COVID-19 Measures Should Not Threaten Shareholder Rights

By Steve Wolosky, Andrew Freedman, Adrienne Ward and Ron Berenblat
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Law360 (April 16, 2020, 6:15 PM EDT) --
Steve Wolosky
Steve Wolosky
Andrew Freedman
Andrew Freedman
Adrienne Ward
Adrienne Ward
Ron Berenblat
Ron Berenblat
Last week, certain factions within the Delaware State Bar Association, or DSBA, attempted to fast-track legislation that would allow corporations incorporated in Delaware to postpone their annual meetings of stockholders in light of the COVID‑19 public health threat.

While these groups' actions appear to have been well intentioned, we have significant concerns that their proposed amendment to the statute, which we understand is no longer being considered by DSBA leadership but may be resurrected at a future date, could be abused by corporations looking to postpone their annual meetings and avoid being held accountable to stockholders under the pretense that such a delay is required due to COVID‑19.

We also believe the proposed amendments to the statute or similar legislation are unnecessary in light of the latest emergency order issued by Delaware Gov. John Carney relating to COVID‑19 intended to reduce the number of in-person stockholder meetings held by Delaware corporations in order to protect the health and safety of meeting participants.

Proposed Amendments to Section 110 of DGCL

Section 110 of the Delaware General Corporation Law, or DGCL, requires Delaware corporations to hold annual meetings of stockholders. Many publicly traded Delaware corporations provided notice of their annual meetings to stockholders prior to the escalation of the COVID‑19 pandemic or may be required to hold their annual meetings at a future date when the dangers imposed by COVID‑19 will have not yet subsided.

Due to the possibility that Delaware corporations may need emergency relief from their obligations to hold annual meetings under the DGCL in order to promote the safety of meeting participants, the DSBA Executive Committee was asked to adopt a resolution that would have advocated to the Delaware General Assembly for immediate consideration certain emergency amendments to Section 110.

These draft amendments related to the authority of boards of directors of Delaware corporations to adopt emergency bylaws and to take certain actions relating to annual meetings during emergency conditions such as those created by the COVID‑19 pandemic. While we understand that the DSBA Executive Committee is no longer considering the resolution in light of Carney's subsequent emergency order discussed below, we are concerned that some form of the resolution may be revisited by DSBA leadership at a later date.

Under Section 110(a), the board of any Delaware corporation may adopt emergency bylaws which, notwithstanding any different provision that may be present elsewhere in the DGCL or in the charter or bylaws of the corporation, will be operative during any emergency resulting from an attack on the United States, during any nuclear or atomic disaster or during the existence of any catastrophe or similar emergency, "as a result of which" a quorum of the board cannot readily be convened for action.

Under the draft legislation proposed to DSBA leadership and available to us, Section 110(a) would be amended to, among other things, clarify that the types of events that give rise to the availability of these emergency powers could include "an epidemic or pandemic, and a declaration of a national emergency by the United States government."

Of greater concern, under the draft legislation, Section 110(a) would be amended to strike the language "as a result of which" within the provision italicized above and to replace it with "irrespective of whether." This would eliminate the requirement for a causal link between the emergency and an inability to convene a quorum for board action, thus potentially empowering a board minority with the power of the full board without suitable justification.

In addition, Section 110 of the DGCL would be amended by adding a new subsection (i) specifically providing that during any emergency condition contemplated by Section 110(a), the board (or, if a quorum cannot be readily convened for a meeting, a majority of the directors present) may:

  • Take any action that it determines to be practical and necessary to address the circumstances of such emergency condition with respect to a meeting of stockholders notwithstanding anything to the contrary in the DGCL or in the charter or bylaws, including, but not limited to;

  • Postponing any such meeting to a later time or date (with the record date for such meeting applying to the postponed meeting irrespective of Section 213 of the DGCL); and

  • With respect to a corporation subject to the SEC reporting requirements under the Securities Exchange Act of 1934, as amended, notifying stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the SEC pursuant to the applicable Exchange Act rules.

New Section 110(i) would also provide that no person will be liable, and no meeting of stockholders will be postponed or voided, for the failure to make a stockholder list available pursuant to Section 219 of the DGCL if it was not practicable to allow inspection during any such emergency condition.

While these are unprecedented times and ensuring the health and safety of all meeting participants should be the highest priority, the proposed amendments or similar legislation would have far-reaching implications for stockholders and their ability to exercise their ultimate form of corporate democracy that we believe would require more careful consideration.

In order to reduce the likelihood of unscrupulous boards invoking these rules for entrenchment purposes, any amendment to Section 110 should preserve the language requiring a causal link between the emergency and an inability to convene a quorum for board action and contain other features that protect the interests of stockholders.

For example, if an emergency is declared, corporations should not have the ability to postpone their annual meetings indefinitely. Any amendment should explicitly require the corporation to reschedule its meeting to be held within a set number of days (e.g., 30 days) following the official cessation of the emergency.

Any amendment should also require that the corporation hold a virtual meeting rather than hold out for an in-person meeting if the emergency persists for an extended period of time specified in the statute. In addition, it may be appropriate for any amendment to require the corporation to set a new record date in the event of an extended postponement.

Carney's Emergency Order

Shortly after the proposed legislation came to light, Carney on April 6 issued the 10th modification to his State of Emergency Declaration relating to COVID‑19 intended to reduce the number of in-person stockholder meetings held by Delaware corporations in order to protect the health and safety of the civilian population in light of the pandemic.

Rather than giving corporations broad discretion to summarily postpone in-person annual meetings during an emergency and irrespective of whether the emergency prevented a quorum of the board from being convened, as set forth in the draft DGCL amendment proposed to DSBA leadership, the governor's order takes a more cautious approach by only permitting boards of U.S. Securities and Exchange Commission reporting companies to address the public health threat caused by COVID‑19 by switching from a currently noticed in-person meeting to a remote communication meeting and allowing an adjournment of a currently noticed in-person meeting to a later dated remote meeting if necessary. The relevant excerpts from the emergency order are set forth below:

[If], as a result of the public health threat caused by the COVID‑19 pandemic or the COVID‑19 outbreak in the United States, the board of directors wishes to change a meeting currently noticed for a physical location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and a press release, which shall be promptly posted on the corporation's website after release, and

[If] it is impracticable to convene a currently noticed meeting of stockholders at the physical location for which it has been noticed due to the public health threat caused by the COVID‑19 pandemic or the COVID‑19 outbreak in the United States, such corporation may adjourn such meeting to another date or time, to be held by remote communication, by providing notice of the date and time and the means of remote communication in a document filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and a press release, which shall be promptly posted on the corporation's website after release.

We commend Carney for giving corporations the ability to protect the safety of meeting participants without endangering the rights of stockholders. Allowing a corporation to pivot from an in-person meeting to a remote communication meeting and to adjourn an in-person meeting to a later dated remote meeting if necessary addresses the health concerns presented by COVID-19 without creating unnecessary fallout that could threaten shareholder democracy.

By stopping short of replicating features of the draft amendment proposed to DSBA leadership that would allow boards to postpone in-person meetings, preserve stale record dates indefinitely, and eliminate the requirement for a causal link between the emergency and an inability to convene a quorum for board action, we believe the governor deliberately crafted the emergency order with an eye toward reducing the likelihood that it will be used as a board entrenchment device.

Conclusion

We believe the governor's order is sufficient to allow corporations to address COVID-19-related logistical challenges they may be facing with respect to their meetings, and there is no need for state legislators to adopt a statutory amendment that could threaten stockholder rights.

Nevertheless, to the extent DSBA leadership decides to revisit advocating the draft legislation, it should resist the urge to bypass the formalities and procedures normally associated with carefully formulating and recommending these types of statutory amendments given the concerns discussed above.



Steve Wolosky and Andrew Freedman are partners and co-chairs of the shareholder activism practice, and Adrienne Ward and Ron Berenblat are partners at Olshan Frome Wolosky LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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