General meetings are a practical expression of corporate democracy and allow members to have a constructive dialogue with the company’s management. They enable the company’s actual owners (i.e. members) to raise issues before the management and receive information essential for them to make informed decisions, which are manifested through their votes. In short, it is the manifestation of corporate democracy.
In India, the Companies Act, 2013 (“Act”) always allowed directors to participate in board meetings via audio visual means. However, there was no corresponding provision for members to participate in general meetings, though it did allow for remote participation through a proxy or electronic voting or postal ballot.
However, the recent COVID-19 pandemic and the consequent nation-wide lockdown has led to a situation where companies cannot conduct general meetings at physical locations, as mandated by the Act. In light of the same, the Ministry of Corporate Affairs (“MCA”), on April 08, 2020 issued a notification (“April Notification”) expanding the scope of e-voting and postal ballot and prescribing a framework for conduct of an extraordinary general meeting
(“EGM”), where there are urgent matters that need shareholder approval prior to June 30, 2020.
In this note (“Note”), we will talk about virtual and hybrid general meetings, the provisions of the Act governing the conduct of general meetings in India, including the April Notification, and take a brief look at the applicable laws in United Kingdom and the United States pertaining to virtual-only and hybrid shareholders’ (or stockholders’) meetings.
- What are virtual-only and hybrid shareholders’ meetings?
“Virtual-only” shareholders’ meetings are held exclusively through the use of technology with all the participants being remotely placed. The United Kingdom is an example where virtual meetings are permitted. On the other hand, “hybrid meetings” are those meetings which are held at a physical location but also permit participation of members through remote communication. 42 states in the United States either provide for or permit the conduct of hybrid shareholders’ meetings.
- What is a general meeting and how is the same governed in India?
A general meeting is a meeting of shareholders of the company. All companies need to hold such meetings to seek authorization from the owners of the company for various business decisions to be taken by the company. The Act recognizes two kinds of general meetings:
(i) Annual General Meeting or “AGM” (Section 96 of the Act): This is a mandatory meeting to be conducted once every year, with a list of mandatory matters to be transacted at the AGM, which includes approval of annual accounts, appointment of directors and auditors, etc.
(ii) Extra-ordinary General Meeting or “EGM” (Section 100 of the Act): An EGM is held on a need basis, when deemed fit by the board of the company (“Board”), to transact urgent business which cannot wait until an AGM.
- Does the Act recognize remote attendance of members in general meetings?
The Act (even prior to the April Notification) permitted members to attend general meetings other than by way of their physical presence at the meeting venue, by (i) participation through proxies, (ii) voting through postal ballot and (iii) e-voting.
(i) Appointment of Proxies: Section 105 of the Act permits a member to appoint another person, in writing (in the prescribed format Form MGT11) as a proxy to vote on his/her/its behalf. However, such proxy cannot speak during the meeting and the proxy is required to be physically present at the meeting venue. Hence, it is not a complete move to a digital medium of conducting general meetings.
(ii) Voting through Postal ballot: A member can exercise his/her/its vote on the resolutions being proposed at the general meetings through postal ballot, as provided for under Section 110 of the Act read with Rule 22 (Procedure to be Followed for Conducting Business Through Postal Ballot) and Rule 20 (Voting through electronic means) of the Companies (Management and Administrative) Rules, 2014 (“Management Rules“). Section 110 prescribes that any decision, barring those which grant the directors or the auditors a right to be heard, can be taken through postal ballot.
The Management Rules prescribe a detailed procedure for offering postal ballot voting, which includes sufficient prior notice (individually to the members, on the company’s website as well as periodic newspaper advertisements as to postal ballot details), circulating a draft resolution along with explanatory statements, etc. A member can exercise the vote through postal ballot within 30 days of the notice being dispatched. Postal ballot votes will be reviewed, tallied and results declared by an independent scrutinizer and all ballot papers need to be preserved as per the Act.
It is pertinent to note that Rule 22(16) of the Management Rules mandates that certain specified matters (such as conversion into a private company, shifting of registered office outside local limits, etc.) should be transacted only by postal ballot or through e-voting facility.
While postal ballot does go a long way in reducing the requirement of having the physical presence of members, it does not offer scope for discussion amongst the shareholders or with the management of the company. Members’ decisions are solely based on the information shared by the company through the notices and other material provided. Hence, while it is corporate governance by the letter of the law, it is not “governance”, in spirit.
(iii) Electronic Voting under the Act: Voting by electronic means (“EVoting”) is a facility provided to members to cast their votes via electronic mode on the proposed resolutions, whether at a general meeting or through postal ballot. E-Voting was introduced to widen members’ participation in decision-making as it was felt that the process of postal ballot was time-consuming and involved substantial administrative costs. Currently, E-Voting is included in Postal Ballot, and as such this substantially eases the burden associated with voting through post. Listed companies and unlisted public companies having a 1000 or more members are mandatorily required to offer the E-Voting facility in compliance with Rule 20 of the Management Rules. For all other companies, it is an option to offer this facility. Note that where a proposed resolution is being considered for voting through electronic means, the same shall be final and cannot be withdrawn.
Similar to the postal ballot procedural requirements, Rule 20 of the Management Rules also requires detailed notices to be issued to the members (with copies to the directors and auditors) on the E-Voting facility, stating that the e-vote cast will be final and providing details of the manner in which the vote may be case, time period for casting a vote, cut-off date, contact details of grievance redressal officers in relation to the E-Voting facility. Such notice is also required to be published on the company’s website and via newspaper advertisements. Note that while a member has cast a final vote through the E-Voting facility, such member can still participate in the general meeting via his/her physical presence.
The votes cast through the E-Voting facility will be reviewed, tallied and results declared by an independent scrutinizer, within 3 days of conclusion of the general meeting. The scrutinizer is also required to maintain a manual/electronic register to record the assent or dissent received from the voting members along with their details.
- Impact of the April Notification
(i) Shareholder approval only through Postal Ballot or E-Voting:
The April Notification requests all companies to take decisions on urgent matters requiring members’ approval through Postal Ballot or EVoting and to avoid physical meetings. This does not include decisions to be taken in respect of “items of ordinary business or business where a person has the right to be heard”, presumably referring to Section 110 of the Act, which states that “… a company may, in respect of any item of business, other than ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting, transact by means of postal ballot, as prescribed…“
(ii) Conduct of an extra-ordinary general meeting prior to June 30, 2020:
If a company urgently requires shareholder approval through an EGM prior to June 30, 2020 and the conduct of an EGM is unavoidable, then the April Notification prescribes conduct of a members’ meeting through video conference (“VC”) or other audio visual means (“OAVM”) for this limited duration, subject to the below conditions.
For companies that are mandatorily required to provide the E-Voting facility under law:
- Notice for the EGM: The notice to be served upon the members containing details regarding the manner in which the meeting will be conducted through VC/OAVM, access details for the members to participate in the meeting and a helpline number for the members to address their grievances relating to their participation in the meeting. Additionally, the notice should be uploaded on the company’s website and sent to the stock exchange (in case of a listed company).
- Attendance to constitute quorum: Attendance of the members participating through VC or OAVM shall be counted towards the quorum for the purposes of the Act.
- Requirements for effective participation by members: The mode of communication should support at least a thousand participants (on a first-come-first-served basis, except for institutional investors, large shareholders holding more than 2% of shares) and must permit two-way video or tele-conferencing to ensure that participants are able to pose questions concurrently or well in advance to the company.
- Access to remote E-Voting: Access to remote E-Voting facility shall be provided to the members prior to the scheduled meeting.
- Voting rights of participating members: If a member has not cast his/her vote through remote E-Voting facility, and is otherwise not barred from voting under the Act (e.g. a member who has not paid calls on his shares), he/she/it may cast their vote by show of hands at the meeting (conducted through VC/OAVM) or by E-Voting during the virtual meeting.
- Appointment of chairperson: Unless otherwise required by the company’s articles of association, the chairperson shall be appointed by show of hands or poll (if there are less than 50 members at the meeting), or by a poll conducted through E-Voting (if there are 50 or more members at the meeting).
- Conduct of voting: Voting should be conducted by the E-Voting facility, where there are 50 or more members present. If there are fewer members, then voting may be conducted through E-Voting or by show of hands (conducted through VC/OAMV) unless a demand for poll is made (as per Section 109 of the Act), in which case the voting has to be conducted through E-Voting only.
- Appointment of proxy: Since there is no requirement of a proxy in a remotely conducted meeting, the members will not be allowed to appoint a proxy for the purpose of participating in such a meeting. However, this does not affect the right of members to appoint a representative for the President of India or Governor of a state under Section 112 (where such person is a member) and the appointment of a representative for a body corporate or a creditor under Section 113 (where such body corporate is a member or the meeting is held for creditors of the company).
- Mandatory attendance: At least one independent director (if any) and the auditor (or its authorized representative) have to be present at a meeting conducted through VC/OAVM.
- Maintenance of record of VC/OAVM: The company shall have to maintain a recorded transcript of the members’ meeting held through VC or OAVM. Public companies are required to upload the recorded transcript on their website.
In case of companies that are not mandatorily required to provide an E -Voting facility under law:
- Common provisions: The provisions relating to notice for the EGM, quorum, mandatory attendance and maintenance of a record of the proceedings shall apply as in the case of companies that are mandatorily required to provide the E-Voting facility under law (refer above).
- Requirements for effective participation by members: The mode of communication should support at least five hundred participants (on a first-come-first-served basis, except for institutional investors, large shareholders holding more than 2% of shares) and must permit two-way video or tele-conferencing to ensure that participants are able to pose questions concurrently or well in advance to the company.
- Conduct of a poll: The members shall be provided with a designated email address to be mentioned in the notice for the meeting to email their votes at the time of passing a resolution during the meeting. The members shall send their votes only to this designated email address and only using their email addresses registered with the company.
(iii) Can companies that have already served notices for their EGM to their shareholders, take the benefit of the April Notification?
Yes. If the notice for an EGM has already been served prior to April 08, 2020, the company may implement the framework laid down in the April Notification and conduct its EGM through VC or OAVM, if it has procured the consent of 95% of its shareholders entitled to vote (as per Section 101(1) of the Act). Further, a fresh notice will have to be issued to the shareholders for such EGM in accordance with the April Notification.
(iv) Filing of resolutions with the Registrar of Companies (“RoC”)
Any resolution passed by the company in accordance with the April Notification has to be filed with the RoC within 60 days of such meeting, stating that the requirements of the April Notification have been complied by the company.
- Virtual Meetings and Hybrid Meetings in other jurisdictions
- United States of America
For remote communication to be generally acceptable for a Virtual Meeting, one should reasonably be able to verify the identity of members and provide them with an opportunity to participate in the meeting effectively, have sufficient access to the live proceedings and vote. Under the state corporation laws in the United States, the Board is empowered to determine the date, time and place of general meetings. However, depending on where the company/corporation is incorporated, different requirements apply.
- Delaware
Delaware law usually permits companies to hold Virtual Meetings as well as Hybrid Meetings, provided that certain conditions are fulfilled. As per Section 211 (Meetings of Stockholders) of Title 8, the Board has the authority to decide to hold the meeting solely by means of remote communication, (if not otherwise stated in the company’s certificate of incorporation or bylaws). If the meeting is a Hybrid Meeting, stockholders and their proxies who are not physically present at the place of the meeting shall be deemed to be present if they participate through remote means, subject to certain conditions such as verifying the identity of the stockholder/proxyholder, implantation of reasonable measures to ensure effective participation (including an opportunity to read/hear proceedings concurrently) and maintenance of records. Similar to Indian law, there are also detailed requirements on providing adequate and complete notice of the Hybrid and Virtual Meetings.
- New York
New York Business Corporation Law generally permits the conduct of Hybrid Meetings (and not virtual-only meetings), where shareholders may be allowed to participate remotely, though an in-person meeting is still required to be held. Further, corporations are required to permit shareholders to attend meetings via remote communication and such shareholders should be deemed present for voting purposes.
However, in light of the pandemic, an executive order has been passed by New York’s Governor on March 20, 2020, temporarily suspending the requirement for annual or special shareholder meetings to be held at a physical location for meetings to be conducted between March 20, 2020, and April 19, 2020. Thus, New York corporations may now choose to hold a Virtual Meeting for this duration.
- California
As per Section 600 of the Corporations Code, shareholders may participate in a shareholders’ meeting by electronic transmission and vote in the meeting remotely, where such meeting is held partly at a designated physical location and partly by electronic transmission (Hybrid Meeting), or completely by electronic transmission (Virtual Meeting), if (i) remote/virtual participation is not prohibited by the corporation’s bylaws, (ii) the Board authorizes such participation, (iii) the Board complies with any guidelines adopted by it in this regard, and (iv) electronic transmission is being made to the shareholder, with such shareholder’s consent to the use of such means of communication. The law also prescribes other conditions to be fulfilled for the conduct of Hybrid and Virtual Meetings that are similar to the conditions specified under Delaware’s Title 8 law, with respect to the verification of the shareholder’s identity, provisions facilitating effective participation in the meeting, notice of the meetings, and the maintenance of records of the votes cast (or other actions taken) at the meeting.
- United Kingdom
Section 360A of the Companies Act, 2006 (“UK Act”) allows companies to conduct shareholders meetings through electronic means without any restrictions. However, in case of listed companies, certain conditions need to be fulfilled relating to verification of the identity of participants and ensuring the security of the electronic communication.
As such, there are no specific restrictions on conduct of Virtual Meetings, offering great flexibility to companies to design their own procedures to conduct their general meetings. In fact, Jimmy Choo has created a specific mobile app for conducting Virtual Meetings.
Our Take
The MCA has rightly recognized the increasing need for companies to be able to conduct their statutorily required meetings through video conferencing or other audio-visual means, particularly during this pandemic. The changes introduced by the April Notification will greatly ease the regulatory compliance burden of companies across the country, given the countrywide lockdown, and impossibility of conduct of physical meetings.
From a quick review of laws in major jurisdictions, it can be seen that some jurisdictions, such as the UK, provide companies with absolute discretion with respect to conduct of their general meetings, and others have taken a middle path, where Virtual Meetings are permitted, subject to conditions. There have been concerns raised that virtual-only participation could diminish the ability of shareholders to fully participate and have their concerns heard without the risk of management exerting excessive control. Particularly, virtual-only interactions could eliminate the only possibility for shareholders to directly engage on a regular basis with the management to discuss the company’s functioning. Hence, certain checks and balances are required, to ensure that remote communication
is not misused by companies or shareholders.
The requirements of the April Notification appear to have introduced effective checks and balances on the process of corporate governance and ease of doing business. However, it may be helpful to include an additional provision that mandates that the companies implement reasonable measures to verify the identity of the member to avoid manipulation of remote means of communication for serving personal needs, especially in light of the possibility (and in many cases, ease) of misuse of AV/OAVM technology. The April Notification definitely demonstrates an intent in favor of conducting virtual meetings, through video conferencing or otherwise, and with proper measures in places (to prevent misuse), it may be beneficial as a long-term measure to facilitate efficient participation of members whether or not they are able to be physically present for each general meeting.
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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.