As our clients and friends know, each year Mintz provides an analysis of the regulatory developments that impact public companies as they prepare for their fiscal year-end filings with the Securities and Exchange Commission (the "SEC") and their annual shareholder meetings. This advisory discusses key considerations to keep in mind as you embark upon the year-end reporting process in 2021.
Everyone well knows that 2020 was a year unlike any other. COVID-19 created disruption and challenges for publicly traded companies across industries on an unprecedented scale, and during the spring of 2020, the SEC and the national stock exchanges quickly implemented a variety of accommodations for those issuers to try to address those challenges where possible. Most companies continue to feel the effects of the pandemic at some level, including altered levels of activity due to quarantines, travel restrictions, employee health concerns, and otherwise, and those effects will certainly need to be addressed in 2021 10-K reports. In addition, in 2020 many public companies began to take more deliberate steps to respond to and address social justice and issues of diversity and inclusion, including through heightened ESG (environmental, social and governance) disclosures. While it is too soon to say whether and how the SEC under a Biden Administration will address increasing investor and stakeholder demands for more regulatory focus on ESG matters, it is clear that the time has come for companies to incorporate ESG concepts as part of their ongoing board conversations and their routine disclosure practices. Mintz has been an active participant in the ESG movement for some time, and this past year established an ESG Practice to work with clients on these important issues.
Among the developments we discuss in this advisory are the embrace of "virtual" annual shareholder meetings; changes to the disclosure requirements in the Form 10-K sections on Business (including a new "human capital" subsection), Risk Factors, and Legal Proceedings; amendments to the shareholder proposal eligibility rules; and changes to the definitions of "accelerated filer" and "large accelerated filer." In addition, we address several other significant developments and considerations companies should focus on this year and provide an update on the policies and practices of the major proxy advisory firms.
We are hopeful that 2021 will bring a return to a greater sense of normalcy and reduced volatility for all of our clients.
Impacts of the COVID-19 Pandemic on Shareholder Meetings and Reporting
COVID-19-related government-mandated restrictions on gathering and travel required public companies to make a variety of operational and governance changes quickly and prompted government accommodations, as described below.
The COVID-19 pandemic resulted in an exponential increase in the number of virtual shareholder meetings held in 2020.1 Most 2020 virtual meetings were held by audio rather than video means2 with shareholder questions submitted through a virtual meeting portal, a practice that sometimes raised issues because these questions were not visible to all attendees. Some shareholders also expressed dissatisfaction with the audio-only virtual meeting format because they were not able to see the officers and directors of the participating company during the meeting. Current pandemic restrictions and health and safety concerns suggest that shareholder meetings in the first half of 2021 will likely continue to be held virtually or in a hybrid format. Companies preparing for a virtual meeting of shareholders should also focus on applicable corporate law requirements of the states in which they are incorporated, which govern the availability of virtual meetings, and on the evolving positions of regulators, proxy advisors, and investors.
State law requirements. The Governors of California, Massachusetts, and New York, among others, have issued COVID-19 orders temporarily permitting virtual shareholder meetings during the pandemic. Detailed information about some of these virtual shareholder meeting orders and requirements is available in our client advisories here (New York) and here (Massachusetts). Delaware law generally permits virtual-only meetings subject to certain shareholder participation rights, recordkeeping, and information requirements.
Institutional investors. The Council of Institutional Investors continues to express concern that virtual-only meetings do not approximate an in-person experience and may serve to reduce the board's accountability to shareholders. Some of these objections eventually may be withdrawn if virtual meeting technologies develop to more closely approximate the in-person meeting experience.
Proxy advisor policies. Proxy advisors Institutional Shareholder Services' ("ISS") and Glass Lewis' 2021 voting policies do not support a widespread pivot to virtual-only meetings post-pandemic, and these organizations expect companies holding virtual-only meetings to provide shareholders with electronic participation rights comparable to those available to shareholders who attend in-person meetings, as well as disclosure of the rationale for the decision to hold a virtual meeting. More on ISS' and Glass Lewis' positions on virtual meetings is available under Proxy Advisors Voting Guidance Updates below.
Until virtual meeting technology is able to offer a comparable experience to in-person attendance, it is unlikely that all stakeholders will support a permanent move to a virtual format for annual shareholder meetings.3 Companies should continue to keep abreast of state-imposed restrictions on public gatherings, state corporation laws governing virtual meetings, institutional investor and proxy advisor policies, and shareholder concerns in order to prepare for contingencies and developments in this area. Companies should also investigate the virtual meeting services options that Broadridge and other service providers, such as stock transfer agents, have developed over the past year, focusing on how shareholders will be able to participate in the meeting in order to find an option that best meets the company's and its shareholders' needs.
MD&A. Last year, the SEC's Division of Corporation Finance (the "Staff") issued CF Disclosure Guidance: Topic 9 and Topic 9A (the "Guidance"), outlining a number of factors for companies to consider in assessing and disclosing the evolving impact of COVID-19 on their businesses. In light of the ongoing uncertainties due to the pandemic, the Guidance advises companies to keep their disclosures current by considering known and unknown factors or trends and discussing their impact on the company's financial condition, results of operations, short and long-term liquidity, and capital resources as necessary. Detailed information about the questions the Staff asks companies to consider as they evaluate their disclosure obligations related to the effects of the pandemic is available in our client advisory here. The Guidance also asks companies to consider the short- and long-term impact of any financial assistance they may have received under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on the company's financial condition and whether the pandemic raises substantial doubts about the company's ability to continue as a going concern. This disclosure in the MD&A should give companies an opportunity to provide a useful narrative about how they have adapted and expect to continue to adapt to the impacts of COVID-19.
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2. Broadridge, a leading virtual meeting service provider, reported that it hosted 1,494 virtual shareholder meetings during the first six months of 2020, a majority of which were audio-only.
3. ISS Governance, 2020 Global Benchmark Policy Survey Summary of Results, indicated that almost 80% of surveyed investors preferred hybrid to virtual-only meetings if pandemic-related restrictions do not continue to apply, September 25, 2020.
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