It is a truism to say that businesses must innovate or suffocate, and the ongoing tech revolution has only been accelerated by the COVID-19 pandemic. By necessity, more and more companies are moving their corporate functions and events online, leading to a host of challenges when it comes to ensuring shareholder oversight and participation. We asked Lenczner Slaght litigator Chris Yung to spell out the pitfalls and perils of virtual meetings and what they mean for shareholders, executive boards, and the transfer agents responsible for their organization and operation.
Do present regulations permitting online shareholder meetings distinguish between contested and uncontested meetings? What are some of the obstacles to holding contested meetings online, and how can interested parties overcome these hurdles?
Corporations should consult their governing statute and by-laws to determine the applicable rules regarding online meetings. Provided that an issuer is allowed to hold its meeting electronically the regulations do not formally distinguish between a contested and uncontested meeting (i.e., one is not more permitted than the other). But the regulatory considerations between the two will vary, and securities regulators are cognizant of the practical and logistical differences between them. When the COVID-19 outbreak began, the Canadian Securities Regulators issued general guidance on holding virtual and hybrid AGMs, but in respect of proxy contests, and other special types of meetings, the guidance was to contact the regulators themselves for a further discussion.
There are many practical obstacles to holding a contested online only meeting, and none had ever been held prior to 2020. On April 30, 2020, broadcasting company Tegna Inc. (a Delaware incorporated company), held what is regarded as the first contested online-only annual meeting, breaking new ground, and signaling the potential for such meetings to be held in future.
One of the most significant hurdles for a contested online-only AGM is the ability of the transfer agent to run such a meeting. The transfer agents are responsible for counting the proxies and acting as the meeting scrutineers. A contested meeting is necessarily more complex because there can be multiple proxy forms, and a contested meeting is more likely to have issues relating to ballots (i.e., votes cast at the meeting itself, as distinct from proxy votes that are cast in advance). Prior to 2020, transfer agents generally did not have the technical solutions available to run such a meeting. Where a contested meeting produces a clear winner (as happened in Tegna where the incumbent board clearly prevailed), potential logistical problems may not be important. But a close vote can lead to a painstaking review and count by the parties and their lawyers, where any faults in the online process can be grounds to toss out a result. Given these challenges, a transfer agent may have significant difficulty in ensuring confidence in the meeting’s integrity and outcome. By comparison, “hybrid meetings” (where the online participation supplements a physically held meeting), have far fewer logistical challenges and are much easier to organize.
How do hybrid meetings work? What are the advantages or disadvantages to using this approach rather than a purely online event?
Hybrid meetings are simply physical meetings where shareholders have the option to participate in person or electronically. Because there is still a physical meeting in a physical location, hybrid meetings offer the advantages of a virtual meeting (i.e., lowered costs and inconvenience for shareholder participation), but without the governance and other logistical drawbacks that arise from online-only meetings.
In the context of COVID-19 hybrid meetings also offer a way to overcome limitations particular to the pandemic. In 2020 travel restrictions, self-isolation and quarantine measures restricted the abilities of persons to freely travel across international and even domestic borders. Without the option of virtual participation, shareholders and proxyholders not present in the same venue as the meeting face heightened barriers to participation.
How can shareholders seeking to challenge or scrutinize the board or chair’s actions ensure that their right to participation is respected? In the absence of in-person meetings, can these rights be protected or are the board and chair mute opposition?
Companies and shareholders should be aware of the governance concerns associated with online-only meetings. In 2016, Lululemon Athletica Inc. made headlines when it announced it would be holding its annual meeting exclusively online. This came under heavy criticism from its founder, Chip Wilson, who was himself in a public dispute with the board at the time. In an editorial in the Globe and Mail, Mr. Wilson complained that questions to the board had to be submitted in advance and were vetted to allow only acceptable “soft ball” questions to be put forward. Since the meeting was held as a “voice only” webcast, shareholders were said to have lost a literal opportunity to look their management “in the eye”.
These governance concerns have been recognized by proxy advisors, Institutional Shareholder Services, and Glass Lewis, who provide influential voting recommendations. Prior to the COVID-19 pandemic, Glass Lewis had a policy of recommending that shareholders vote against directors who sit on governance committees of companies that adopt online-only meetings. When COVID-19 broke out, Glass Lewis recognized the extenuating circumstances required a revision to this policy, so for the 2020 proxy season it conducted its review on a case-by-case basis. The policy has since been made more flexible and will consider additional factors, such as whether an issuer has provided robust disclosure and assurances that shareholders will have the same rights and opportunities for participation as they would at an in-person meeting.
Another concern relates to the disenfranchisement of those who are less computer literate, as noted by Justice Fitzpatrick of the British Columbia Supreme Court in Glacier Media Inc. (Re), 2020 BCSC 591. The case concerned an extension to hold an annual meeting outside of the time limits under the Canada Business Corporations Act. Given the extraordinary circumstances of the COVID-19 pandemic, an extension was granted. In obiter, the Court noted that while certain companies had sought to hold their meetings online, these would not necessarily allow all shareholders the same opportunities for participation, noting that some shareholders may not even own a computer.
What advice do you have for clients seeking to hold virtual meetings? How can organizers deal with such issues as cybersecurity, communications, and accommodation of large numbers of users?
Logistical considerations on meeting design and technical considerations should be discussed with the transfer agent well in advance. In a virtual meeting there is a risk that technical difficulties may cause a meeting to be interrupted or may prevent it from commencing in the first place. Issuers should consider these and develop contingency plans that are communicated before the meeting. As with any online activity, cyber-attacks and hacking risks are present. These risks exist in the context of non-contested meetings as well, but the perceived risk in the contested meeting context is greater since the stakes at such meetings are significantly higher.
Do you anticipate online-only or hybrid shareholder meetings extending beyond the pandemic?
It has been said that COVID-19 has had the effect of accelerating several trends that were already underway when the outbreak hit, particularly as it relates to technology. We have seen this in the operations of the courts, and the conduct of shareholder meetings is no exception. Prior to the outbreak there was already a trend of issuers adopting the use of internet platforms for shareholder meetings. The pandemic has now given more issuers the incentive and opportunity to experiment with online meetings. The extent to which this will lead to a “new normal” where all meetings will be hybrid or online-only remains to be seen, but it is certain that now more than ever companies, shareholders, and their lawyers, should be aware of the issues arising from shareholder meetings in the online context.
Christopher Yung is a lawyer at Lenczner Slaght. Chris has a broad litigation practice, with a focus on commercial litigation, securities litigation, insolvency and restructuring, and shareholder disputes. Prior to joining Lenczner Slaght, Chris practiced with a leading international Canadian firm as a corporate transactional lawyer in Toronto and London, UK, specializing in mergers and acquisitions, corporate finance, and general corporate commercial matters.