Picture This
Let’s pretend it’s 2019 and you are attending an annual meeting the old-fashioned way: in person. You own shares of The Tao Company.[1] You arrive at Tao’s 2019 meeting of shareholders, present proof that you are a record holder who owned the stock as of the record date, grab a cup of coffee and seat yourself in the audience. About 50 other people are in the audience with you.
Nothing is on the stage except for a table with a DVD player and a monitor. At exactly 9:00, someone comes onto the stage to turn on the monitor and press "PLAY" on the DVD player. You watch The Tao Company’s CEO and general counsel talk on screen for about 15 minutes. The CEO calls the meeting to order and runs through the usual items of business to vote on that you read about in the Tao proxy materials. You see headshots of each of the Tao board members. Tao’s general counsel mentions that if you’d like to vote or change your vote, you can raise your hand and a Tao employee will give you a ballot to complete and submit before the polls close.
The DVD pauses, and an usher invites a shareholder proponent to approach a microphone standing in the aisle and speak for three minutes. After that, the DVD resumes, and you watch Tao’s CEO make a few more remarks. The general counsel comes back onto the screen, declares the polls closed and the meeting adjourned. He gives a “pass/fail” report on the items voted on and then reads answers to a handful of questions that were submitted by shareholders in advance. You have your own question, so you write it down and give it to the usher. Your question doesn’t get addressed at the meeting.
The DVD ends, indicating the meeting is over. Your phone says it’s exactly 9:30. As you exit the room, there is an announcement thanking you for attending The Tao Company’s 2019 annual meeting of shareholders and to get home safely.
You Call That a “Meeting”?
But was that really a meeting of the shareholders of The Tao Company? I don’t think so, at least not for purposes of the legal requirement for a corporation to hold one. IMHO, what I just described was two events. One was a management rehearsal of an annual meeting that was captured using a video recording device and saved to a DVD. The other was a gathering of about 50 Tao employees and shareholders to watch the DVD a few days later. If that gathering actually was a shareholder meeting, who was the chairperson? Who was there to call it to order and declare it adjourned? The person with the DVD remote?
Apparently there is a small number of companies that have conducted their virtual annual meeting this way: staging a VSM that had been entirely recorded in advance, except for the portion where the shareholder proponent was brought onto the line to present their proposal. No Q&A session, only reading answers to some of the questions that had been submitted in advance. I’m not going to name specific companies, but I have good sources in high places who confirmed that a completely pre-recorded VSM is a thing, and there are companies that did this in 2021… without telling people that’s what they were doing.
So, Are Pre-Recordings Illegal?
Many companies use recorded videos as part of their annual meetings. This is totally appropriate and should even be encouraged. These videos include TV ads, previews of new products, customer testimonials, and employee stories, all of which can add rich content and interesting texture to an otherwise perfunctory event. Companies go to great lengths for their events—whether it’s for customers, employees or investors—to have a certain “look and feel” that portrays the company in the way they want. It’s about perception and culture. At my old company’s annual meetings, we used sound and imagery very effectively to have the attendees, both shareholders and employees, walk out of there feeling proud to be part of something larger and that all of us were playing a part in “caring for the world, one person at a time.” When done well, using this type of content can add intangible, unquantifiable value to the corporation’s reputation and branding.
You may not know this, but many companies use audio recordings to kick off their quarterly earnings calls. The head of investor relations’ opening remarks about the results of the quarter are almost always scripted, so some companies just record them during the afternoon or evening before the actual call and play them back the next morning. Then the CFO and head of investor relations come onto the line to answer questions from research analysts in real time. Someone once suggested to me that this practice is unethical. I disagree. If you are going to read from a script anyway, why not just record it to sharpen the sound quality and make sure there are no flubs, like saying adjusted EBITDA was $3 million instead of $3 billion? The script usually tracks the language of the press release that gets issued and filed on Form 8-K before the call, so people have already read it by the time the call starts. Really the only reason people tune into earnings calls is to pick up any useful nuggets of information (or witness the occasional profanity-laden tirade) that may come out during the Q&A sessions.
The Law
Isn’t what The Tao Company did just like an earnings call and therefore totally fine? No. The difference is that companies are legally required to have annual shareholder meetings. They are not required to have earnings calls or even issue earnings reports. As long as a public company files its Forms 10-K and 10-Qs, it’s fulfilled its periodic financial disclosure obligations. And there’s no requirement to have calls to talk about the 10-Ks and 10-Qs with the investment community or anyone else.
Here’s what the relevant portion of Section 211 (Meetings of Stockholders) of the Delaware General Corporation Law (DGCL) says:
(a)(1) Meetings of stockholders may be held at such place, either within or without this State as may be designated by or in the manner provided in the certificate of incorporation or bylaws, or if not so designated, as determined by the board of directors…
(b) … an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws… Any other proper business may be transacted at the annual meeting.
When a specific set of people are required to meet to accomplish a specific thing on a designated date and at a designated time, to me that means all of those people have to convene, or be invited to convene, and do what needs to be done at same time, even if it's on a teleconference or videoconference instead of in the same room. As we know, the laws of most states (including Delaware) allow companies to hold a shareholder meeting “virtually” (i.e., with no physical meeting place) if certain requirements are met. But, even if everyone is together only in cyberspace, they still have to be there at the same time (IMHO). The Tao Company didn’t do that. They chose to get cute and cobble two things together and call it one.
Right to Participate
The companies that did the pre-recorded annual meeting thing either didn’t have a Q&A session or did one like Tao’s, playing pre-recorded answers to questions that had been submitted in advance. As I’ve said many times before, there is no legal requirement for a corporation to have a Q&A session at an annual meeting. Interestingly, the only mention in the law that may suggest that there has to be one is in the language about VSMs. Section 211(a)(2) of the DGCL says that the board may allow shareholders to attend its annual meeting via VSM and be deemed present in person and vote, with one of the conditions being that the corporation “shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings” (emphasis added).
Doesn’t requiring a reasonable opportunity for shareholders to “participate” mean there’s a right to ask questions, especially when the law distinguishes participating from voting? Based on prevailing practice, clearly most lawyers think not, taking the view that “participate in” the meeting means attend the meeting.[2] Some lawyers, however, say that there could be a right to ask questions on the items of business, but it may depend on whether a company is public or private. Shareholders of public companies are provided with extensive proxy disclosures required by SEC and stock exchange rules well in advance of the meeting. So, public company shareholders should have everything “material” to make an informed voting decision before coming to the meeting. Shareholders of private companies, however, don’t receive any SEC or stock exchange required disclosure. They may have very little information to go on before the vote. Thus, there is a more compelling argument that a private company shareholder has a right to ask questions at the meeting to get what they need to make an informed voting decision.
Who Cares?
But even if The Tao Company’s entire annual meeting, including Q&A, was pre-recorded, so what? Everything that was supposed to happen happened. Tao’s shareholders were able to attend, each item of business (including the election of directors and the shareholder proposal) was presented, shareholders could vote before the polls closed, etc. And Tao even gave shareholders the opportunity to submit questions in advance of and during the meeting. No shareholders were disenfranchised or otherwise harmed during this VSM.
Why am I being so pedantic and crying over spilled milk when there are way more important problems to solve in Corporate Governance Land? The reason is that it seems like we’ve identified a VSM-specific legal issue. At a VSM, a company can play audio or video recordings of people who appear to be speaking in real time, but are not. In fact, they can do the entire thing that way without anyone in the VSM audience knowing. There’s no way they could get away with that at an in-person annual meeting. The question is: Does recording the proceedings in advance and playing it later for the shareholders through a VSM platform, when shareholders have no clue that the company is doing that, fly for legal purposes?
There was once a great TV ad with the line, “Is it live, or is it Memorex?” where the amplified voice of jazz legend Ella Fitzgerald shatters a glass both when she is singing live and when the recording is played on tape. The implicit claim was that listening to Lady Ella recorded on a Memorex cassette tape is virtually indistinguishable from being in the front row when she is singing live. Without seeing, you have no way of knowing.
How virtual can a virtual shareholder meeting be and still be called a meeting?
[1] A fictitious Delaware corporation (fictitious ticker symbol: WAY) named after the Tao Te Ching, the classic Chinese text written by philosopher Lao Tzu during the Zhou Dynasty (c. 1046–256 BCE). [2] Section 7.09 of the Model Business Corporation Act (Remote Participation in Shareholders’ Meetings), both the black letter and the official comment, makes it clear that “participation” means attendance under the laws of the states that have adopted that section of the MBCA.