As the Covid-19 pandemic continues to disrupt normal business operations and impede a third proxy/annual meeting season, the SEC has issued guidance regarding compliance with the federal proxy rules for upcoming annual meetings considering health, transportation, and other logistical issues raised by the spread of Covid. Layering onto the guidance directed at extra-ordinary circumstances is the growing underlying belief that virtual and hybrid meetings are here to stay and public America must navigate a new road map.
On January 19, 2022, the SEC Divisions of Corporation Finance (“CorpFin”) and of Investment Management issued guidance related to meeting the requirements of the federal proxy rules for holding annual meetings in light of Covid disruptions. In addition to the specific guidelines, the SEC strongly encourages all market participants, including broker-dealers, transfer agents, and proxy service providers to be flexible and work collaboratively with one another with the goal of facilitating a company’s obligation to hold an annual meeting.
As I’ve written about many times, the regulation of corporate law rests primarily within the power and authority of the states. However, for public companies, the federal government imposes various corporate law mandates including those related to matters of corporate governance. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies.
Federal proxy regulations give effect to existing state law rights to receive notice of meetings, the disclosures required in those notices, the obligations of various parties including proxy solicitors and advisors, and the ability of shareholders to include proposals (see HERE). Amended rules governing proxy advisors and solicitors were adopted in July 2020, but since that time the SEC has announced that it would not enforce these rule changes and has proposed additional amendments to roll back the 2020 changes (see HERE). The SEC has also recently passed rules requiring the use of universal proxy cards (see HERE).
Changes to Date, Time or Location of Meeting
The new SEC guidance is focused on certain logistical issues that companies may face as a result of the Covid-19 pandemic. Many companies are considering late in the process changes to the date, time or location of their annual meeting to accommodate for Covid concerns. In that regard, the SEC will allow a company that has already mailed and filed its definitive proxy materials, to notify shareholders of a change in the date, time, or location of its shareholder meeting without mailing additional soliciting materials or amending its proxy materials if it:
- Issues a press release announcing the change;
- Files the announcements as definitive additional soliciting material on EDGAR; and
- Takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of the change.
The SEC requires that a company take prompt action once it determines to make a change. If a company has not yet filed and mailed its definitive proxy materials, it should consider additional disclosures regarding the possibility that the date, time, or location of the meeting will change due to Covid.
The ability to conduct a “virtual” meeting is governed by state law, where permitted, and the issuer’s governing documents. The same disclosures that facilitate informed shareholder voting are required whether a meeting is in-person, virtual or hybrid (i.e., an in-person meeting that also permits shareholder participation through electronic means).
To the extent a company intends to conduct a virtual or hybrid meeting, the SEC expects the company to notify its shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the virtual or hybrid meeting, including how shareholders can remotely access, participate in, and vote at such meeting. For companies that have not yet filed and delivered their definitive proxy materials, such disclosures should be in the definitive proxy statement and other soliciting materials. Companies that have already filed and mailed their definitive proxy materials do not need to mail additional soliciting materials (including new proxy cards) solely for the purpose of switching to a virtual or hybrid meeting if they follow the steps described above for announcing a change in the meeting date, time, or location.
Presentation of Shareholder Proposals
Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages companies, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone. For more on submittal of shareholder proposals in advance of a meeting, see HERE.
Moreover, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to Covid, the SEC would consider this to be “good cause” under Rule 14a-8(h) should the company assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.
Delays in Printing and Mailing of Full Set of Proxy Materials
The SEC is aware that some companies may be encountering delays in the printing and physical mailing of the full set of their proxy materials for their upcoming shareholder meetings due to the impact of Covid on the facilities and staffing of their proxy service providers or transfer agents. As result, some companies would prefer to furnish their proxy materials through “notice only” provisions in the proxy rules. However, the notice only provisions require a company to send the notice of the electronic availability of the proxy materials and provide intermediaries (such as brokers and dealers) at least 40 calendar days before the meeting. The notice only provisions also require a company to provide paper copies of proxy materials to requesting shareholders, in a timely manner.
Although the SEC encourages all companies to abide by the rules, even if it means delaying a meeting, it will not object to the use of notice only provisions even if not in complete technical compliance with the rules. However, any such use would need to be as a result of unavoidable delays or difficulties resulting from Covid. In addition, the company would need to provide shareholders with proxy materials sufficiently in advance of the meeting to review these materials and exercise their voting rights in an informed manner.
Industry Views on Virtual and Hybrid Meetings
The topic of virtual and hybrid meetings has received a lot of attention recently as the 2022 proxy season is gearing up. Views are definitely split. Some shareholders prefer the easier attendance of a virtual meeting, while others are old-school and want to look a director in the eye. An overarching concern was that the 2020 virtual annual meeting season missed the mark in ensuring that shareholders’ rights and participation were properly satisfied. Last year a lot of progress was made on improving the process, and this year should be even better.
Notably, the majority of shareholders of Cracker Barrel voted to require the company to hold its annual meeting virtually. The Vanguard family of funds has indicated that it will support both virtual only and hybrid meeting structures as long as: (i) meeting procedures are disclosed ahead of the meeting; (ii) a formal process is in place to allow shareholders to submit questions to the board; (iii) real-time video footage is available and attendees can call into the meeting or send a recorded message; and (iv) shareholder rights are not unreasonably curtailed. Glass Lewis has also been outspoken on the topic indicating that virtual meetings are fine as long as great care is taken to protect shareholder communication and participation (including technical support), especially in the Q&A process. Where a company falls short, Glass Lewis will hold the board accountable recommending “against” votes.
Similarly, many articles have been published offering advice for handling the Q&A process in a virtual or hybrid meeting format. Suggestions include inviting shareholders to submit questions in advance via email and in any event committing to answering each and every shareholder question and posting the questions and responses on the company website.
Although hybrid meetings are gaining in common usage, from a company perspective it is not an easier option. Planning a hybrid meeting requires planning two simultaneous events including the logistics associated with an in-person meeting and the technological necessities of a virtual meeting.
Companies must also consider state law requirements. Many state corporate statutes require in-person meetings, although Delaware, the most popular public company state of domicile, offers a great deal of flexibility on meeting formats, including virtual meetings.