As companies continue to incorporate technology into their corporate practice, at issue is whether this increases transparency with shareholders or shields management from liability.[1] Bylaws, state and federal securities laws statutorily require companies to hold an annual shareholder meeting.[2] During the meeting, shareholders elect directors, receive updates on company developments, and express concerns with management.[3]
Traditionally, these meetings are held in-person; however, an increasing number of companies are adopting virtual-only meetings.[4] Virtual-only meetings are held exclusively online without any in-person participation or physical location.[5] Shareholders simply log into a voting website using their unique code, and then cast their votes and/or ask the board questions.[6]
The benefits to this corporate practice are clear.[7] Companies streamline costs while increasing efficiency and shareholder participation.[8] For example, it eliminates the costs of arranging a physical meeting, such as venue, personnel, and travel costs.[9] Shareholders, who are otherwise unlikely to attend in-person meetings, are now more likely to participate because of increased accessibility.[10] Additionally, shareholders can submit concerns and questions before the virtual session.[11] This allows the board to preview their questions and concerns and therefore prioritize the agenda, eliminate duplicative items, and prepare comprehensive responses.[12]
Despite these benefits, some individual shareholders and even institutional investors have pushed back against the trend.[13] They argue that while in-person meetings may seem inefficient and even a superficial forum for communication between shareholders and the board, they are the only opportunity for actual transparency.[14] In comparison, virtual-only meetings provide management with excessive power to control the dialogue with shareholders, which, in turn, cuts shareholders out of the conversation.[15] Specifically, board members can screen shareholder questions and avoid answering difficult questions that they would otherwise be forced to answer at an in-person meeting; that is, they can avoid accountability.[16]
Indeed, in 2016, John Chevedden, an activist investor for HP Inc., launched a proposal calling for a shareholder vote to restore in-person annual meetings.[17] In a letter to the Securities and Exchange Commission (“SEC”), Chevedden argued, “A cloud meeting gives a company wide latitude to muzzle shareholders during the mandatory annual meeting.”[18] Similarly, the California Public Employees’ Retirement System, which is the largest U.S. public pension fund, dismissed virtual-only meetings, claiming that shareholders couldn’t effectively express their concerns to management absent face-to-face interactions.[19]
Furthermore, virtual-only meetings can create uncertainty for companies.[20] Shareholders can cast or change their votes at the last minute rather than submitting a proxy vote in advance.[21] Typically, shareholders who cannot attend the meeting, vote by casting their shares by proxy.[22] They can submit their proxy vote via mail, phone, or Internet before the set deadline, which allows companies to gauge whether their solicitation methods are effective before the actual meeting.[23] However, virtual-only meetings allow shareholders to login and vote last minute, which makes it more difficult for companies to make early determinations.[24]
Despite the stated concerns of shareholders and investors, the SEC has responded to proposals for in-person meetings by issuing no-action letters.[25] By doing so, the SEC reaffirms its prior position that management decides the format of annual meetings.[26] Accordingly, companies can ignore such proposals and continue virtual-only meetings.[27]
Although the SEC has proved lenient with respect to corporate governance of shareholder meetings, state governments have passed legislation on the issue.[28] Nearly half of the states have passed laws allowing for and governing virtual-only meetings; thus, before making the switch to virtual-only meetings, companies must first determine whether the proposed meetings will conform with the law of the state where the company is incorporated.[29] In Delaware, for example, a company can only hold its annual meeting virtually if it uses reasonable measures to verify the proxy status of a voter.[30] A company must also provide a voter with a reasonable opportunity to participate.[31]
Notwithstanding the controversy described above, companies continue to implement virtual-only meetings. In the 2017 proxy season, 163 publicly held companies switched to virtual-only meetings, compared to 122 in the 2016 proxy season.[32] These companies include major brands such as HP, Fitbit, Intel, Spring and GoPro.[33]
Considering the record number of companies that switched to virtual-only meetings last year, the 2018 proxy season may be an important indicator for the future of these meetings.[34] Following the trends from recent years, investors will probably express their disapproval for virtual-only meetings by voting against the directors who authorized such meetings.[35] Companies understand the critical role investors play in corporate governance through their voting powers; thus, many companies will likely decide whether to switch to virtual-only meetings depending on this year’s voting trends.[36]
[1] See Gretchen Morgenson, Meet the Shareholders? Not at These Shareholder Meetings, N.Y. Times (Mar. 31, 2017), https://www.nytimes.com/2017/03/31/business/corporate-virtual-shareholder-meetings.html.
[2] See Craig M. Garner & Chris G. Gessinger, Annual Meeting Handbook, Latham & Watkins LLP (2012), https://www.lw.com/thoughtleadership/annual-meeting-handbook-2012.
[3] Id.
[4] See Morgenson supra, note 1.
[5] Id.
[6] See Tatyana Shumsky, The SEC Backs “Virtual-Only” Annual Meeting Option, Wall Street J. (Jan. 12, 2017, 2:41 PM), https://blogs.wsj.com/cfo/2017/01/12/sec-backs-virtual-only-annual-meeting-option/.
[7] Id.
[8] Id.
[9] See Lisa Fontenot & Linda Dang, The Pros and Cons of Virtual-Only Shareholder Meetings, Law 360 (Nov. 29, 2016, 12:56 PM), http://www.law360.com.fordham.proxy.liblynxgateway.com/articles/866760/the-pros-and-cons-of-virtual-only-shareholder-meetings.
[10] Id.
[11] Id.; See also Robert Richardson, Virtual-Only Shareholder Meetings: Streamlining Costs or Cutting Shareholders Out, Harv. L. School F. of Corp, Governance and Fin. Reg. (Nov. 30, 2017), https://corpgov.law.harvard.edu/2017/11/30/virtual-only-shareholder-meetings-streamlining-costs-or-cutting-shareholders-out/.
[12] See Fontenot supra, note 5.
[13] See Shumsky supra, note 3.
[14] See Morgenson supra, note 1.
[15] Id.
[16] See Fontenot supra, note 5.
[17] See Shumsky supra, note 3.
[18] Id. (citation omitted).
[19] Id.
[20] See Steven M. Haas, et al., A Practical Guide to Virtual-Only Shareholder Meetings, Harv. L. School F. of Corp, Governance and Fin. Reg. (Nov. 17, 2017), https://corpgov.law.harvard.edu/2017/11/17/a-practical-guide-to-virtual-only-shareholder-meetings/.
[21] See Proxy Vote, Investopedia, LLC (2018), https://www.investopedia.com/terms/p/ proxy-vote.asp.
[22] Id.
[23] Id.
[24] See Haas supra, note 20.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] See Richardson supra, note 11.
[33] Id.
[34] See Haas supra, note 20
[35] Id.
[36] Id.
