By Sam Pearse
22.04.2020
Summary
- AGMS for UK-incorporated public limited companies can and should still go ahead during the lockdown.
- Companies should take advantage of any flexibility in their articles of association to hold meetings either virtually or partly in-person and partly virtually.
- Companies can still hold AGMs even if their articles of association have not been amended to take advantage of the flexibility available to them, however they should consider amending their articles of association for subsequent years.
- Shareholders will be able to vote using proxy forms but should expect to have less opportunity for Q&A.
Introduction
The annual general meeting (AGM) season is upon us. English company law requires public limited companies (English private companies do not have to hold AGMs, and most dispensed with them once the Companies Act 2006 (CA 2006) came into force) to hold their AGMs to be held within six months of the financial year end. With most public companies closing their books on 31 December, that means that the bulk of the AGMs need to be concluded before 30 June with notices calling the meetings being sent out by early June.
The UK Government currently prohibits gatherings of more than two people, and such pairing to maintain two metres distance, all subject to compulsory “Stay at Home Measures”. There is therefore clearly a tension between company law and government rules promulgated during March 2020 in response to Covid-19.
For many public companies doing away with an AGM would be a blessing. AGMs are often sparsely attended with official business being quickly dispensed. In those circumstances, the time and monetary cost of gathering the board in a large room might be better deployed elsewhere.
There are several reasons for AGMs’ continued importance. They remain to be the sole point of direct access to the board for all but the largest shareholders, providing an opportunity for the directors to be engaged directly. AGMs are also the arena in which shareholders can publicly exercise their franchise to vote in favour of or against resolutions such as those relating to compensation and board composition.
So AGMs have to be held but they cannot be held in person.
Virtual & Hybrid AGMs
Virtual AGMs are where nobody attends physically. All participants attend electronically using virtual meeting platforms. Virtual AGMs are not uncommon in the United States and in mainland Europe, with BBVA and Banco Santander both asking shareholders to participate in this year’s AGMs virtually. Industry bodies such as the Investment Association (IA) and Institutional Shareholder Services (ISS) have traditionally opposed virtual-only AGMs for the reasons given above, and that may account for the almost non-existent use of virtual-only AGMs in the UK. To date, the only UK quoted company that has held an entirely virtual AGM remains Jimmy Choo. However, both the IA and the ISS have relaxed their opposition to virtual AGMs meetings for the duration of the lockdown.
Hybrid AGMs permit shareholders to attend in person or electronically, and so are less controversial and more commonplace, at least to the extent that ISS supports their usage. With the use of remote meeting platforms booming during the pandemic, we may well see a growing level of demand for conducting AGMs in that way as people become more comfortable with virtual meetings. Inevitably, this will drive greater technological development and hybrid AGMs may as such well become the norm.
Whether or not a company can presently hold general meetings entirely virtually or in a hybrid form depends on its articles of association. The CA 2006 permits general meetings of UK-incorporated companies to be held virtually (both fully or in hybrid form) but not all companies’ articles of association contain the necessary provisions to take advantage of this.
If your company, or a company in which you have invested is able to hold general meetings fully virtually and/or using a hybrid form you can accordingly expect the relevant procedure to be followed, even if the company has either never or only rarely made use of this option before. In that case, matters should continue broadly as normal.
Alternative Options
For those companies whose articles of association do currently not permit virtual or hybrid AGMs, the options are limited.
The amendment of its articles of association requires shareholder consent and, as such, a general meeting, which takes the company back to square one. For those companies that have already issued notices calling their AGM it is back to beyond even that as a new resolution would need to be circulated, bearing in mind the relevant notice periods.
A company could consider postponing its AGM, but it should be noted that the UK Government has so far not relaxed the law requiring AGMs to be held within six months of the financial year end. Any postponement of an AGM beyond such deadline would therefore amount to a bet on the Government formally doing so before such date. This is not a bet that I would advise a company to place.
In many cases, a company will therefore have no option other than to call a “physical” AGM. In March 2020 a group of industry bodies, including the IA, the Quoted Companies Alliance, The Chartered Governance Institute and the Financial Reporting Council, accordingly issued Guidance on how to conduct such AGMs in these exceptional times. They concede that it is not permitted for shareholders to attend general meetings in person, and state that shareholders should therefore be:
- Told to stay away (i.e. not recommended but instructed);
- Turned away from the physical meeting – which the chair will be permitted to do;
- Encouraged to vote by proxy; and
- Provided with an alternative means of submitting questions.
Fortunately, most UK-incorporated companies have a very low quorum requirement of two shareholders present in person or by proxy, which is the default position under the CA 2006. It is as such entirely plausible for a company to validly constitute a general meeting with just two directors in attendance, as directors of quoted companies are typically shareholders, or if not they can be appointed as proxies or corporate representatives. This alternative approach is also valid for companies with greater quorum requirements.
One of the companies that is following this approach for its upcoming AGM is Rolls Royce whose alternative arrangements can be found here.
Impact on Shareholders
2020’s AGMs will therefore be held in one way or another, and shareholders will be able exercise their franchise and vote at them on critical business matters such as board compensation and composition, share issues and buybacks.
Irrespective whether an AGM is held fully virtually, in the form of a hybrid or in the quasi-physical form described above, the ability of shareholders to ask follow-up questions or to challenge the board and prompt debate, and to do so in a relatively public forum, will be adversely affected. That will be unsatisfying to institutions and activist shareholders and place further emphasis on the need for boards to run well-constructed proxy contests with the engagement of legal, proxy and public relations experts.
Future Considerations for Companies
Companies, whether private limited or public limited, whose articles of association do not currently permit virtual or hybrid general meetings should consider proposing shareholder resolutions to adopt the necessary updates at their next general meeting. Sadly, it is likely that a catastrophic event such as a pandemic will occur again and companies should take advantage of the flexibility afforded by company law. Even if virtual AGMs continue to be unfavoured, having them as a fall-back option is preferable to the otherwise resulting challenges. The technology exists to enable electronic voting and Q&A and corporate governance would be best served by permitting its use.
For more Information
Please contact Sam Pearse or another member of the Duane Morris London team.