In recent times, annual general meetings of listed companies and other companies with a large group of shareholders have been considered virtually infeasible — the risk of spreading the coronavirus was too great. Prohibition orders issued by the authorities have become more frequent and companies had been forced to postpone shareholder meetings. Important structural measures and the distribution of dividends could have been considerably delayed.
On 27 March 2020, the German legislator passed an act to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal proceedings (“Act”). Its purpose is in particular to address challenges and uncertainties in preparing and holding annual general meetings. Management and supervisory boards of German companies should consider the novelties, which will be examined below.
First, the Act opens up the already existing possibilities of online participation and the use of electronic communication channels also for those companies that do not have a corresponding authorisation in the articles of association. As a result,
have been expressly made possible even if the articles of association or bylaws do not provide for a respective authorisation.
These measures require the approval of the supervisory board. Here, too, the Act makes it easier to take decisions (see chapter 6).
At the “heart” of the Act is the “virtual annual general meeting” — for the first time it is possible to hold an annual general meeting entirely without the physical presence of shareholders at the venue of the meeting. Although there is no classical place of meeting in this respect, at least the chairperson of the meeting and the notary public who takes the minutes should meet. The company’s proxy should also be physically present on site for organisational reasons.
According to this provision, the management board may “convene” such annual general meeting without the physical presence of the shareholders, provided that
In recent years, the video and audio transmission of the annual general meeting has already been tested successfully by many – especially larger – companies, but is usually limited to the transmission of the speech of the CEO and the report of the supervisory board. In some cases the general debate was also broadcast; in this regard the companies had to pay particular attention to data protection aspects. In contrast to previous practice, the virtual annual general meeting must be broadcast in full. For this purpose, it is advisable to use the proven means and to make them available for the entire annual general meeting.
Since the general debate will not be held in its traditional form, it is to be expected that data protection issues will be considerably less significant, as one cannot expect that speakers or individuals asking questioners will be named or shown. In addition, the legislator makes it clear in the statement of reasons for the draft that the company does not have to vouch for undisturbed transmission and smooth reception vis-à-vis every shareholder. This should considerably reduce, if not eliminate, in this area the risk of action to set aside, similar to the already existing exclusion of action to set aside in section 243 (3) no. 1 of the German Stock Corporation Act (AktG).
In order to exercise voting rights, the management board must first offer the possibility of granting proxy. The use of the proxy nominated by the company, whose authorisation should be made possible by electronic instruction until the end of the general debate, lends itself to this purpose. The management board may then decide to provide for either electronic absentee voting or another method of electronic voting, such as via a shareholder portal with a voting function. In practice, it will be advisable here to first use those instruments that the company has already used in the past, such as some companies already did for e-mail voting. On the other hand, the integration of voting fields, e.g. in the shareholder portal, has not yet been technically implemented and may also be more complex, which would then have to be kept open until the end of the voting process.
There is very far-reaching relief with regard to the shareholders’ right to ask questions. While the shareholders’ right to speak at the virtual annual general meeting will not apply altogether, the right to ask questions will be considerably restricted. There are considerable restrictions in the management board’s duty to provide information. According to the statutory provisions, shareholders shall be given the opportunity to submit questions electronically, whereby the company may stipulate that questions must be submitted at least two days before the meeting. Section 121 (7) AktG, according to which the day of the annual general meeting is not to be counted, should apply for the calculation of the period. On the other hand, there is no provision for the day of receipt not to be taken into account either. As a result, the management board can stipulate that questions must be submitted in advance, for example by e-mail or via a shareholder portal. As a precautionary measure, the deadline should be the second day before the day of the meeting.
The obligation to answer the questions is considerably restricted. The answer is given at the “dutiful, free discretion” of the management board. According to the statement of reasons for the draft of the Act, the shareholder expressly has no right to a reply. In this respect, the legislator refers to an expected flood of questions and obviously wants to provide the management board with tools to deal with this — real or only assumed — flood. In practical terms, the management board can summarise questions, give preference to shareholders’ associations or institutional shareholders in answering them, or generally exercise its discretion in terms of not answering them. There is no limitation to the grounds for refusal of information provided for in section 131 (3) AktG.
At present, the extent to which the discretion must be exercised “freely” or “dutifully” still appears open. From a legal point of view, the two terms have different connotations: free discretion allows for a more extensive selection of questions and answers than it is the case with dutiful discretion. In view of the fact that the legislator’s statement of reasons for the draft of the Act is based on dutiful discretion when selecting and answering questions, in addition to the aspect of efficiency, a balance should always be struck between the interests of the shareholders and the company in terms of an objectively justifiable decision. In any case, a clear regulation would have been desirable; on the basis of the Act, the management board in any case has a wide range of discretionary powers, which it can deal with responsibly, but certainly “courageously”.
The questions asked or submitted electronically must be answered at the annual general meeting after exercising the above discretion. The legislator’s statement of reasons for the draft of the Act still mentions an interesting possibility: If questions are answered in advance, e.g. in a FAQ catalogue, they do not have to be answered (again) at the annual general meeting. In this respect, drawing up such a FAQ catalogue with the “classic” or otherwise expected shareholder questions accessible should be a good idea from a legal point of view.
Finally, shareholders who are not present in person and who have exercised their voting rights by one of the electronic means opened up by the management board must be granted the right to object to the minutes. The shareholders must be given the opportunity to submit their objection electronically. In practical terms, setting up a specific e-mail address should be a practical way of doing this. Since the notary must note and record objections, it must be ensured that he is given access to the e-mails of objection.
Since the right of objection also expires at the end of the virtual annual general meeting, appropriate measures should be taken to ensure that the e-mail address can be reached. However, it seems less advisable to set up an “objection button” in the shareholder portal. An all too easy “invitation to object” by a simple click is likely to lead to a sharp increase in the number of objections declared in this way and therefore to considerable uncertainty in implementing the decisions.
Companies wishing to use the virtual annual general meeting should contact the notary public recording the minutes in good time, not only, but in particular, with regard to the possibility of electronic objection, in order to agree on possible implementation options.
The law does not regulate the handling of the shareholders’ right to submit motions. In particular, it remains unclear whether and to what extent countermotions can even be submitted at a virtual annual general meeting.
The legislator’s statement of reasons for the draft of the Act apparently assumes that all rights to propose motions “in” the annual general meeting of shareholders will lapse if only electronic postal voting and proxy voting are provided for. Where other forms of electronic participation are used, there “may” be rights to propose motions. It remains to be seen whether the conclusion must be drawn from this that countermotion rights are to be dropped altogether at a virtual annual general meeting.
A practical problem arises when dealing with motions from shareholders in accordance with section 126 AktG. As a matter of principle, such motions must be submitted again at the annual general meeting. Depending on the specific form of the virtual annual general meeting, the shareholder may not be able to formally submit this motion due to the lack of a communication channel. Whether and to what extent the countermotion right of the shareholders still exists at all in the form of the virtual annual general meeting is still unresolved. After evaluation of the reasons for the Act, however, it seems likely that rights to propose motions in this form to the annual general meeting are also suspended.
Furthermore, the Act makes the provisions of the AktG regarding deadlines considerably more flexible. In general, the management board can decide to shorten the deadlines as shown below. If the convocation period is shortened, the remaining deadlines follow accordingly. It is important to note that this is a shortening option that can be applied individually.
Whether a shortening of the convocation period and therefore, if necessary, more flexibility is advisable must be examined in each individual case. Particular consideration should be given to whether the appropriate flow of information between notifying offices and intermediaries can be ensured in times of the corona crisis or whether, in view of this, it would be advisable to retain the classic deadline regime.
The Act also stipulates that, in deviation from section 59 (1) AktG, the management board may also pay a deduction from the net profit for the year to shareholders without authorisation in the articles of association. This provision is intended to counter the frequently expressed fear that the payment of dividends will be delayed due to the requirement of a resolution by the annual general meeting because the annual general meeting is postponed. Such a decision is not required for advance payments.
Firstly, it should be noted that only the authorisation in the articles of association is considered dispensable. However, the specific restrictions on advance payments in accordance with section 59 (2) AktG continue to apply, i.e.
Depending on the amount of the dividend proposed by management, shareholders may initially only receive a “dividend light”. The approval of the supervisory board has always been required (section 59 (3) AktG); however, resolutions can now be passed under simplified conditions (see chapter 6).
To date, advance payments have had no significant practical relevance. Many companies ignored a corresponding authorisation in their articles of association because the expense for the company and the benefit for the shareholders, who (could) routinely decide on the dividend anyway, were often considered disproportionate. In addition, there were the limitations mentioned above. These still exist but the current restrictions on preparing and holding a timely annual general meeting could make the instrument of advance payments more attractive.
The management board and supervisory board should at least consider the relevant options if the occasion arises, especially as the shareholders may have certain expectations. However, liability risks must be kept in mind, as the management may be liable for damages if it makes excessive advance payments to shareholders.
The annual general meeting of a stock corporation (Aktiengesellschaft – AG) or partnership limited by shares (Kommanditgesellschaft auf Aktien – KGaA) no longer has to be held within the first eight months of a fiscal year, but only before the end of the fiscal year.
This provision initially provides the companies concerned with more time and increases their planning security. It is apparently based on the expectation that the corona pandemic will subside in the foreseeable future and that annual general meetings will again be plannable and feasible as face-to-face events as of September 2020. However, companies considering to hold a virtual annual general meeting may also benefit from the extension of the deadline if they wish to wait for first experiences with this option or the development of technical means.
This option is not available to companies in the legal form of a European company (Societas Europaea – SE). As in the past, they must hold the annual general meeting within the first six months of the fiscal year. This may be surprising, as these companies have a shorter time frame for carrying out their meetings anyway. Under EU law, however, the general meeting of an SE must be held within six months following the end of the financial year. National legislators cannot disregard this — even in exceptional times of crisis — because they lack the necessary legislative competence.
The restriction affects more than 30 issuers from DAX, MDAX and SDAX alone. They and all other public companies with the legal form of an SE and their shareholders undoubtedly deserve the same protection as stock corporations and partnerships limited by shares and their shareholders. A timely response from Brussels would therefore be highly desirable.
The management board, as the body responsible for convening the meeting, will decide whether to make use of the extended deadline at its due discretion with the approval of the supervisory board (see chapter 6). Penalty proceedings pursuant to section 407 (1) AktG shall then be excluded, as shall any liability of the management board for damages. According to the legislator’s statement of reasons for the draft of the Act, however, this will probably only be the case if the postponement beyond the original deadline is due to the effects of the pandemic. However, such a restriction does not explicitly follow from the wording of the Act.
The aforementioned concessions are subject to the approval of the supervisory board. According to the legislator’s statement of reasons for the draft of the Act, this is intended to prevent possible abuse to the extent possible and to ensure the supervisory competence of the supervisory board. In some cases, this requirement had also been provided for under the pre-existing legislation.
The supervisory board decides — as usual — by resolution. In order to enable the board to adopt the approval resolution promptly and with little preparation, the law provides that, in deviation from section 108 (4) AktG, it may adopt resolutions in writing, by telephone or in a comparable manner without the physical presence of the members, irrespective of corresponding provisions in the articles of association or rules of procedure. The latter also includes video conferences or resolutions by e-mail or even Whatsapp, whereby care must always be taken to ensure careful documentation. The right of the supervisory board members to object to such a form of resolution is not waived — unless otherwise provided for in the articles of association or the rules of procedure; however, at the present time it is unlikely to be exercised dutifully in rare cases.
Whether the decision in individual cases can be delegated to a committee is also governed by section 107 (3) sentence 7 AktG, from which the law does not provide for any deviation.
Setting aside a resolution of the annual general meeting cannot be based on
In doing so, the legislator wanted to prevent companies from not taking advantage of the corresponding relief for fear of legal challenges. This also includes the fact that violations of the limited duty of disclosure do not give rise to any possibility of setting aside. This is only different in the — practically extremely rare — case where intent must be proven to the company. The exclusion of setting-aside in accordance with section 243 (3) no. 1 AktG remains unchanged.
The provisions pursuant to section 118 (1) sentences 3 to 5, (2) sentence 2 AktG were inserted by the German act for the implementation of the stockholder rights directive (ARUG II); they are only applicable to annual general meetings convened after 3 September 2020. However, the legislator wanted to ensure that even in the event of an annual general meeting being convened subsequently, an action for setting aside cannot be based on negligent violations of these provisions.
In doing so, the legislator is taking another welcome step against abusive actions for setting aside. Companies that opt for a virtual annual general meeting and take on the challenges associated with it are at the same time accommodating shareholders who — albeit for good reasons — are interested in ensuring that the scheduling is not postponed any further and that the meeting does not take place shortly before the end of the financial year. It would not be appropriate for them to reckon with increased risks of actions for setting aside and, as a consequence, to refrain from making use of the relief or to have to deal with corresponding actions for setting aside. After all, the law can only fulfil its purpose if the companies can implement the measures decided upon — not least the distribution of profits — in a timely and legally secure manner.
It is to be expected that many companies in the current situation will make use of the relief provided by the law for their annual general meeting 2020. Timely shareholder meetings are in the interest of both the company and its shareholders. The associated restrictions on shareholder rights are considerable, which is why the current crisis legislation can only be used in part, if at all, as a "field test" for a generally applicable regulation of the virtual annual general meeting without physical presence. A challenge also lies in the practical implementation of the new possibilities: The companies that have already tested and used the possibilities of electronic shareholder participation in the past have an advantage. All the others should now be open to the technical possibilities.
For the current crisis, however, such relief is certainly a useful tool to enable the annual general meetings of listed companies to be conducted in a legally secure manner within an orderly framework. In doing so, they are providing an important service to the German capital market and its participants.
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