Navigating Proxy Season in Light of COVID-19
Given recent recommendations from the Center for Disease Control and the White House to avoid social gatherings in order to “flatten the curve” of disease advancement, issuers are placed in the difficult position of determining how to maintain compliance with federal proxy rules while not placing participants in harm’s way.
This alert is intended to provide additional guidance to companies faced with these challenges, and will be presented in two parts (with Part Two to follow). This Part One provides a summary of the aforementioned SEC Announcement, and is intended to serve as a mechanism to cause clients to begin evaluating their respective annual meeting strategy in conjunction with the SEC Announcement. Part Two will provide an analysis of state law and contract issues regarding replacing in-person annual meetings with virtual meetings, and will address similar topics to provide guidance to non-publicly traded companies.
Summary of SEC Guidance
In the SEC Announcement, the staff of the Division of Corporate Finance of the SEC begins by acknowledging the challenges faced by issuers of securities during the COVID-19 public health crisis, and implores all parties and intermediaries involved in the proxy voting process “to be flexible and work collaboratively with one another,” and to “cooperate with one another to facilitate issuers’ obligations to hold annual meetings and disseminate timely, accurate and clear proxy disclosures under the federal securities laws as well as to allow shareholders to exercise their voting rights under state law.”
The SEC Announcement then provides guidance (further described below) relating to (a) changing the date, time, or location of an annual meeting, (b) holding “virtual” shareholder meetings, and (c) dealing with the presentation of shareholder proposals under Rule 14a-8(h) of the Securities Exchange Act of 1934; all in light of the public health challenges posed by COVID-19.
How may an issuer reschedule or change the location/venue of its annual shareholders meeting, in order to provide a safe meeting while ensuring compliance with SEC regulations?
Many companies may have already mailed proxy materials to shareholders prior to the onset of the COVID-19 crisis, and given the sudden and profound nature of the onset of the crisis, such issuers may not have anticipated the drastic impact that the crisis would have on the ability to travel and gather for the annual shareholders meeting.
The Staff has therefore determined to take the approach that an issuer that has already mailed and filed its proxy materials can notify shareholders of a change in the date, time, or location of the annual shareholders meeting without an additional mailing to shareholders, provided that it promptly, and far enough in advance that the market is alerted to the change in a timely manner:
- Issues a press release announcing the change in time, date or location/venue of the meeting;
- Files an announcement as “definitive additional soliciting material” on EDGAR; and
- Takes all reasonable steps to inform other intermediaries in the proxy process (e.g., proxy service providers) and other relevant market participants (e.g., relevant national securities exchanges) of the change in time, date or venue of the meeting.
On the other hand, issuers that have not yet mailed their proxy materials are strongly encouraged by the Staff to include in the mailing a disclosure that the time, date and location/venue of the annual meeting are subject to change due to public health concerns in connection with the COVID-19 virus.
May an issuer hold “virtual” or “hybrid” shareholder meetings in order to provide a safe meeting while ensuring compliance with SEC regulations?
As an initial matter, it is important to note that whether or not an issuing company may hold a virtual meeting is purely a function of state law and the governing documents of the company (including its Certificate or Articles of Incorporation and Bylaws). Companies that are unsure whether they may hold a virtual meeting under applicable state law or its governing documents, or are unsure how to proceed with meeting applicable legal and regulatory requirements in a virtual meeting context, should consult their corporate counsel for definitive guidance. In Part Two of this article, we will undertake to provide some general guidance and a framework for navigating these questions.
The Staff recognizes that the desire of issuing companies to comply with “social distancing” recommendations will likely result in many issuers turning to virtual meetings in order to facilitate the annual shareholders meeting while not putting participants in harm’s way. It is critical that the issuing company wishing to conduct a virtual meeting provide “robust disclosures that facilitate informed shareholder voting,” the same as with an in-person meeting that permits shareholder participation through electronic voting.
The Staff expects an issuing company wishing to change meeting “location” from a physically in-person setting to a virtual one, to include in its respective definitive proxy materials a notification:
- Meeting the notification requirements described in the section immediately above regarding informing meeting participants of a change in time, date or location, including timely notification of shareholders, intermediaries and other market participants of the plan to change to a virtual format.
- Providing “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.”
Issuing companies that have already mailed their proxy materials are not required to send another mailing announcing the change to a “virtual” meeting format, provided that they meet the requirements described in the section immediately above regarding informing meeting participants of a change in time, date or location, including, in summary, a press release announcing the change, filing “definitive additional soliciting material” on EDGAR, and taking all reasonable action to inform intermediaries in the proxy process and other relevant market participants.
Should special accommodations be provided for the 2020 proxy season with respect to the presentation of shareholder proposals, in light of potential travel difficulties and sickness resulting from the COVID-19 virus?
Under Rule 14a-8(h) of the Securities Exchange Act of 1934, shareholder proposals must be presented by the in-person appearance of the shareholder proponent or representative at the annual meeting. In light of the challenges with travel and sickness that may be posed by COVID-19, the Staff has provided the following guidance with respect to shareholder proposals during the 2020 proxy season:
- The Staff is encouraging issuing companies, to the extent feasible, to facilitate the ability of shareholder proponents or their representatives to present shareholder proposals through alternative means, such as by phone; and
- To the extent that a shareholder proponent or representative is unable to attend the annual meeting due to various challenges related to COVID-19 (such as inability to travel), the Staff would consider such challenges to be “good cause” under Rule 14a-8(h) of the Securities Exchange Act of 1934 in the event that the issuer would attempt to exclude a proposal in the following two calendar years pursuant to Rule 14a-8(h)(3) of the Securities Exchange Act of 1934.
Therefore, as requested by the Staff, issuers should be flexible and work collaboratively with all parties during this unprecedented challenge. To the extent that any accommodation may present a legal challenge, issuers are encouraged to consult with their respective corporate counsel to navigate the contours of applicable law while taking a common-sense approach to ensure the safety and well-being of everyone affected.