Once again, it is time to prepare for the proxy and annual report season. There are many issues to take into consideration when crafting required regulatory disclosures in a manner that conveys effective messaging to the company's investors. Advance planning, careful drafting and multifaceted review greatly contribute to a successful proxy and annual report season, culminating in a productive annual shareholders' meeting.

This post provides an overview of key issues that companies should consider as they get ready for the upcoming 2022 US proxy and annual report season (2022 Proxy Season), including:

  • Virtual Meetings
  • Compensation Issues
  • Shareholder Proposals
  • Environmental, Social and Governance (ESG) Matters
  • Human Capital Management
  • Board Diversity
  • Proxy Voting Advice
  • Related Person Transaction Approvals
  • Dodd-Frank Rulemaking
  • Risk Factors
  • Management's Discussion and Analysis
  • Holding Foreign Companies Accountable Act Disclosure
  • ITRA Compliance
  • Electronic Signatures on SEC Filings
  • Director and Officer Questionnaires

Virtual Meetings

COVID-19 travel and gathering restrictions accelerated the growth of virtual shareholders' meetings exponentially, generating a great deal of practical experience and discussions, and to some degree, consensus on key practices. Virtual shareholders' meetings are likely to continue as a regular practice, but there are a variety of forms that virtual meetings may take. Some virtual shareholders' meetings are hybrids, with in-person meetings supplemented by audio and/or video options. Other companies conduct fully virtual meetings, without an in-person component.

One of the first matters companies should consider when planning for their 2022 annual meetings is what format their meetings will take, whether physical, virtual or a combination. The status of the COVID-19 pandemic and the matters presented for a shareholder vote at the annual meeting are factors that may influence this decision. Although companies may delay the final decision until closer to the time they file their proxy statement with the US Securities and Exchange Commission (SEC), if a virtual meeting is being considered, it is helpful to begin making arrangements with third-party service providers well in advance of the SEC filing and annual meeting dates in order to obtain the desired dates, times and services.

If a virtual meeting is being considered, companies should familiarize themselves with applicable laws and governance requirements impacting the ability to hold, and the procedures for conducting, virtual meetings. Specifically, companies should review laws of their jurisdiction of incorporation, as well as the provisions of their charters and bylaws, applicable to convening, postponing, adjourning and reconvening virtual shareholders' meetings. They should determine how to comply with any requirements for making shareholder lists available for inspection in a virtual meeting context. Companies should build time into their annual meeting schedule for dry runs with the virtual systems, even if companies have conducted virtual meetings in the past.

From the company perspective, the virtual meeting format may add efficiency to the flow of meetings. Investors, including proponents of shareholder proposals, may benefit by being able to attend more annual meetings, which increases opportunities to hear from, and engage with, management and directors. Eliminating travel saves expenses for both companies and investors in addition to lowering the environmental impact of shareholders' meetings. However, prepandemic, some investors and proxy advisory firms were critical of virtual-only meeting formats and may expect a return to in-person meetings once travel and gathering restrictions are lifted. While hybrid meetings provide flexibility, offering the advantages of both the in-person and virtual formats, they may increase company costs by incurring the traditional in-person meeting costs, such as travel, venue and security, as well as the technology costs of arranging for a virtual meeting platform.

The proxy statement disclosure for a virtual meeting must disclose all necessary information for shareholders to attend and vote their shares, including what information and documentation is needed in order to vote at the meeting and differences in procedures for record shareholders and beneficial shareholders to participate. It is helpful to indicate when the virtual meeting website will be open to log in, ideally at least 15 minutes before the meeting is scheduled to begin, and whether there is a telephone number, email address or chat feature available to report and resolve technical problems.

Question-and-answer sessions can be an important component of an annual meeting, and, as a result, many investors expect the proxy statement to clearly disclose how this will be handled at the meeting, such as whether questions may (or must) be submitted in advance of the meeting or only during the meeting and whether proof of share ownership must be provided when submitting a question. If a company is scheduling the question-and-answer session to occur after the voting is completed and the formal meeting is adjourned in order to minimize the impact of technical glitches on the proposals being voted upon, the company should clearly disclose that fact in its proxy statement. From an investor relations perspective, companies should be sure they have a way to track who submits questions so they have the ability to follow up for further engagement.

Some companies may also choose to post unanswered questions and answers online following the meeting for transparency.

If shareholder proposals are on the agenda for a virtual meeting, companies should coordinate with the proponents in advance of the meeting regarding the logistics for presentation of the proposals at the meeting.

Regulation FD applies in the virtual meeting context, including in situations where a technical difficulty occurs. Therefore, if it happens that some, but not all, participants at a virtual meeting are able to hear some or a portion of the proceedings, the company will need to assess whether material, non-public information was involved, in which case a press release or Form 8-K would be needed to comply with Regulation FD.

Compensation Issues

Say-on-Pay. During the 2021 proxy season, the say-on-pay proposal at most companies once again received majority approval. According to the Semler Brossy 2021 Say On Pay & Proxy Results report dated July 29, 2021, only 2.8 percent of the Russell 3000 had a failed say -on-pay vote, which was slightly greater than the 2.2-percent failure rate for the 2020 proxy season. The average vote results of 90.5 percent for Russell 3000 companies and 88.7 percent for the S&P 500 companies, in both cases, were below the average vote results from the prior year.1 While many say-on-pay failures during the 2021 proxy season were due to misalignment between pay and performance or problematic pay practices, some were likely due to COVID-related compensation practices.

An "Against" recommendation from a proxy advisory firm does not always result in a failed say - on-pay vote, but it will likely cause shareholder support to decline, which may influence the ongoing level and tone of shareholder engagement on compensation matters and director nominees in the coming year, as well as future votes on say-on-pay and director elections. If a company receives a negative proxy voting recommendation from a proxy advisory firm, it often (but not always) prepares additional material in support of its executive compensation program. In order to use such materials, companies must file them with the SEC as definitive additional soliciting material not later than the date first distributed or used to solicit shareholders.

From a planning perspective, companies should remember that a shareholder vote on the frequency of say-on-pay votes needs to be conducted at least once every six years. Therefore, it would be prudent for companies to check when they last conducted a say-when-on-pay vote in order to calendar when they next need to submit a frequency proposal to shareholders.

COVID-19 Adjustments. To the extent that compensation decisions for executive officers made during 2021 were impacted by the COVID-19 pandemic, that should be addressed in the compensation discussion and analysis. If multi-year performance measures were adjusted in light of the pandemic, the adjustments should be explained and the rationale for the changes should be disclosed. Companies should expect proxy advisory firms and investors to pay particular attention to those disclosures.

Footnote

1 See https://semlerbrossy.com/wp-content/uploads/2021/07/SBCG-2021-SOP-Report-2021-07-29-_FINAL.pdf

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Originally Published by Harvard Law School Forum on Corporate Governance.

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