Corporate Law Proves Adaptable In The Face Of Pandemic Disruptions 

By March 2020, the COVID-19 pandemic had been spreading quietly for months in the United States and a national emergency was declared. As luck would have it, this was during corporate proxy season.

Rapid changes, pushed by the pandemic, interfered with corporate life in two primary ways, according to Lawrence Hamermesh, the executive director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School and a faculty member for the Practising Law Institute’s programs on Delaware law and securities regulation.

Corporations which had recently declared dividends or mailed out proxy materials regarding their in-person annual meeting were caught in an ever-shifting situation. While the economy dangled on the edge of a cliff, businesses worried about their liquidity. Dividends became problematic, Hamermesh said. The notion of bringing hundreds of shareholders together and cramming them into a hotel ballroom also seemed like a very bad idea.

Two loci of corporate law in America — the state of Delaware and the Securities and Exchange Commission — had to act.

Declared Dividends

Companies which had declared a nice fat dividend just before the pandemic hit “were looking at a situation where the idea of sending out money to stockholders looked problematic if not illegal, because there wasn’t enough money,” Hamermesh said. Some wanted to abort the dividend issuance. “There were those who thought that was already the law,” but weren’t certain.

Because more than 66 percent of corporations in the Fortune 500 are incorporated in Delaware, it was up to the Delaware legislature to remove all doubt. 

Of course, as is often the case with legislatures, the change did not come overnight. House Bill 341 containing pandemic-driven changes was signed into law on July 16, 2020. 

The changes to section 110 of the Delaware General Corporation Law regarding emergency bylaws were the most germane. The board of directors may now adopt these bylaws, subject to repeal by action of the stockholders, “during the existence of any catastrophe,  including, but not limited to, an epidemic or pandemic, and a declaration of a national emergency by the United States government, or other similar emergency condition[.]”

The specifics above were added to a list of other dire situations, including nuclear or atomic disaster.

The power to pass emergency bylaws given by the new section 110 is broad, even if the full board cannot be convened for a meeting. A quorum of directors present “may make any provision that may be practical and necessary for the circumstances of the emergency.”

That could include temporary withdrawal of a declared dividend. 

On this matter, the changes make clear that any such dividend may be changed, so long as the already-announced record date (the cut-off for stock ownership) has not occurred and the 60-days-or-less period between the record date and the payment date is preserved. 

The new section 110 requires any corporation seeking to change a declared dividend to give notice as quickly “as practicable.” In a nod to ease and efficiency in a bad situation, the notice can be given via a public filing with the SEC, provided the company is subject to the Securities Exchange Act of 1934, as amended.

The Delaware legislature also made things easier for corporations by stating: “No person shall be liable, and no meeting of stockholders shall be postponed or voided, for the failure to make a stocklist available pursuant to [section 219 of the General Corporate Law] if it was not practicable to allow inspection during any such emergency condition.”

Hamermesh explained that three dates are important when issuing dividends: the declaration date (when the board determines to issue the dividend), the subsequent record date, and then the date of payment.

“Certainly, between the declaration and the record date the board could say ‘never mind,’” he explained.

The corporate world readily accepted the ability to postpone a dividend, Hamermesh said. “It all made a lot of sense. As I recall, it was less controversial than the second one.” He is referring to the provisions allowing in-person annual meetings of shareholders to be postponed or otherwise changed, including conversion to a virtual meeting.

Annual Meetings

Companies are required to hold stockholder meetings every year. Delaware law has allowed these meetings to be virtual for some time, so corporations could have planned an online event from the beginning, Hamermesh explained. Problems arose when particular companies had no internal provision to allow remote meetings or, of course, they had already sent out their notice and materials about an in-person event when gatherings were suddenly restricted because of the pandemic.

“Quite a few companies had issued their proxy statements stating that the annual meeting would be at a hotel in New York, or in some other particular place,” Hamermesh said. After the pandemic hit “you didn’t want hundreds of people in one hotel conference room, and in some places you simply couldn’t do it.”

The SEC acted first to prevent these meetings from turning into super-spreader events. It issued guidance, last updated on April 9, 2020.

In light of the difficulties caused by the pandemic, the guidance said, “the staff will take the position that an issuer that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the date, time, or location of its shareholder meeting without mailing additional soliciting materials or amending its proxy materials[.]”

To make the change, a corporation needed to issue a press release announcing the details and post that press release on its website. In addition, it had to file an announcement of any changes as “definitive additional soliciting material on EDGAR,” the database where anyone can examine the SEC filings of public corporations.

A corporation was also required to take “all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.”

Unfortunately, this SEC guidance “didn’t solve the Delaware law problem,” Hamermesh said. That’s part of what House Bill 341 was designed to fix.

“We were wrestling with this in March or April [of 2020],” Hamermesh said. “The Delaware legislature was not meeting in person, or at all. We were going crazy, thinking, ‘Are they going to do anything?’ They finally did, but it was touch and go for a while.”

Specifically, Delaware had caught up by July, essentially by incorporating the SEC guidance. The change to section 110 allowed a corporation subject to SEC reporting requirements “to notify stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the Securities and Exchange Commission” pursuant to sections 13, 14 or 15(d) of the Securities and Exchange Act of 1934, as amended.

Hamermesh reported that plenty of corporations have availed themselves of this rule change, but as per usual with any change, not all parties were pleased.

“Some shareholder activists say virtual-only meetings are instruments of the devil and this legislation is enabling the devil to do his work,” Hamermesh said. “The underlying complaint is you don’t get to show up in person and look the CEO in the face and ask live questions. Some believe this can be used to squelch stockholder questioning,” making it harder to hold leadership accountable.

The suspicions of abuse were muted by necessity, however, Hamermesh said. “Otherwise, some companies couldn’t have meetings at all.”

When the state of emergency is over — as distant as that happy day seems considering the spread of the virulent Delta variant — virtual meetings may become rare once again. For some shareholders, nothing beats being able to look the CEO in the eye, with no screen in the way.

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Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.