As spring approaches, so do annual shareholder meetings for many public companies. Traditionally, these meetings were held in-person. However, due to fairly recent advances in technology, companies now have the option to hold these meetings exclusively online or by providing for online participation, which both offer advantages and disadvantages to shareholders and company leaders. Furthermore, not all state corporate statutes permit a virtual component, and those that do may impose specific requirements. With an increasing amount of public companies adopting virtual components, key stakeholders in today’s public companies should understand the advantages, disadvantages and any important practical and legal considerations to take into account- before deciding to take the virtual leap.
Virtual shareholder meetings
Unlike traditional, in person meetings, shareholder meetings with an online component may be conducted in two formats. In a totally virtual shareholder meeting, the meeting is held exclusively online, replacing the traditional in-person meeting entirely. A hybrid shareholder meeting still retains an in-person meeting at a physical location where shareholders are invited to attend, while also permitting shareholders to participate online remotely. In both formats, shareholders are more than passive internet observers, but rather can submit questions ahead of time and vote on matters in real time during meetings.
Advantages and benefits
There are a number of important advantages when considering shareholder meetings with a virtual component. First, is convenience. Shareholders need not travel to a single location to attend the meeting, but can participate from anywhere, thereby increasing “attendance” and participation in important business decisions. This convenience is also realized by busy directors and board members. Lower costs are also a significant benefit. Holding an online meeting reduces the usual costs incurred in the traditional format, including rooms and venue rentals, catering, and travel expenses for both shareholders and board members. Additionally, the online format permits questions to be submitted by shareholders ahead of time, which produces a better platform for the Q&A session because shareholder questions can be considered in advance and addressed more fully. Questions may also be submitted anonymously, which could allow shareholders to feel more comfortable asking questions. Having shareholder questions submitted in advance also gives the company more control over the proceedings, and reduces the chances that board members may be caught off guard by live shareholder questions. Finally, an online component promotes a technologically savvy appearance for the company.
Disadvantages and risks
The online component produces a variety of potential disadvantages. First, by abandoning or limiting an in-person format, remote participation reduces the face-to-face communication at these meetings, which could leave shareholders unable to confront company representatives directly. Another significant concern is company-favorable filtering of meeting issues. When virtual-only meetings permit shareholders to submit their questions ahead of time, this introduces the risk that a company will pre-screen these questions and avoid the more controversial inquiries. For the company, there is also the drawback of unpredictable voting. With a virtual component where voting occurs in real-time rather than by proxy, this increases the possibility of last-minute shareholder voting, and raises concerns for those companies that are used to receiving proxies ahead of time and predicting whether their proposals will pass before the meeting occurs.
Legal and practical considerations
For a company considering including an online component in its shareholder meetings, whether virtual-only or hybrid, the company should consider the following legal and practical considerations.
State statues. First, the company should determine whether online shareholder meetings are permitted in the company’s state of incorporation, and if so, if there are any limitations. A significant number of states, including Delaware, Ohio, California, and Texas (to name a few), all have statutes that permit virtual-only or hybrid shareholder meetings. However, even if permitted, not all state corporate statutes are uniform, and some statutes impose conditions intended to limit using this format. For example, the California statute requires that corporations obtain shareholders’ consent prior to a virtual-only shareholder meeting. Furthermore, some states preclude online meetings altogether.
General stock exchange requirements. The federal securities laws do not specifically restrict the manner in which meetings may be conducted, and the Securities and Exchange Commission takes the position that boards of directors can decide whether annual meetings should be virtual-only or in-person. While the major public stock exchanges (NYSE; Nasdaq) do not expressly prohibit companies from using virtual components in annual meetings, these exchanges might require other general conditions for respecting shareholders’ rights at any type of meeting. Such general requirements might be harder to satisfy for a company opting to implement virtual components. Accordingly, a company listed on a public exchange would be prudent to review any of the exchanges’ general rules and regulations, and determine if it could meet those requirements given the virtual format it intends to implement.
Internal governance. A company desiring to conduct a shareholder meeting with virtual components should also ensure that its governing documents (e.g., its articles of incorporation, certificate, bylaws) permit a virtual meeting. Company leaders would be well advised not to rely solely on older language in their governing documents, but instead to add specific permissions expressly allowing for virtual components.
Practical guidance. In consideration of the foregoing factors, interested constituents of public companies, institutional investors, and third-party firms providing virtual shareholder meeting services to companies, have all advocated best practices for those seeking to conduct virtual shareholder meetings. The goal of these practices is to provide transparency to shareholders, and include the following procedures:
- Clearly communicating the chosen meeting technology ahead of time, and ensuring accessibility by using a platform that will accommodate most, if not all, shareholders
- Testing the platform before going “live,” and providing technical support resources during the meeting
- Establishing procedures to validate meeting attendees as shareholders or proxyholders;
- Adopting and publishing principles for online participation ahead of the meeting
- Establishing reasonable guidelines for questions, including how shareholders can submit questions in advance, setting time limits for answering questions, and how questions and answers will be displayed during and after meetings. (For increased transparency, companies might also consider making publicly available all of those questions received before the meeting)
- Providing a specific forum during the meeting for shareholders to present proposals
- Recording the meeting on a public website for a specific and reasonable period of time
This list is not exhaustive, and a company may need to take additional steps to ensure the desired transparency of its shareholders.
With technological advances, the option of virtual meetings will likely become more normalized for today’s public companies. Therefore, prudent company leaders should understand the advantages, disadvantages, and legal and practical considerations of using a virtual format before deciding whether this option makes sense. Furthermore, these leaders should ensure meeting transparency by learning from other companies and following available practical guidance.