Matthew J. Carter
Washington, D.C. +1 202 261 3395
Given the recent recommendations for social distancing in connection with COVID-19 as well as stay-at-home orders that have been implemented in most states, many public companies, including business development companies (“BDCs”), and registered closed-end funds will need to address how best to satisfy their obligation to hold an annual stockholder meeting while complying with these restrictions. Companies and funds may elect to hold a “virtual-only” stockholder meeting or a so-called “hybrid” stockholder meeting (i.e., an in-person meeting that also permits stockholder participation through electronic means) in line with recent SEC relief that eases compliance with federal securities laws governing annual meetings.
As a threshold matter, the ability to conduct a virtual-only or hybrid stockholder meeting is governed by state law and a company’s or fund’s governing documents. Any consideration of a virtual-only or hybrid stockholder meeting should begin with a review of state law and the corporate bylaws or equivalent organizational documents to ensure that a virtual-only or hybrid stockholder meeting is permissible for that company or fund. Delaware and Maryland each permit virtual-only and hybrid stockholder meetings, and a recent executive order in New York temporarily permits virtual-only stockholder meetings for New York corporations as well.
Compliance with state and local laws must also be considered in connection with any decision to hold a hybrid or in-person stockholder meeting as certain states and localities have issued orders restricting certain kinds of meetings. In addition, these state and local orders may also implicate employment law issues if an employee of the company or fund will be required to be present at an in-person or hybrid meeting.
With respect to in-person board meetings for registered investment companies and BDCs, the SEC recently granted an exemption from the requirement under the Investment Company Act of 1940 (the “1940 Act”) that certain items be approved at an in-person board meeting, such as approval of investment advisory agreements, approval of principal underwriting agreements, approval of 12b-1 plans and approval of a change in independent auditors. While such items can now be approved at telephonic or videoconference board meetings, investment companies’ and BDCs’ boards must also ratify such approvals at a subsequent in-person meeting.
SEC Guidance regarding Changing Date, Time or Location of Stockholder Meeting, or Changing to a Virtual Meeting
As noted above, recent SEC guidance, issued on March 13, 2020, provides clarification on the SEC Staff’s position with respect to virtual-only and hybrid stockholder meetings, and provides simplified disclosure for those companies and funds that have already filed and mailed their definitive proxy materials.
For companies and funds that have already filed and mailed their definitive proxy materials, the SEC guidance provides that such companies and funds do not need to mail additional soliciting materials or amend their filings solely for purposes of amending the date, time or location of their annual stockholder meetings, or to convert their annual meeting to a virtual-only or hybrid meeting. Instead, the notice of change can be provided by complying with the following three steps: (i) issuing a press release announcing the change of the date, time or location of the meeting, or a change to a virtual-only or hybrid meeting; (ii) filing such announcement as definitive additional soliciting material on EDGAR, and (iii) taking all reasonable steps to inform other intermediaries in the proxy process (e.g., proxy service providers) and market participants (e.g., securities exchanges) of the change. The SEC guidance clarifies that such actions should be taken promptly after the decisions has been made to change the date, time or location of the meeting, or to change to a virtual-only or hybrid stockholder meeting.
For companies and funds that have determined that they will hold virtual or hybrid meetings and have not yet filed and mailed their definitive proxy materials, the disclosures with respect to a virtual-only or hybrid meeting should be contained in the definitive proxy statement. The SEC guidance also notes that companies and funds should consider including in their proxy materials a statement to the effect that the meeting may be changed to a virtual-only or hybrid meeting and also describing how stockholders will be notified of such change.
For more information, see the SEC’s Guidance issued on March 13, 2020 and updated on April 7, 2020. See also Dechert OnPoint, Considerations for Board and Shareholder Meetings, initially published on March 16, 2020 and updated through April 7, 2020.
State Law Considerations in Delaware, Maryland and New York
As discussed above, the ability to conduct virtual-only or hybrid stockholder meetings is governed by state law. Delaware, Maryland and New York each currently permit virtual-only or hybrid meetings. If a company or fund is not organized in these states, it should confirm whether its state of organization permits virtual-only or hybrid stockholder meetings.
Under Delaware law, virtual-only and hybrid stockholder meetings are permitted so long as the company (or fund, if it is organized as a corporation): (i) implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder; (ii) provides such stockholders or proxyholders with a reasonable opportunity to participate in the meeting and vote on applicable matters; and (iii) keeps a record of any vote or action of stockholders or proxyholders that occurs. These conditions for a virtual meeting are in additional to the other Delaware law requirements applicable to stockholder meetings, including the requirement to have an inspector of elections and to have a stockholder list available for viewing for stockholders participating in the meeting.
The state of Delaware has also relaxed its notice requirements for Delaware corporations that wish to change from an in-person stockholder meeting to a virtual-only stockholder meeting. If a public company has already scheduled an in-person meeting and wishes to change the meeting to a virtual-only meeting, Section 232 of the Delaware General Corporate Law (“DGCL”) normally requires the corporation to notify its stockholders via either mail, courier service or email of such change. However, the relaxed requirements permit notification of the change by filing a document to that effect with the SEC and issuing a press release to be promptly posted to the company’s website. Moreover, if it is impracticable to convene a stockholder meeting due to COVID-19, the meeting may be adjourned to later date or time, to be held by remote communication, if the company provides notice of the date, time and means of remote communication in the same manner described in the preceding sentence.
Under Maryland corporate law, if the board is authorized by the charter or bylaws to determine the place of annual stockholder meetings (as is typically the case), the board may determine that the meeting “may be held solely by means of remote communication.” Similar to Delaware, Maryland law requires that corporations, in connection with a virtual-only or hybrid stockholder meeting: (i) implement reasonable measures to verify that each person considered present and authorized to vote at the meeting is a stockholder or proxy holder; (ii) implement reasonable measures to provide such stockholders and proxy holders a reasonable opportunity to participate in the meeting and to vote on matters submitted to stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with the proceedings; and (iii) in the event any stockholder or proxy holder takes action at the meeting, maintain a record of the vote or other action. In Maryland, an inspector of elections is only required if the company’s or fund’s governing documents require an inspector of elections. In a distinction from Delaware law, Maryland corporate law requires that a corporation “provide a place for a meeting of the stockholders.” Practitioners generally view that providing a physical location to access a virtual stockholder meeting would meet this requirement. For example, it would be reasonable to conclude that setting up a physical location for stockholders and proxy holders to make use of a computer (provided by the company) and log into the virtual meeting software should be sufficient. In disclosure in a proxy statement or subsequent press release, Maryland corporations should consider disclosing that a physical location for the virtual-only meeting is available upon advance written request, and that directors and management will not be present at the physical location.
On Mach 20, 2020, the Governor of New York issued an executive order that permits virtual-only stockholder meetings until April 19, 2020 by suspending provisions of the New York Business Corporation Law that require meetings of stockholders to be noted and held at a physical location, and that require prior notice of annual meetings and certain adjournments. Practically, such order has the effect of permitting virtual-only meetings for New York corporations, and allowing New York corporations that have already provided notice of an in-person or hybrid stockholder meeting to switch to a virtual meeting without complying with a minimum notice period. Should the COVID-19 outbreak extend beyond April 19, 2020, it is expected that the Governor of New York would extend the time period included in such relief.
Proxy Advisory Firms and Other Considerations
Proxy advisory firms have traditionally been opposed to virtual-only stockholder meetings, by taking the view that such virtual meetings do not provide an adequate ability for stockholders to interact directly with management and directors and they might not allow for stockholders to have all of their questions answered. In light of concerns related to COVID-19, Glass Lewis, one of the larger proxy advisory firms, has explicitly relaxed its policy with respect to virtual meetings, noting that it will generally refrain from recommending to vote against members of the governance committee of a company holding a virtual-only meeting, provided that the company or fund discloses, at a minimum, its rationale for holding a virtual-only stockholder meeting, including citing COVID-19. Glass Lewis indicated that this policy would be in place for meetings occurring on prior to June 30, 2020, after which its historical policy on virtual stockholder meetings would apply, even if the COVID-19 outbreak continues. Glass Lewis’s historical policy generally requires robust disclosure in the proxy statement regarding stockholder participation and has provided illustrative examples of what it considers acceptable disclosure.
ISS, another influential proxy advisory firm, has also relaxed its policy with respect to virtual-only meetings. In recent guidance, ISS announced that virtual-only may be both necessary and desirable in the current situation, and stated that in the markets in which the ISS benchmark policy discourages virtual-only meetings, and where a virtual-only meeting is permitted by law and without requiring any amendment of bylaws, it will alter its policy and not make adverse vote recommendations against companies that hold virtual-only meetings. ISS noted that if boards opt to hold virtual-only meetings, they should disclose clearly the reason for their decision and strive to provide stockholders with meaningful opportunity to participate as fully as possible, including being able to ask questions of directors and management and engage in dialogue if they wish.
In addition to robust disclosure in regard to stockholder participation in virtual or hybrid meetings, companies and funds should also consider building out a more robust meeting script and rules of conduct in connection with a virtual-only stockholders meeting. In light of the requirements under state law and the emphasis by proxy advisory firms with respect to stockholder questions, consider formalizing a different process for submitting stockholder questions through the virtual meeting software and including language in the meeting script regarding the Q&A session.
SEC Order regarding Board Approval of Certain Items under the 1940 Act
A recent SEC order, originally issued on March 13, 2020 and extended and amended on March 25, 2020, permits registered investment companies’ and BDCs’ boards to approve certain items without an in-person meeting provided that certain conditions are met.
Under normal circumstances, the 1940 Act requires that certain board approvals take place at an in-person meeting. Pursuant to the SEC Order, registered investment companies, BDCs, and their investment advisers and principal underwriters are exempt from in-person approval requirements with respect to:
To be eligible for such relief, the following conditions must be met: (i) reliance on the order must be necessary or appropriate due to circumstances related to current or potential effects of COVID-19; (ii) all directors must participate in the meeting through a medium whereby they are able to hear each other simultaneously during the meeting (i.e., either teleconference or videoconference may be used); and (iii) the board, including a majority of the directors who are not interested persons of the registered management investment company or BDC, must ratify the action(s) taken pursuant to this exemption at the next in-person meeting (whenever that may be). The foregoing relief applies to approvals in the time period from March 13, 2020 to August 15, 2020.
Companies and funds that wish to approve these items via telephonic or videoconference board meetings should ensure they create compliance reminders for the ratification that must occur at the next in-person board meeting, which may be a substantial time in the future.
For more information, see the SEC’s Order issued on March 13, 2020, and amended and extended by the SEC’s Order issued on March 25, 2020.
SEC Guidance regarding Signature Requirements
Before or at the time a document with a conformed signature is filed through the EDGAR system, Rule 302(b) of Regulation S-T requires that such document be manually signed and that electronic filers must retain such documents for a period of five year and furnish copies to the SEC upon request. Given difficulties in complying with this requirement in light of health, transportation and other logistical issues related to COVID-19, the SEC staff has recently issued guidance easing this requirement.
The revised conditions of Regulation S-T Rule 302(b) require the following: (i) the signatory must retain a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature, and provide such document to the filer for retention as promptly as reasonably practicable; (ii) the document must indicate the date and time when the signature was executed; and (iii) the filer must establish and maintain policies and procedures governing this process.
For more information, see the SEC’s Guidance issued on March 24, 2020.
 See § 211(a)(2) of the DGCL.
 See §§ 219 and 231 of the DGCL.
 See Tenth Modification of the Declaration of a State of Emergency for the State of Delaware Due to Public Health Threat, available at https://governor.delaware.gov/health-soe/tenth-state-of-emergency/.
 See § 2-503(a) of the Maryland General Corporation Law (“MGCL”).
 See § 2-503(c) of the MGCL.
 See § 2-503(a)(2) of the MGCL.
 See Executive Order No. 202.8, available at https://www.governor.ny.gov/news/no-2028-continuing-temporary-suspension-and-modification-laws-relating-disaster-emergency. See also New York Business Corporation Law Sections 605(a), requiring meetings of stockholder to occur at a place, and 605(a)-(b), requiring prior notice of annual stockholder meetings and certain adjournments.
 See Immediate Glass Lewis Guidelines Update on Virtual-Only Meetings due to COVID-19 (Coronavirus), dated March 19, 2020, available at https://www.glasslewis.com/immediate-glass-lewis-guidelines-update-on-virtual-only-meetings-due-to-covid-19-coronavirus/
 See ISS Global Policy Board, Impacts of the COVID-19 Pandemic, dated April 8, 2020, available at https://www.issgovernance.com/file/policy/active/americas/ISS-Policy-Guidance-for-Impacts-of-the-Coronavirus-Pandemic.pdf