By LaDawn Naegle and Vicki Westerhaus

Law360 (June 5, 2020, 3:04 PM EDT) --

LaDawn Naegle

Vicki Westerhaus

The COVID-19 pandemic forced a rapid shift from in-person to virtual annual meetings. Before March 31, only 12% of annual meetings were virtual-only, compared to 77% of annual meetings after April 1, according to a May Intelligize report. Not surprisingly, as the vast majority of these companies held first-time virtual-only meetings, both management and shareholders explored the process in real time, and reports of virtual meeting glitches soon began to emerge. 

Twenty minutes into the virtual-only annual meeting of Goodyear Tire & Rubber Company, shareholder John Chevedden was presenting his shareholder proposal (to allow shareholders to vote on bylaw and charter amendments) when the microphone cut out. Chevedden filed a shareholder alert with the U.S. Securities and Exchange Commission, alleging that Goodyear management cut the microphone during his presentation and requesting that the polls be reopened so Goodyear shareholders can vote based on the full text of his proposal presentation.

So far, there has been no publicly disclosed response from Goodyear on Chevedden's allegation that management cut off the microphone. Goodyear filed its Form 8-K promptly after conclusion of the meeting reporting that the proposal was defeated. 

The Council of Institutional Investors also reported problems with virtual-only meetings, in some cases related to the particular meeting platform and in other cases allegedly due to company practices at the meetings. In an April 30 CII posting and a May 3 letter to the SEC Investor Advisory Committee in advance of its May 4 meeting to discuss issues relating to public companies in the context of the COVID-19 pandemic, the CII expressed its concerns about virtual-only annual meetings. The CII cited anecdotal reports of problems early in the 2020 annual meeting season, including:

• Some virtual meeting platforms allow only record holders, not beneficial holders, to ask questions during annual meetings. In order to ask a question during the annual meeting, the beneficial owner must receive a legal proxy from the record holder, and reportedly, if the record holder had already voted, it would have to withdraw its vote before executing the required legal proxy because the voting power would transfer to the beneficial holder.

• Several shareholders reported difficulty logging into annual meetings, in some cases because pre-registration appeared to be required but information was not received ahead of time, and in other cases due to control number issues, among other things.

• Shareholder proposal proponents in some cases reported being required to dial in to a separate line for proponents that prohibited them from asking questions during the Q&A. In other cases, shareholder proposal proponents were asked to allow management to read their statements in support of the proposal, rather than allowing the proponents themselves to state their case.

• Several complaints emerged with respect to shareholders' ability to ask questions. In some cases, shareholders reported an inability to ask questions if the shareholder voted in advance by proxy. In other cases, the virtual-only meetings were webcasts and shareholders had no opportunity to ask questions during the meeting. In these cases, presumably questions were limited to those that were submitted in writing in advance of the meeting.

• Concerns also were raised about possible cherry-picking of questions asked by shareholders and lack of transparency on questions asked. In one case, a company left approximately 10 minutes for Q&A and reportedly left shareholder questions unanswered. In another instance, it was reported that a company did not allow a proponent to speak on behalf of their proposal. 

The CII urged public companies to mitigate the log-in and connectivity issues by providing the ability for guests to listen to a meeting without logging in. The CII has historically not been a supporter of virtual-only meetings, taking a governance policy position that virtual meetings should be held only in connection with in-person meetings and then only as a tool to broaden shareholder involvement. In its letter, however, the CII acknowledged that virtual-only meetings had "become imperative" in light of the circumstances surrounding COVID-19, and that the ability to hold virtual annual meetings "has been a good thing at this moment of crisis."

The CII has taken the position that public company annual shareholder meetings, regardless of whether they are virtual or in person, "are public events and involve public disclosure, and prospective shareholders and other market participants should be able to listen."

The CII went on to encourage the SEC to complete its rulemaking for universal proxies and also to require proxy statement disclosure for companies holding virtual annual meetings to explain how companies are complying with state law rules about shareholder ability to participate in meetings. 

The SEC Investor Advisory Committee, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act to advise the SEC on regulatory priorities and initiatives to protect investors and promote investor confidence, discussed the matter of virtual-only meetings at its May 4 special meeting via webcast.

In his introductory remarks for the May 4 meeting, Chairman Jay Clayton noted that the SEC had acted quickly to allow public companies to switch to the virtual meeting format in the face of the health and safety concerns related to COVID-19 and, acknowledging that this would be a first for many public companies, encouraged a discussion about practices that could be considered by companies "to ensure shareholder engagement is appropriate in these settings."

In her remarks at the May 4 meeting, Commissioner Hester M. Peirce acknowledged that because state law governs so many of the issues related to the virtual shareholder meeting, she "hope[d] that feedback and discussions will be focused on the touchpoints with the federal securities laws."

The virtual meeting discussion was relatively brief, and the CII concerns were referenced. While some members of the committee thought a "wait and see" approach was best, others, citing the CII letter, expressed concern that the virtual meeting would not provide shareholders with the same ability to speak that they have at in-person meetings. 

Companies with virtual annual meetings still to come may want to consider some of the concerns that have been raised and coordinate with their remote meeting provider to put plans in place to address some of these recurring issues. 

Companies and virtual-only meeting platform providers should discuss and be prepared to address technology challenges that may occur, such as problems dialing into or logging into the meeting and difficulty asking questions or voting during the meeting. Information about where to find technical support should be readily available to shareholders.

In the event of a full-scale technology failure, companies should familiarize themselves in advance with alternatives, including the process for adjourning or postponing the meeting to a later date and time. Bylaws and applicable state corporate law must be consulted to determine the circumstances under which a meeting may be convened and adjourned (in the event of technical issues, for example), and whether and how to postpone the meeting in the event the meeting cannot be convened. In general, a postponement, unlike an adjournment, is treated as a new meeting date, triggering the requirements to set a new record date, mail a new notice, and provide notice to stockholders not less than 10 nor more than 60 days before the meeting date.

Companies should coordinate with platform providers to ensure that meeting materials are available online, as they would be at an in-person meeting. Shareholders should have access to the meeting agenda, rules of conduct and proxy materials through the virtual meeting platform. In addition, Section 219 of the Delaware General Corporation Law (like many state corporate codes) requires that if a virtual annual meeting is held, the list of stockholders entitled to vote at the meeting "shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting." Companies should check state law requirements to determine stockholder list disclosure requirements, if any.

Following the meeting, companies should consider whether to post a summary of questions asked and answers, particularly if some questions were not answered due to time constraints. Although not required by SEC rules, it demonstrates an effort to be transparent with investors.

Companies also should consider communications going forward with respect to future meetings. While many companies have already publicly stated that they plan to return to an in-person format next year, others are keeping their options open for a permanent shift to virtual meetings if they gain wide-spread acceptance and are generally allowed under applicable state law.

Proxy advisory services, including Glass Lewis & Co. and Institutional Shareholder Services Inc., have updated their policies to address the need for virtual-only annual meetings during the COVID-19 pandemic. While Glass Lewis historically has recommended a vote against governance committee members when a company intends to hold a virtual-only annual meeting, in light of the COVID-19 pandemic, Glass Lewis updated its virtual meeting guidelines to acknowledge that, given the current situation, virtual-only meetings provide compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings.

The Glass Lewis policy update stated that for the duration of the 2020 proxy season (March 1 through June 30), Glass Lewis will take into account the extenuating circumstance of the COVID-19 pandemic when applying its policy on virtual-only shareholder meetings, and review them on a case-by-case basis and will also note whether companies state their intention to resume holding in-person or hybrid meetings under normal circumstances.

Additionally, should these companies opt to continue holding virtual-only shareholder meetings in subsequent years, Glass Lewis stated that it expects future proxy statements to include robust disclosure concerning shareholder participation. Glass Lewis stated that following the pandemic, its standard policy on virtual shareholder meetings will apply in future years.

ISS does not have a policy to recommend votes against the directors of U.S. companies that hold virtual-only meetings. ISS recently issued policy guidance confirming no change to that approach and acknowledging that, while a preference may exist under normal circumstances to hold hybrid meetings instead of the virtual-only meeting, a virtual-only meeting under the circumstances of the pandemic could be "both necessary and desirable."

ISS encouraged companies that hold virtual-only meetings "to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish." 

Depending on how the remainder of the annual meeting season proceeds, and the number of companies indicating they will retain the virtual-only meeting format, we can expect to see a more focused push for SEC rulemaking or guidance on virtual-only meetings going forward. 

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LaDawn Naegle and Vicki Westerhaus are partners at Bryan Cave Leighton Paisner 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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