How should private companies hold shareholder meetings in light of Covid-19 and social distancing requirements?
Shareholder meetings serve two key functions. First, they allow the company to take decisions which require shareholder approval. Second, they are a good opportunity to communicate with shareholders. At shareholder meeting the board will report on the business of the company and shareholders will have an opportunity to ask questions. There is also the opportunity to discuss the direction of the company. In short, it is the main opportunity for shareholders to contribute their views on their investment. Therefore, even those companies that are not required to hold regular shareholder meetings may still wish to do so. We are advising businesses where shareholder relations are somewhat strained and consequently it is difficult to take commercial decisions swiftly which is more important now than ever before.
Communication is critical at this stage and we would advise all companies to engage in regular communication with their shareholders, to keep them up to date, to inform them of how the business is doing and to seek to understand whether there may be any appetite for additional investment.
Although a physical meeting of shareholders is not compulsory for private companies (unless the Articles of Association say otherwise), companies have a number of options to consider when it comes to holding shareholder meetings. Although the rules on social distancing are relaxing, private companies may not wish to put shareholders at risk by holding a physical meeting.
Option 1 – Not holding a shareholder meeting
This option has the advantage of simplicity for many private companies. If there is no pressing business that requires a shareholder meeting, then it may be easier not to call one until social distancing rules have been relaxed enough for physical shareholder meetings to be held.
On the downside, it means that unless electronic or online meetings are called, or information is circulated, shareholders may not be informed about the state of the company. It also removes an important forum in which to express their concerns about the company. In addition, this option may not be possible if a company’s Articles of Association require it to hold a shareholder meeting.
Option 2 – Use proxies
If a company has more than one shareholder, then the minimum number of persons who must be present at a shareholder meeting is two (required by legislation) or more if specified in the company’s Articles of Association. Provided this minimum number is present the meeting can be validly held. A number of organisations have suggested that companies should hold their meetings by having two people present and requiring all other shareholders to appoint one of those people as their proxy. There is even the suggestion that any shareholders, beyond the minimum required for quorum, who attempt to attend the meeting should be refused entry.
This option will allow the company to hold a valid meeting and to pass necessary shareholder resolutions but does not address the problem of shareholder communication.
If this option is chosen, the board of directors should explain the situation and the planned arrangements for the meeting. They should make clear that no shareholder will be permitted to attend the meeting, other than the minimum number required (who should be chosen in advance) and should encourage shareholders to appoint a proxy using a proxy form sent by the board. Shareholders may appoint a proxy by specifying a title such as the Chair of the meeting so that they can be sure that the person who is their proxy will be present.
Option 3 – Hold a virtual or hybrid shareholder meeting
The Companies Act 2006 allows shareholders to attend shareholder meetings by electronic means so long as all participants can see, be seen, hear, and be heard by all other participants. This means that shareholder meetings could be conducted entirely remotely (a virtual meeting) or with some shareholders physically present and others attending remotely (a hybrid meeting).
In 2016 Jimmy Choo held the first fully electronic AGM in the UK by a listed company. Many other plcs put forward their proposals to change their Articles of Association. However, fully electronic meetings as opposed to hybrid meetings were not embraced by the Investment Association at the time who said it was a significant concern for shareholders. Some commentators have argued that there is a conflict between sections 311 and 3A of the Companies Act 2006 which require a place of meeting but also allow electronic communications at such meetings. Others take the position that if a company amends its Articles of Association to specifically permit virtual meetings, then this would be acceptable.
The BEIS has issued guidance for listed companies in light of Covid-19 to enable them to hold AGMs which are compliant with the Companies Act 2006. One suggestion is to have one shareholder act as a proxy for another shareholder and then only one individual is required to form a quorum. The London Stock Exchange is backing temporary measures to allow listed companies to hold their AGMs electronically.
We would recommend an amendment to your Articles of Association to take the opportunity to hold virtual meetings even if this is not your current intention. In any event, a hybrid meeting where the minimum number of shareholders required for quorum physically attend the same place (while maintaining social distancing), and the remainder of the shareholders attend remotely is also a sensible option.
If you choose to hold a virtual or hybrid meeting, it is essential that the company ensures that the technology is available to facilitate a successful meeting. This has two aspects. First, the company must ensure that the meeting is hosted on a stable platform which will allow all shareholders to participate in the meeting and that will enable the meeting to occur without interruption due to technical issues. It may also be sensible to have some system in place to allow the chairman to mute participants so the meeting is not disrupted by competing voices (though they should also keep in mind that all shareholders should have a chance to ask questions and express their opinions). Second, the company should consider whether shareholders have the technology necessary to participate in the meeting. This includes adequate WiFi and other computer systems to attend the meeting.
As with the proxy meeting option, the board should explain how the meeting will be held and make clear that shareholder will not be able to attend the meeting in person (other than those required to meet quorum).
Option 4 – Use written resolutions
Private companies may pass shareholder resolutions using the written resolution procedure. Under this procedure the board circulates the text of a proposed shareholder resolution in writing via mail, courier or email to every shareholder who is eligible to vote on the resolution. Each shareholder can then vote for the resolution by signing a copy of the resolution and returning it to the company within a specified period (usually 28 days). The resolution is passed as soon as shareholders together holding at least the required number of shares to pass the resolution return the signed resolution.
This solution allows a company to make decisions that require shareholder approval without any of them needing to be in the same room. This is therefore the safest way to conduct company business. However, as with options 1 and 2 it does not afford shareholders the opportunity to engage with the board.
A key component in using the written resolution procedure is the circulation of a comprehensive note from the Board to explain the solutions and the reasons why they are being proposed and why shareholders should vote accordingly. This should also assist in avoiding delays as the quicker shareholders respond, the faster the resolution can be passed.
Why you should maintain good shareholder communication
Maintaining engagement with shareholders is always important, particularly when a company is facing challenges. The company belongs to its shareholders and so there is a moral duty, if not always a legal duty, to keep them informed of the state of their company.
In addition, there are practical reasons for ensuring high levels of shareholder engagement during times of crisis. Companies facing difficulties may need to conduct significant transformations of the business. This may require approval from the shareholders due to the law, the Articles of Association or a shareholders’ agreement. Shareholders are more likely to agree to these changes if they believe the board is being open with them and/or including them in the decision-making process.
Similarly, the company may need to raise money to survive the crisis. Existing investors are often an easier source of further capital than third parties. They already have a stake in the success of the company and have been convinced that it is a good investment. However, they are unlikely to contribute further capital if the board does not communicate with them. A lack of communication means they may not think they have sufficient knowledge to make further investment. Further, investing is often an emotional decision. Shareholders may feel undervalued if the board only contacts them when the company is trying to raise money. Consistent communication increases shareholder confidence which may be key to company survival.
Shareholder communication can be maintained in a number of ways: updates via email or letter, online Q&A sessions, and information on the website. In addition, while entirely virtual shareholder meetings may not be appropriate for passing shareholder resolutions, they can be a useful forum for communicating with shareholders and addressing their concerns. They key to shareholder communication is less about the method of communication and more about the mindset that the company belongs to the shareholders and directors should bear this in mind in their decision making.