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28 May 2018
For most companies, annual shareholder meetings are non-events, with little to no shareholder attendance. That's why the concept of virtual annual meetings—which allow shareholders to overcome the logistical and financial burdens of attendance in person—was originally viewed as a way to rejuvenate the concept of annual meetings. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it has been shareholders—the designated beneficiaries of the virtual annual meeting—that have raised objections to virtual-only meetings because they were viewed to insulate management and directors from shareholders, allowing management to avoid uncomfortable questions. (See this PubCo post and this PubCo post.) While the number of virtual-only annual meetings increased from 21 in 2011 to 155 in 2016 to over 212 in 2017, the criticism among some commentators and institutional holders has not abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. With that in mind, a group of interested representatives of retail and institutional investors, public companies, proxy advisors and legal counsel, known as The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, have developed a set of best practices designed to ensure that the needs of all constituents are satisfied—to "promote both the reality and the perception of scrupulous fairness."
According to the results of the ISS 2017-2018 global policy survey, almost 20% of investors thought either virtual-only shareholder meetings (where the meeting is held entirely online with no physical location) or hybrid shareholder meetings (where physical meetings are supplemented by real-time audio or video, with a variety of types of online participation by shareholders) were acceptable, and 8% thought neither were acceptable. However, 36% were fine with hybrid meetings, but not virtual-only shareholder meetings, and 32% were fine with either, so long as virtual-only meetings afforded the same shareholder rights as physical meetings. Among non-investors, 42% viewed either virtual-only or hybrid shareholder meetings to be acceptable without reservation. Many non-investors, however, did not agree with that view, with 22% finding hybrid meetings acceptable, but "virtual-only" meetings acceptable only if they provided the same shareholder rights as a physical meeting, and 15% did not approve of either. See this PubCo post.
The Committee first advocated that companies ensure, in the event the company elects to use any type of virtual format, that the meeting permit the exercise of all applicable shareholder rights, that procedures be adopted that are fair to all shareholders, and that the company recognize shareholder concerns regarding the conduct of the meeting. In light of the importance of providing equal access to all shareholders, the Committee recommended that, in deciding whether to use any type of virtual format, companies consider the following:
Notably, Committee members were split regarding the advisability of virtual-only—as opposed to hybrid—meetings.
Once a decision has been made to hold a virtual-only or hybrid meeting, the Committee advocated that the following principles apply:
There has been significant opposition to virtual-only annual meetings. The corporate governance policy of the Council of Institutional Investors provides that companies should use a virtual format for shareholders meetings "only as a supplement to traditional in-person shareowner meetings, not as a substitute. Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees."
Similarly, proxy advisor Glass Lewis' 2018 guidelines indicate that "[w]hen analyzing the governance profile of companies that choose to hold virtual-only meetings, we look for robust disclosure in a company's proxy statement which assures shareowners that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. Beginning in 2019, however, Glass Lewis will generally recommend voting against members of the governance committee of a board where the board is planning to hold a virtual-only shareholder meeting and the company does not provide such disclosure."
And, in 2017, the New York City Comptroller's Office advised that, in response "to the surge in public companies holding 'virtual‐only' annual meetings, the NYC Funds amended their voting guidelines…to affirm their expectation that companies hold 'in‐person' annual meetings and only hold 'virtual' meetings to supplement, not replace, in‐person meetings. In‐person meetings enable shareowners, regardless of their size, to have a face‐to‐face opportunity to engage and ask questions of senior management and directors in the presence of other investors at least once per year. Under the new guideline, the NYC Funds will vote against incumbent members of the governance/nominating committee at any company that holds a 'virtual‐only' annual meeting. This new guideline was [applicable] to all U.S. portfolio companies in 2018."
It is also worth noting that several shareholder proposals have been submitted, including some by the group associated with John Chevedden, to adopt a corporate governance policy to initiate or restore in-person annual meetings and to publicize this policy to investors. While the SEC staff has generally allowed omission of these proposals on the basis of the "ordinary business" exclusion, apparently some companies have, on receipt of the proposal, elected to revisit their policies and restore in-person meetings.
The Committee's recommendations for best practices are designed to allow the same level of dialogue as is typically available at in-person annual meetings, recognizing that modifications may be appropriate as governance practices evolve.
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (email@example.com). The Cooley LLP website can be accessed at www.cooley.com.
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