The Situation: In light of the public health and safety concerns associated with the current global COVID-19 pandemic, public companies across the country are taking steps to hold their upcoming shareholder meetings as virtual meetings or allow remote participation to protect both shareholders and the companies' employees and directors. Furthermore, California and many of its counties and cities are currently operating under "stay-at-home" and "shelter-in-place" orders that may restrict in-person or hybrid shareholder meetings.
The California Corporations Code, however, makes holding virtual meetings very difficult, as it imposes a requirement that each shareholder participating electronically must provide unrevoked consent to the use of electronic means to communicate with that shareholder and further imposes onerous requirements on obtaining consent from individual shareholders. In addition, a California corporation is required to provide written notice to its shareholders (subject to the same consent requirement for electronic delivery) of the location of the shareholder meeting, including any change from a physical meeting to a virtual or hybrid meeting.
The Result: California's Governor Gavin Newsom issued an executive order on March 30, 2020 (the "Order"), that, among other things, suspends the requirements under the California Corporations Code to request and receive shareholder consent for virtual meetings and to provide notice of a change of the location of a shareholder meeting (as long as the corporation provides notice via press release, website posting, or other means reasonably designed to inform shareholders of the change). Currently, the Order applies to shareholder meetings that were scheduled as of the date of the Order and to meetings that must occur before June 30, 2020.
Looking Ahead: California corporations should carefully consider whether an annual or special shareholder meeting that was scheduled as of the date of the Order or that must occur before June 30, 2020, should be changed to a virtual meeting or to a hybrid meeting that supports remote communication in order to avoid public health and safety concerns and comply with fast-evolving federal, state, and local restrictions on public gatherings, or, if practicable, postponed.
Some practitioners have expressed doubt as to whether Governor Newsom has the authority to override the statutory requirements by executive order. Accordingly, California corporations should also consider the impact that a potential later finding that the Order exceeded the Governor's authority might have on the validity of the business conducted at a virtual meeting, especially regarding important actions, such as share issuance authorizations and director elections. For that reason, a hybrid meeting might be a preferable alternative to help mitigate that risk.
What the Order Means for California Corporations
Under California Corporations Code Section 20 and California Corporations Code Section 600, a California corporation must obtain unrevoked consent from each shareholder participating electronically in a virtual or hybrid shareholder meeting―a nearly impossible hurdle for public companies to meet―and must comply with onerous requirements to obtain that consent. Under California Corporations Code Section 601, a California corporation is required to provide written notice to its shareholders of the location of the shareholder meeting, including any change to a virtual or hybrid meeting. The Order suspends, for shareholder meetings that were "scheduled" as of the date of the Order and for meetings which "must occur" before June 30, 2020, the consent requirements under Sections 20, 600, and 601 for electronic participation in meetings. (The Order does not specify what "scheduled" or "must occur" mean, and so California corporations which have not yet noticed a meeting may also want to consult with counsel to determine whether to postpone that meeting, if practicable.) For meetings that have been initially properly noticed, the Order also allows (notwithstanding contrary provisions in Section 601) for a change in location to a virtual or hybrid shareholder meeting to be noticed by a press release, website posting, or other means reasonably designed to inform shareholders of the change.
California corporations considering a virtual or hybrid shareholder meeting, in light of the Order, should review their articles of incorporation and bylaws to confirm that the Board of Directors is not prohibited from holding virtual-only or hybrid meetings. The Order does not override such provisions; it only applies to the statutory notice and shareholder consent requirements noted above. If necessary, the Board of Directors may be able to amend the bylaws to provide for shareholder meetings to be held solely or partially through remote communications.
If permitted by the organizational documents and determined by the Board of Directors to be in the company's best interests, the decision to hold a virtual or hybrid shareholder meeting should be memorialized by a formal resolution.
A California corporation planning a virtual or hybrid shareholder meeting should discuss with counsel the necessary guidelines and procedures to preserve shareholder access and engagement for such a meeting and to properly record votes cast during the meeting, all of which are subject to statutory requirements included in the Corporations Code (which are not suspended by the Order). A California corporation considering a virtual or hybrid meeting may want to engage a seasoned third party service provider to assist it in setting up the meeting, as the service provider may be able to assist in ensuring compliance with these requirements. Any technical difficulties that result in some shareholders failing to gain clear access to participate in the meeting could call into question the validity of the meeting.
The Order was issued under California's Emergency Services Act (specifically California Government Code Section 8567 and California Government Code Section 8571), which allows the Governor, among other things, to (i) make, amend, and rescind orders and regulations necessary to carry out the provisions of the Government Code and (ii) suspend any regulatory statute or statute prescribing the procedure for conduct of state business in case of any state of emergency, if strict compliance with the statute would in any way prevent, hinder, or delay the mitigation of the effects of the emergency. Some practitioners have expressed doubt as to whether the Governor can suspend parts of the Corporations Code pursuant to the authority granted to him under those sections. As a result, California corporations that move to virtual meetings should carefully assess whether any critical actions are anticipated to be taken at the meetings and, if so, consider with counsel the risk that those actions subsequently may be invalidated if the Order is itself invalidated. For that reason, a hybrid meeting might be a preferable alternative to help mitigate that risk.
Federal Securities Law Proxy Requirements. Companies should also confirm that a planned virtual or hybrid shareholder meeting conforms to the recent guidance from the Securities and Exchange Commission on shareholder meetings in light of COVID-19. This Jones Day Commentary provides more information.
Other State Law Changes. For information relating to similar changes under New York law, see "Executive Order Permits Virtual Shareholder Meetings for New York Corporations." For information relating to similar changes under Georgia law, see "Governor Kemp Issues Executive Order Permitting Virtual Shareholder Meetings for Georgia Corporations."
Two Key Takeaways
- California's governor has issued an executive order permitting California corporations to change to a virtual or hybrid format for previously scheduled shareholder meetings or shareholder meetings that must occur before June 30, 2020.
- California corporations should carefully consider whether an annual or special shareholder meeting that is already scheduled or that must occur before June 30, 2020, should be changed to a virtual meeting or to a hybrid meeting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.