SECURITIES REGULATION & IR

The COVID-19 pandemic has caused many issuers to turn to virtual platforms to conduct shareholders’ meetings. However, following the 2020 proxy season, some shareholders expressed displeasure with the new virtual format. This article highlights some key legal and practical considerations related to virtual meetings and some best practices to optimize shareholder participation.

Legal landscape

The statutory requirements of virtual shareholders’ meetings vary in Canada. Prior to convening a virtual meeting, corporations should consult their governing statute to ensure that they are authorized to hold such meetings and that their chosen communications platform complies with applicable law.

(a)   Authorization to hold virtual meetings

The Canada Business Corporations Act (the CBCA) contemplates both hybrid and virtual meetings. At hybrid meetings, shareholders have the option to attend remotely or in person, whereas at virtual meetings, shareholders can only attend remotely. The CBCA and certain provincial corporate statutes provide that a corporation may only hold a virtual meeting if the corporation’s by-laws expressly provide for such meetings. Other provincial statutes, including those in Ontario and Quebec, permit virtual meetings so long as they are not restricted by the by-laws. The British Columbia Business Corporations Act allows for a general meeting to be held at a location outside of British Columbia if the corporation’s articles permit. Previously, there was some uncertainty as to whether “a location outside of British Columbia” included a virtual location. This uncertainty has been temporarily resolved by a ministerial order issued by the Minister of Public Safety and Solicitor General of British Columbia in response to the pandemic, which clarifies that meetings do not require a physical location and can be held solely by virtual means provided that: (a) instructions for participating virtually are provided in the notice of meeting; (b) all participants are able to communicate with each other and, if applicable, vote; and (c) the person holding the meeting facilitates the use of the virtual medium.

Some governments in Canada have encouraged the use of virtual meetings during the pandemic by providing relief from impediments in a corporation’s organizing documents. For instance, British Columbia, Ontario, and Quebec have temporarily allowed corporations to hold virtual meetings regardless of any restrictions in their governing documents. Issuers that have relied on this relief to conduct virtual meetings should be prepared to transition back to in-person meetings when these measures expire. Alternatively, it is possible that the pandemic will spur permanent legislative change. Indeed, Alberta has recently removed the requirement that the by-laws must expressly permit virtual meetings.

(b)   Adequate shareholder communication

Under the CBCA, the digital platform used to conduct hybrid and virtual meetings must allow “all participants to communicate adequately with each other during the meeting.” Most provincial corporate statutes contain similar language. Satisfying this requirement is necessary to achieving a quorum at virtual meetings. Unfortunately, there has been minimal guidance as to what constitutes adequate communication among participants.

Positions of proxy advisory firms

Shareholders’ meetings provide a valuable opportunity for investors to engage with representatives of the issuer. Corporations should therefore promote shareholder participation at virtual meetings and take notice of the positions of proxy advisory firms.

Institutional shareholders often rely on the recommendations of proxy advisory firms to make voting decisions. Such firms have been generally reluctant to endorse virtual meetings. Glass Lewis’ policy states that “virtual-only meetings have the potential to curb the ability of a company’s shareholders to meaningfully communicate with the company’s management.” As such, Glass Lewis generally recommends voting against members of the governance committee where the issuer plans to hold a virtual meeting and robust disclosure has not been provided to shareholders assuring them that they will receive the same opportunities to participate as they would at a physical meeting. Glass Lewis expects such disclosure to address: (a) the ability of shareholders to submit questions; (b) whether the answers to shareholders’ questions will be posted online; (c) technical and logistical issues; and (d) the procedure for obtaining technical support. Although Glass Lewis relaxed this policy for the 2020 proxy season, it is in full effect for 2021.

Conversely, ISS’ policy for TSX-listed companies does not include a position on virtual meetings. ISS has, however, adopted a new policy in the United States, whereby it will generally recommend voting in favour of management proposals to hold virtual meetings, provided they do not preclude physical meetings.

Improving shareholder participation

It is important that corporations address the concerns raised by shareholders in the aftermath of the 2020 proxy season. The vast majority of virtual meetings in 2020 were audio only. Some shareholders felt muted by the virtual format, that they could not meaningfully engage with management, and that management failed to acknowledge certain questions.

A working group comprising Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance released a report following the 2020 proxy season identifying best practices for virtual meetings, some of which include:

(1)   disclosing clear and comprehensive instructions on how shareholders can attend and vote;

(2)   explaining how shareholders can submit questions, whether in advance of the meeting or live, and any rules with respect to eligibility, time limits, and the structure of Q&A periods;

(3)   coordinating with and allowing shareholder proponents to formally present proposals; and

(4)   permitting shareholders to test the virtual platform in advance and providing live technical support.

The report also encourages certain “optional and emerging practices” that include (a) supporting accessibility needs, such as closed captioning, signing, or real-time translation and (b) allowing shareholders to see all submitted questions and to indicate their interest level in particular questions that have been queued. However, corporations should consider whether these measures are necessary to facilitate adequate communication among meeting participants, in which case these practices may be legal minimums.

Corporations should also reflect on whether their chosen virtual platform permits shareholders to not only communicate with representatives of the issuer but with each other as well. It is difficult to imagine how an audio-only format could meet this requirement when there are many participants. It will be interesting to see how issuers handle virtual meetings in 2021.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Thomas Fung (Associate) and Jordan Chu (Articling Student) at McCarthy Tétrault LLP.