Shareholder meetings – time for a change?

Background

On 28 January 2021, GC100 issued a discussion paper called “Shareholder Meetings – Time for a Change?”

GC100 represents general counsel and company secretaries working in FTSE 100 companies. Its aim is to engage with government, regulators and policy makers to provide practical and business-focused input on law and regulation which affects the largest UK listed companies. Therefore, points made by GC100 are quite likely to be reflected in law and practice eventually and so should be noted by all as signals of best practice.

Summary

GC100’s view is that the current AGM regime should be reviewed so that the positive experiences at some AGM’s in 2020 can be extended to benefit more companies, their shareholders and other stakeholders. In particular, GC100 would like to:

• encourage the government to amend the Companies Act 2006 (CA 2006) to ensure that in addition to hybrid meetings (which preserve the physical meeting but give flexibility to shareholders in deciding how to attend), virtual meetings are expressly permitted, thereby providing statutory legal certainty of the validity of a meeting to any company considering amending its articles of association to permit virtual meetings;
• work together with the government, investor bodies and the Financial Reporting Council (FRC) on a code of best practice for listed companies wishing to permit virtual participation in their shareholder meetings which addresses areas of shareholder concern such as engagement with the board and how questions should be addressed - the discussion paper includes a proposed draft of such a code (Code of Best Practice);
• secure the support of investor bodies and the FRC for listed companies to have the flexibility to hold AGMs in the way that they consider are in the best interests of their shareholders, such as by being able to choose between holding a physical AGM, a hybrid AGM, or a fully virtual AGM (in line with the Code of Best Practice) in the future; and
• open a debate on the value of further innovation in shareholder and stakeholder engagement, such as by encouraging companies to hold additional shareholder and/or stakeholder engagement sessions that are not held concurrently with the formal business of an AGM (for example, after the notice of meeting has been sent, but before the deadline for proxy forms to be lodged and the AGM is held).

The Fladgate view

Fladgate endorses the recommendations of the discussion paper and, in particular, the key point that a company should have ability to choose to hold the sort of meeting that is best suited to itself and its shareholders.

It is widely recognised in many spheres of life that one benefit of the Covid crisis has been to demonstrate that business can function in a virtual arena. There are many points one can make in favour of virtual and, especially, hybrid meetings and these are explained further below.

However, there remains some legal uncertainty as to whether virtual shareholder meetings are, in fact, permitted under CA 2006. We therefore agree with GC100 that the government should amend CA 2006 to ensure that meetings are expressly permitted to be held by electronic means (as is currently provided on a temporary basis in the Corporate Insolvency and Governance Act 2020 (CIGA)) to remove this uncertainty. The ability granted by CIGA to hold virtual meetings irrespective of what a company’s articles say cannot be extended beyond 5 April 2021 without a change in the law and so action to change this is needed urgently.

The purpose of shareholder meetings

Any debate about shareholder meetings must acknowledge that a shareholders meeting and, in particular, an AGM fulfils two purposes i.e. being: (1) the meeting at which legal approvals are obtained for various corporate matters; and (2) a shareholder engagement event enabling shareholders to question and hold to account the board of directors and, at an AGM the chairs of the company’s committees. The Code of Best Practice recognises this important dual role.

The current position

In response to the difficulties in holding shareholder meetings during the Covid crisis, CIGA temporarily suspends certain shareholder rights, such that shareholders do not have the right to: (i) attend a shareholder meeting in person; (ii) participate in the meeting other than by voting; or (iii) vote by any particular means; so as to enable virtual meetings to take place for a limited period. The period during which CIGA permits virtual meetings irrespective of a company’s articles of association has been extended to 30 March 2021, but it cannot be extended beyond 5 April 2021 without a change in the law.

The view of institutional shareholders

Research has shown the majority of FTSE 350 companies’ articles of association do not expressly permit either hybrid or virtual shareholder meetings. However, there was an increase in 2020 in the number of companies proposing amendments to their articles of association to permit hybrid (but not virtual) meetings.

Previously the groups representing institutional shareholders such as the Investment Association (IA) had voiced opposition to both hybrid and virtual meetings, but it seems that such institutional opposition to hybrid meetings is reducing. The IA considers that it is harder for participants to identify the views of fellow participants in a virtual-only format, and to register agreement (or disagreement), and also considers that companies who adopt a “virtual-only” approach may also risk giving the impression that they are attempting to filter questions or participation of shareholders and do not want to be subject to the questions of their shareholders. For this reason, the IA is supportive of changes to articles of association to allow virtual meetings only where the company has provided an assurance that these meetings should only be used when physical meetings are restricted by government regulations or guidance.

The case for hybrid (and virtual) meetings

The discussion paper includes the following comments (all which we agree with):

• Concerns about shareholders having the ability to register their disagreement with the Board are best addressed by companies themselves demonstrating the benefits of a virtual or hybrid meeting for their particular shareholder base.
• It is possible to adapt effective moderation of the conduct of meetings into a virtual or hybrid AGM format.
• It is vital that companies are transparent in how they manage the Q&A process. A company could post answers to all submitted questions on the company website or set out reasons as to how and why questions are grouped or a tailored approach is adopted.
• The attendance at physical AGMs traditionally represents a very low percentage of a company’s issued share capital. This is likely to be because many shareholders are overseas or find it too difficult to attend meetings during a working day. The ability to hold a hybrid or virtual AGM should increase the number of shareholders attending the AGM and engaging with the Board.
• As with physical meetings, security measures must be finely tuned to ensure that shareholders with a right to attend are not excluded from the meeting. While some form of registration will almost certainly be necessary, the registration process must be simple to ensure that it does not become a barrier to attendance.
• While not holding physical AGMs can bring obvious cost savings due to reductions in travel, venue hire and catering costs, virtual meetings also incur costs of streaming the meeting online, setting up broadcast equipment and enabling online voting. While the cost of virtual or hybrid meetings (and the lack of a range of providers of virtual AGM services currently in the UK) remains a concern, the sector is rapidly developing. A clear endorsement of virtual meetings in the UK by government and investor associations may act as a signal for these potential and current providers of AGM services to enter into and expand the market.
• There will also need to be clarification of the legal position before virtual meetings become widely adopted. In addition, it may be prudent for company articles to set out what happens if the virtual or hybrid meeting platform experiences technical issues, as there may be concerns about the validity of the meeting, with potentially catastrophic consequences if the business of the meeting is interrupted.
• Companies should have the flexibility, depending on their circumstances and shareholder base, to decide whether a physical, virtual or a hybrid meeting is more appropriate. All three choices of meeting format bring different benefits, and it is not appropriate to prescribe a one-size-fits-all approach.
• If a company has already decided to facilitate remote attendance at its AGM, hybrid meetings may have some advantages in comparison to virtual meetings, including: preserving the ability for shareholders to attend physically, which some companies may feel is appropriate given their shareholder base; and, while institutional shareholders often have access to a company’s management outside of the AGM, for retail shareholders, a company’s AGM may be the only chance they have access to a company’s management and the ability to directly question the board on matters they consider important.
• The FRC could encourage separate virtual shareholder engagement events in addition to the AGM.

Code of Best Practice

Part 5 of the discussion paper sets out a proposed draft of the Code of Best Practice for electronic participation at hybrid and virtual meetings. The Code of Best Practice is split into three sections dealing with before, during and after the meeting. Some of its key provisions include:

• A dedicated area of the company website should be set up and frequently updated so that shareholders can access the latest information regarding the status of the meeting and any other shareholder meetings. Clear instructions for the process of logging in, asking questions, and voting through electronic facilities should be provided to shareholders before the meeting, and links to the company website should be provided within the notice of meeting.
• If registration and verification is required to access the meeting, shareholders should be provided with access codes through their preferred method of communication in advance of the meeting.
• The meeting should be accessible in both video and audio-only format where possible.
• Shareholders must have the right to speak and be heard through electronic facilities in a similar way as if they were attending physically. In addition to being able to ask questions live through a telephone line or Voice over Internet Protocol, shareholders may also be able to electronically submit questions by typing into a dedicated meeting application or be able to send questions to a designated email address.
• Where a question is asked live by a shareholder, through a telephone line or Voice over Internet Protocol during the meeting, the chair of the meeting should ensure, so far as reasonably practicable, that the question is audible or visible to all other shareholders attending the meeting. Shareholders attending the meeting should also be able to hear or see questions which are submitted electronically via a dedicated meeting application or which have been sent in advance by email. This should be the case regardless of whether or not the questions are in fact answered.
• Shareholders should be allowed to follow up on any answer given to a question asked at the meeting.
• If questions were grouped during the meeting, companies should make clear the basis on which this has been done.