Analysis

3 Keys To Ensure Virtual Shareholder Meetings Go Smoothly

By Tom Zanki
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Law360 (March 31, 2020, 7:42 PM EDT) -- With federal social-distancing guidelines and many state clampdowns on large gatherings in effect for the foreseeable future, public companies are preparing for the likelihood that they will have to hold their annual shareholder meetings virtually.

Lawyers say the switch from physical to virtual meetings is largely doable, but they caution that companies must consider key legal and logistical matters in order to make the transition work.

"For the vast majority of companies, there is a path forward to get through the annual meeting smoothly," Shearman & Sterling LLP partner Kristina Trauger said. "The earlier that they can make a decision — if they intend to change to an alternative format — the better for them."

Spring is the prime season for corporate shareholder meetings. Some companies have already held meetings in one form or another, including Starbucks Corp., which switched to a virtual meeting on March 18 for public health reasons. Other companies have restricted access or introduced electronic voting methods for physical meetings that were held in early March.

More companies are expected to finalize plans for their annual meetings within the next 60 days or so. Given that rules barring large gatherings have dramatically tightened since early March — the Trump administration on Sunday extended its social distancing rules through April 30 — lawyers are advising a growing number of clients on how to lay the groundwork for a virtual meeting.

"Most of our larger clients are looking seriously at virtual meetings, and many are making contingency plans in that area," said Covington & Burling LLP senior counsel David Martin, a former director of the SEC's Division of Corporate Finance. "This is still evolving, so final decisions are still in the offing for many."

Corporate services provider Broadridge expects to handle more than 1,000 virtual meetings this year, up from 326 last year. A Broadridge spokesperson said Tuesday the firm is in the planning stages with "hundreds of companies" interested in holding virtual meetings in 2020.

"It's been a bit of a mad rush to switch to virtual meetings," said Simpson Thacher & Bartlett LLP partner Brad Goldberg, who advises public companies and is tracking the matter.

Here are three factors companies should bear in mind before making the leap to virtual meetings.

Know State Law and Corporate Bylaws

At the federal level, the U.S. Securities and Exchange Commission has provided guidance to accommodate the expected switch to virtual meetings. The SEC has notified public companies that they are free to switch their annual meetings to virtual or hybrid gatherings as long as they provide adequate notice.

Shareholders and their representatives also should not be penalized if they can't present proxy proposals in person because of COVID-19, according to the SEC.

Lawyers say companies must also ensure their home state laws permit virtual gatherings. Delaware, where many companies are incorporated, allows virtual meetings, while most states permit virtual or hybrid gatherings under varying conditions.

Plus, more states that previously precluded virtual shareholder meetings have amended their laws in recent weeks to approve virtual-only and hybrid meetings, including New York, New Jersey, Connecticut and Georgia.

Another factor to consider is whether the corporation's own bylaws permit virtual gatherings. If not explicitly allowed, lawyers say a company's board of directors can change that quickly.

"If there is a restriction in the bylaws, then typically the bylaws allow the board to amend that unilaterally without shareholder approval," Trauger said.

Keep Shareholders in the Loop

Shareholder groups often prefer in-person gatherings as a better way to communicate with executives. The Council of Institutional Investors, which represents pension funds and other big investors, said recently that while coronavirus concerns make it reasonable to switch to virtual meetings in 2020, it hopes such decisions will be a "one-off, tailored for current circumstances."

If companies switch to virtual meetings, the SEC is urging issuers to provide shareholders with the full opportunity to present their proposals through alternative means, including over the phone. Proxy advisory firms, which counsel shareholders on voting matters, are monitoring developments.

Glass-Lewis & Co. has updated its policy on virtual-only meetings to account for the pandemic. Glass-Lewis said it will generally refrain from recommending adverse votes against a board's governing committee members if a company holds a virtual gathering through June 30, as long as the company discloses its reason for going virtual and specifically cites COVID-19 concerns.

"We do not believe that discouraging virtual-only meetings during this time serves the interests of shareholders or companies," Glass-Lewis said in a March 19 statement, adding that it is generally neutral on virtual-only meetings if they ensure meaningful shareholder participation.

Proxy advisory firm Institutional Shareholder Services Inc. declined to comment.

Trauger said companies should develop guidelines on how they will handle questions from shareholders. She added that issuers also must be careful not to disclose material nonpublic information in such discussions and comply with the SEC's Regulation Fair Disclosure rules.

Contact Service Providers ASAP

Lawyers point out that vendors providing the technology to conduct virtual meetings are being bombarded with requests. To ensure smooth execution of meetings, companies should give such providers time to set up an event and not wait until a week or two before the gathering.

Advance run-throughs will reduce the odds of technical glitches, experts say. Earlier contact will also help ensure that companies are able to schedule a meeting at their preferred time.

"If companies think there is any chance they may want to switch to a virtual meeting, they should be reaching out to service providers sooner rather than later so that the providers have ample time to prepare and the company can ensure it maintains its original meeting date," Goldberg said. "Some companies have had to move their annual meeting date in light of vendor availability as a result of the increased demand for virtual meetings."

--Additional reporting by Jack Queen. Editing by Philip Shea and Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.

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