ever-evolving public health situation. In brief, the SEC staff advised that “the staff will take the position that an issuer that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if it:
As might be expected, the staff advised that these actions should be taken promptly after the decision is made to change the date, time, or location of the meeting and should be carried out sufficiently in advance of the meeting so the market is alerted to such changes.
Recognizing that some companies that have already mailed their proxy statements may choose to undertake “virtual” or “hybrid” meetings, the staff advised that “[i]ssuers that have already filed and mailed their definitive proxy materials would not need to mail additional soliciting materials (including new proxy cards) solely for the purpose of switching to a “virtual” or “hybrid” meeting if they follow the steps [in the bulleted list above] . . . for announcing a change in the meeting date, time, or location.” For companies that have not already mailed their definitive proxy materials to shareholders, the staff advised that companies should consider whether to include disclosures regarding the possibility that the date, time, or location of the annual meeting will change due to COVID-19. Cigna Corp., for instance, has noted in its proxy statement that, due to COVID-19, the meeting may be changed to a virtual meeting.
If there are shareholder proposals to be presented at a meeting, the staff advised that, to the extent feasible under state law, the issuers provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by telephone, during the 2020 proxy season. To the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the staff would consider this to be “good cause” under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.
What are the options? The staff guidance is welcome for companies struggling with the decision of what to do, but extends only to the SEC rules, not to state law and practical concerns. Many corporations need to take immediate action. What are their options?
Proceed, but bar or discourage shareholders from attending. We’ll call this the “Berkshire Hathaway” model. It involves the least disruption to a company’s established plans, although barring or discouraging shareholders from the meeting has its obvious disadvantages to shareholder democracy and engagement, in addition to preventing the company from counting as present, for purposes of quorum and required votes, shareholders who have not submitted their votes by mail, direction to brokers or other means of transmission. Sunoco Products Co. has gone this route in its proxy statement, discouraging in-person attendance while providing video and telephonic coverage.
Those following the Berkshire Hathaway model can take advantage of the new staff guidance with respect to notice of the change and presentation of shareholder proposals, but will need to make sure that their procedures are consistent with state law and their own governance documents.
Change to a “virtual-only” meeting. A majority of states, including Delaware, Virginia and Texas, permit “virtual-only” meetings, in which attendance of all participants is by means of “remote participation.” (California and Maryland, however, impose certain restrictions that make virtual-only meetings unavailable for public companies.) A “virtual-only” meeting, as the name implies, is a meeting conducted solely by remote participation. Meetings that permit virtual participation, but that also have a physical location, are referred to as “hybrid” meetings.
The SEC permits virtual-only or hybrid meetings, if the company provides advance notice to shareholders, proxy service providers and other interested parties, provides adequate means for shareholders to participate in the meeting to the same extent as if they were physically present, and provides full disclosure regarding logistical details, such as
Rules of procedure. There are no established rules of procedure for virtual shareholder participation in annual meetings, but rules must be established before an annual meeting with virtual participants, just as the services that host quarterly earnings calls have rules for taking attendance and submitting questions to the company.
State law and notice requirements. While the SEC permits virtual-only meetings, both state law and a company’s own governing documents may require a physical location. In addition, if the notice of meeting did not provide for virtual participation, it may be that state law would require a new notice, apart from the SEC guidance on notice to shareholders.
Change to a “hybrid” meeting. As noted above, virtual-only meetings have implications for the exercise of shareholder democracy rights and participation. A number of institutional investors and proxy advisors object to virtual-only meetings, arguing that they “allow management teams to cherry pick softball questions and fend off troublesome attendees with the click of a mouse.” Those who have lodged these objections have indicated that they will recommend votes against boards of directors of companies that hold virtual-only annual meetings, although there is a recognition that this year is different, and that companies should not be criticized for holding virtual-only meetings if they indicate that they intend to have in-person meeting locations in the future.
A solution is the “hybrid” meeting, in which a physical location is provided, but attendance may be discouraged, and management and board members may attend remotely. For a hybrid meeting to function as more than an in-person meeting with an audio or video feed, remote participants must be able to participate as they would in a virtual-only meeting.
What choice is most workable? For companies that already have distributed proxy materials that provide for a physical location, but want to encourage social distancing or need comply with local gathering restrictions, the most practical solution for 2020 may be the Berkshire Hathaway model, in which the company goes forward with a skeleton group of representatives at the meeting, but bars or discourages shareholder attendance and provides streaming video or telephonic coverage (but does not provide for full participation by remote shareholders, as in a hybrid meeting). The SEC has provided relief and guidance as to the notice that must be provided; state and local restrictions on public meetings may provide additional “impossibility” defenses to any claim by shareholders that they were deprived of their democracy rights; and it is likely that relief can be granted to any shareholders who disapprove of the format by holding an annual meeting in 2021 to which they can have access.
A company taking this approach should:
- the company has decided to webcast or telephonically cover the meeting, and will not permit (or strongly discourages) shareholder in-person attendance;
- the decision is based on the ongoing COVID-19 restrictions and the need to protect all of the company’s employees, shareholders and community;
- the decision is being made for the current year and no decision has been made to follow this procedure in future years; and
- shareholders will not be able to cast votes or otherwise participate in the meeting (except to the extent that the company has arranged for an audio call-in number to permit shareholders’ questions or statements);