By Steven M. Haas & Charles L. Brewer – Lawyers at Hunton & Williams LLP
Last year, a record number of US public companies held virtual-only shareholder meetings and, despite some shareholder opposition, we believe this trend is likely to continue.
This article provides a practical guide for US companies deciding whether to switch to and then how implement virtual-only shareholder meetings.
Making the switch
Virtual-only shareholder meetings can greatly reduce the costs of the annual meeting process while also communicating with more shareholders. Proponents of these meetings argue that the time and costs of conducting traditional, in-person meetings – which are generally poorly attended and usually perfunctory rather than substantive – outweigh the benefits. But critics of virtual-only meetings claim that nothing can replace the opportunity for shareholders to sit in the same room as a corporation’s directors and officers and ‘look them in the eye’. They also believe that corporations may hold virtual-only meetings to avoid answering pointed or negative questions.
“Corporations should structure the agenda of any virtual meeting to bring matters to a vote, close the polls and adjourn the formal part of the meeting as quickly as possible”
Our view is that there is no one correct approach to holding shareholder meetings. Corporations will need to determine on a case-by-case basis whether in-person, virtual-only or a hybrid is most appropriate under the circumstances. For example, corporations likely will hold contested meetings in person due to the greater complexity, need for discussion at the meeting, larger number of votes likely to be cast during the meeting and increased chance that an adjournment could be necessary. Corporations that historically have high in-person attendance may also face investor backlash for suddenly switching to a virtual-only format.
Because so many US companies held virtual-only shareholder meetings in 2017, we believe that 2018 could be a pivotal year in the US for the future of virtual-only meetings since we will see how many investors register their displeasure by voting against directors who authorised virtual-only meetings. For that reason, many US companies considering virtual-only meetings may defer their decision to 2019 in order to see how investors react this year.
Statutory requirements and organisational documents Not all states permit virtual-only shareholder meetings. In states that do, corporations will need to review the statutory requirements carefully. In addition, corporations must confirm that their organisational documents permit virtual-only shareholder meetings. Many corporations’ bylaws may require a physical location and would therefore need to be amended to allow for a virtual-only meeting.
A key aspect of holding a virtual-only shareholder meeting is providing the ability for shareholders to vote securely online. Consequently, it is likely impractical, if not impossible, for most public corporations to hold a virtual-only meeting without third-party assistance. An experienced service provider can provide a robust and usually cost-effective platform to host a virtual-only meeting more easily than a corporation could develop the technology and related expertise necessary to host a virtual-only shareholder meeting on its own. For privately-held companies, whether a third-party service provider is necessary will depend on the circumstances.
Meeting format: audio-only or video The most fundamental decision a corporation must make regarding a virtual-only meeting is whether it will be audio-only or include video. An audio-only meeting (which does not include live video but may include a contemporaneous slide presentation) is substantially similar to an earnings call, with the key addition of shareholder authentication and voting through a secure website. A meeting that includes live video will generally resemble an in-person shareholder meeting, with the obvious exception that no shareholders would be in physical attendance.
So far, corporations holding virtual-only meetings have overwhelmingly chosen audio-only meetings. Holding an audio-only meeting is cheaper and technologically easier than also broadcasting live video. Broadcasting live video, however, which would allow shareholders to observe the corporation’s representatives as they answer shareholder questions, could help avoid some criticism that a corporation is ‘hiding’ its directors and officers from shareholders by holding a virtual-only meeting.
Safeguarding against technological problems Any company holding a virtual-only shareholder meeting should have contingency plans to deal with a technological failure, such as a power or network outage. These contingency plans should include scenarios in which there is a brief outage where the meeting can be promptly reconvened and a prolonged outage that requires the meeting to be reconvened on a later day.
To minimise the risk of a technological failure disrupting the meeting, corporations should structure the agenda of any virtual meeting to bring matters to a vote, close the polls and adjourn the formal part of the meeting as quickly as possible. With the formal part of the meeting done, the corporation can then turn to shareholder questions or a management presentation which, if disrupted, would not prevent the shareholder vote from being effective or necessarily require that the meeting be reconvened. Whether the meeting will need to be reconvened will depend on whether the formal business was concluded or, as a matter of shareholder relations, the corporation should continue with the rest of the agenda (e.g. answering shareholder questions).
Question and answer sessions give most shareholders their only opportunity to engage directly with a corporation’s directors and officers. Some shareholders believe that this ‘live’ format is the best way to ensure a candid (i.e. unscripted) response to shareholder questions.
For virtual-only shareholder meetings, corporations have a number of options regarding how shareholder questions can be presented, including:
- Live questions via telephone Corporations can structure the meeting similarly to an earnings call, with an operator managing a queue of shareholders who will ask questions via telephone using a dial-in number. This is the most similar to in-person meetings and we expect that many shareholders– particularly activist retail shareholders – would prefer this option
- Live questions via text Virtual meeting platforms offered by third-party service providers allow shareholders to submit questions in text during the meeting. These questions typically are not seen by other shareholders. Compared to the telephone option, shareholders may view this as less effective for presenting potentially negative questions. It also gives the corporation some discretion in choosing which questions to answer
- Pre-submitted questions Corporations may require that shareholders submit all questions in advance, either through pre-recorded audio or video files or in writing. Some critics argue that it results in less candid answers because the corporation will prepare a scripted response in advance of the meeting. Corporations that require pre-submitted questions believe that a prepared response – which can be more substantive and complete than unprepared remarks – is more useful to shareholders without any loss of candour
Unless a corporation chooses to permit live questions via telephone, it will usually need to engage in some editorial control over the questions its directors and officers answer. At a minimum, the corporation (and shareholders) would want to eliminate duplicate questions and questions that are off-topic or inappropriate. But some shareholders believe that corporations will ‘cherry pick’ favourable questions and downplay, rephrase, or ignore questions that are seen as overly negative or hostile.
“Before deciding whether to hold a virtual-only meeting, corporations may want to engage privately with key shareholders to gauge their reaction. Some prominent investors have indicated they will vote against directors who authorise virtual-only meetings. Other institutional shareholders do not seem to view virtual-only meetings as a significant issue”
Corporations can take steps to alleviate this concern by providing transparency into how they select shareholder questions, such as committing to respond to all reasonable questions at the meeting or, if too many questions are received, to post all questions on a website available to shareholders and respond to them after the meeting.
Shareholder proposals Shareholders of US public companies who meet certain ownership requirements may submit proposals for inclusion in a corporation’s proxy statement. Either the proponent or his or her qualified representative must present the proposal at the shareholder meeting.
Corporations that intend to hold a virtual-only shareholder meeting, therefore, must determine how shareholders will present their proposals. Options include:
- Providing a dedicated dial-in number for the shareholder or the shareholder’s designated representative to speak
- Permitting proponents to provide an audio or video recording of their presentation, which the corporation would play during the meeting
- Designating a representative of the corporation to read the proposal or an introduction to the proposal submitted in advance by the proponent
In 2016, most corporations preferred to provide a separate dial-in number for proponents. The corporation should also have a back-up plan to present the shareholder proposal on the proponent’s behalf if the proponent has a technical issue that prevents him or her from presenting the proposal personally.
Pre-meeting communication Before deciding whether to hold a virtual-only meeting, corporations may want to engage privately with key shareholders to gauge their reaction. Some prominent investors have indicated they will vote against directors who authorise virtual-only meetings. Other institutional shareholders do not seem to view virtual-only meetings as a significant issue.
Once a corporation decides to hold a virtual-only meeting, many decisions need to be made in advance with regard to voting, shareholder questions and shareholder proposals, as explained above. Corporations will reach different decisions on these issues in light of their particular shareholder base and their historical practices for holding shareholder meetings. Regardless of the result of any particular decision, however, corporations should publish their procedures for shareholder participation in virtual-only meetings – just as they would for in-person meetings – to ensure that all shareholders feel they have received a meaningful opportunity to participate in the shareholder meeting. Thoughtful, specific procedures may help forestall any complaints shareholders have regarding a virtual-only meeting taking the place of an in-person meeting.
Recap of key issues
There are numerous issues that need to be considered before holding a virtual-only meeting in the US, including:
- Whether to engage with institutional shareholders before deciding to hold a virtual-only meeting
- Whether holding a virtual-only meeting will result in significant ‘withhold’ votes or votes ‘against’ the directors
- Whether to permit non-shareholder attendees, such as analysts, employees, or the media, to view the meeting
- How to structure the agenda of the meeting in order to conclude the formal business as soon as possible
- What contingency plans to prepare to address a technological failure, including contingency plans for a short network outage, a prolonged network outage and the inability of a shareholder proponent to present his or her proposal
- Whether a recording or transcript of the meeting will be available after the meeting and, if so, for how long
- How shareholders will present shareholder proposals, such as through a designated dial-in number or a pre-recorded audio or video statement
- How shareholders can ask questions, including in advance, by text, or ‘live’ and if ‘live’ how to deal with disruptive or otherwise inappropriate behaviour
- How to decide which shareholder questions will be answered, including how to deal with duplicate or inappropriate questions, whether and how to respond to questions for which there is insufficient time to answer them during the meeting and the level of transparency to provide to explain how questions will be chosen
- How to maintain the required record of any vote or action taken by remote communication
- What information to include in the corporation’s proxy materials regarding its switch to a virtual-only shareholder meeting and whether to publicise shareholders’ ability to attend the meeting virtually in other locations (e.g. on the corporation’s website)
It is clear that switching from an in-person to a virtual-only shareholder meeting can be a lengthy process, with many issues that must be considered and decided well in advance of the meeting date. Experienced legal counsel and third-party service providers can help corporations analyse the issues, but each corporation considering whether to hold a virtual-only meeting will need to take into account its historic practices with respect to shareholder meetings, its shareholders’ previous level of engagement, its existing shareholder base and whether it expects shareholders to protest its adoption of virtual-only meetings.
In addition, as virtual-only meetings become more popular, particular practices may coalesce regarding how to address the issues described in this article. Corporations and their advisors will need to continue monitoring the best practices in corporate governance and adjust their meeting procedures accordingly.
About the Authors
Steven Haas is a partner with Hunton & Williams LLP, where he is co-head of the M&A team. He regularly advises on corporate governance, shareholder activism and fiduciary duty matters. He is a fellow in the American College of Governance Counsel and received his law degree from the University of Virginia School of Law.
Charlie Brewer is an associate with Hunton & Williams LLP. He advises on corporate transactions and securities law issues. Before practicing law, he was a member of the investment team of a fund of hedge funds. He received his law degree from William & Mary Law School and his BA from the University of Virginia