Legal Insight
Public Companies: Proxies and Annual Meetings
Proxy voting has become a widely-used governance tool.
Corporate governance encompasses a labyrinth of laws, regulations, rules, and documents. A private corporation is subject to state law and its charter and bylaws (collectively, “organizational documents”). Public companies (shares of which are traded on stock exchanges) are also subject to federal securities laws and exchange rules. Congress periodically passes new securities laws, and the Securities and Exchange Commission (SEC) administers them through regulations. The evolving regulatory landscape has significant compliance costs.
State law requires corporations to hold annual meetings where shareholders elect directors and vote on fundamental corporate changes, including mergers and dissolution. In private “close corporations,” the annual meeting may be a formality handled on paper through the written consents of shareholders. As corporations grow larger, meetings tend to become increasingly traditional and formal. Some states’ laws and organizational documents permit electronic meetings, albeit traditional meetings are customary.
State law and many corporations’ organizational documents authorize proxy representation. This allows shareholders to appoint agents to vote for them at the annual meeting. Because it is impractical for many shareholders to attend the annual meeting, proxy voting has become a widely-used governance tool.
Under the Securities Exchange Act of 1934, the SEC regulates proxy solicitation for securities covered under Section 12 of the Exchange Act. Regulation 14A, Schedule 14A, and other regulations require that shareholders receive a proxy statement containing a meeting notice; a description of voting procedures; and information about directors, nominees for the board of directors, officers, and executive compensation. When electing directors, a proxy statement must be preceded or accompanied by an annual report. It must include, among other things, audited balance sheets and information concerning the company’s financial condition, management, operations, industry segments, products, and securities.
Shareholders can submit proposals for inclusion in the proxy statement provided the shareholders and proposals meet a list of eligibility criteria. Proposals can be excluded for many reasons—for example, the proposal is illegal, misleading, or relates to operations that constitutes less than 5% of net earnings.
If a proposal is ineligible or excludable, management can object to it. If it is compliant, management may ask the shareholder to withdraw it (perhaps management intends to or is implementing the idea) or petition the SEC for permission to exclude it. If included in the proxy statement, management can support or oppose it at the annual meeting. Shareholders will then vote on it at the annual meeting.
The character of an annual meeting will depend on the company’s culture, value, products, and constituencies (i.e., management, shareholders, creditors, other stakeholders). Organizational documents may permit management to rotate the annual meeting among different cities. Management should select appropriate venues with adequate seating, facilities for exhibits, and transportation. If necessary, it should hire an event planner and vendors to handle audio-visual equipment, refreshments, travel accommodations, and security.
To be successful, annual meetings require significant preparation. Management, personnel with important responsibilities, and professional advisors should attend. The chairperson should prepare a detailed agenda. Executives with formal speaking roles should use scripts to introduce their remarks, and they should prepare substantive comments. Shareholders and creditors are investors. They have an interest in the performance of the business and should receive relevant, transparent information.
The chairperson should run the meeting using clear, understandable rules of conduct. Roberts’ Rules of Order are not required. If necessary, a professional—perhaps an attorney—can assist the chairperson. If there are unforeseen circumstances or disruptions, executives should remain calm and adapt as required. During the question and answer period, the rules should limit the length of questions and require appropriate decorum. Meetings should be conducted fairly, and clearly inappropriate behavior can be ruled out of order.
Executives should prepare for likely questions and, where appropriate, defer to colleagues, specialists, or professionals. For example, if asked about an accounting policy, the chairperson or CEO may defer to the company’s accountant or chief financial officer.
The chairperson should understand what constitutes a quorum and the votes required for particular types of proposals to pass (e.g., majority, supermajority, plurality). If appropriate, the company should issue a press release. After the meeting, the corporate secretary should draft the minutes and include voting results. Some of that information must be included in SEC filings.
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