Corona crisis as a legal challenge for the annual general meeting 2020/2021
***** Update of 18 December 2020: Legislator strengthens shareholder rights for virtual annual general meetings in 2021
Shortly before the 2021 annual general meeting season starts, the legislator has at short notice once again strengthened shareholder rights for virtual annual general meetings. It has taken the (actually unrelated) German Act on the Further Shortening of Residual Debt Relief Proceedings and on the Adaptation of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law as well as in Tenancy and Lease Law (the ‘Act’) as an opportunity to also once again adapt the provisions of the COVID-19 Act relating to annual general meetings, which have already been extended until the end of 2021.
On the basis of the Decision Recommendation and the Report of the Committee on Legal Affairs and Consumer Protection, the Bundestag (lower house of German parliament) and the Bundesrat (upper house of German parliament) have adopted the following amendments (see Article 11 of the Act):
- Replacement of the ‘opportunity to ask questions’ with a ‘right to ask questions’ of shareholders by way of electronic communication.
- Abolition of the management board’s discretion as to ‘whether’ to answer questions: The management board can now only decide, according to its duly exercised and free discretion, how (and no longer whether) to answer shareholders’ questions.
- Extension of the deadline for submitting questions: In the future, the management board may only require that questions must be submitted by electronic communication no later than one day (instead of the previous two days) before the meeting.
- The ‘legal fiction solution’ in dealing with shareholder motions is being made law: motions or nominations of shareholders received by the company prior to the annual general meeting and which are to be made accessible by the company (sections 126, 127 German Stock Corporation Act (Aktiengesetz, AktG) are deemed to have been submitted ‘at’ the meeting.
2. The changes in detail
The changes mean that the management board must now in principle answer the questions submitted, subject to a right to refuse to provide information (section 131(3) German Stock Corporation Act), and that it no longer has any discretionary right to choose. At the same time, the legislator is clarifying that this right to ask questions is still not the same as the actual right to information regulated in section 131 German Stock Corporation Act. The management board is still free to combine the same or similar questions and to answer them in a uniform manner if this seems reasonable. In this way, the legislator is essentially only reproducing the largely predominant practice seen this year. Even without this regulation, most companies had themselves decided to answer all shareholder questions received.
Until now, the management board could require that shareholders must submit their questions up to two days before the meeting. In future, shareholders must be given one more day to ask questions. However, it is doubtful whether this serves the interests of the shareholders to any significant extent. The preparation time for answering questions has generally increased the quality of the answers compared to in-person annual general meetings. However, this year’s experience has also shown that many shareholder questions were received by companies only shortly before the deadline. Companies that had to deal with a large number of questions, especially in special situations or in the case of significant structural measures, therefore also needed the full two days immediately before the annual general meeting to carefully prepare the answers and, if necessary, to structure them sensibly according to their subject matter. In these cases, the elimination of one day of preparation time will present companies with particular challenges.
Furthermore, the legislator has now expressly anchored an already widespread practice in dealing with shareholder motions, the so-called ‘legal fiction solution’, in the Act. In doing so, it takes into account the fact that it is typically not possible, although required by law, for shareholders in the context of a virtual annual general meeting to (re)submit countermotions or nominations ‘at’ the meeting. This is because, as annual general meetings in 2020 have largely shown, shareholders have so far not been granted any genuine electronic ‘participation’ by means of electronic communication (section 118(1) sentence 2 German Stock Corporation Act). Even if electronic participation is granted, this does not necessarily have to be linked to the possibility of exercising the right to propose motions. Countermotions and nominations to be made accessible by the company prior to the annual general meeting, i.e. those sent to the company at least 14 days prior to the meeting, will in future be deemed to have been (re)submitted at the annual general meeting. The shareholder submitting the motion must be duly authorised for this purpose, i.e. have evidenced his/her shareholding, and be registered for the annual general meeting.
3. Date of entry into force
Of particular importance for companies that, for example due to a financial year that differs from the calendar year, already hold their annual general meetings in the first months of the new year is the question of when these new regulations are to be taken into account. The described changes are to come into force two months after the Act has been promulgated. It is to be expected that the Act will be promulgated or published in the German Federal Gazette before the end of this year. It is therefore expected that virtual annual general meetings from the end of February 2021 will have to be conducted in accordance with the new rules and that the invitations will have to contain corresponding information.
***** Update from 28 October 2020: Virtual AGM according to COVID-19 Act possible until 31 December 2021
As expected, the German Federal Ministry for Justice and Consumer Protection has passed the “Ordinance to extend measures in corporate law and in the legislation on companies, cooperatives, associations and foundations to combat the effects of the COVID-19 pandemic”. The ordinance was announced today, 28 October 2020, in the German Federal Law Gazette (Bundesgesetzblatt) (BGBl Part I, p. 2258) and enters into force tomorrow. The applicability of sections 1-5 of the COVID-19 Act has been extended until 31 December 2021.
No changes in content were made to the draft bill. In particular, even the much-criticised Explanatory Memorandum of the draft bill has been retained without modification. It remains to be seen whether and to what extent the Ministry’s suggestions (see our last update from 18 September 2020) will influence how general meetings are held in the next year. If only due to the fact that the Ministry was expressly authorised only to “extend the applicability” of and not to make any material changes in the COVID-19 Act, this cannot result in any different application or interpretation of the law than during the 2020 AGM season.
***** Updated on 18.09.2020: Virtual AGM under COVID-19 Act expected to be possible until the end of 2021
On 18 September 2020, the German Federal Ministry of Justice and Consumer Protection published the draft bill for an ordinance to extend measures in corporate law and in the legislation on cooperatives, associations, and foundations to combat the effects of the COVID-19 pandemic (in German). According to this draft, the corporate law measures adopted under 2 of the Act to mitigate the effects the COVID-19 pandemic in civil law, insolvency law and criminal procedural law (COVID-19 Act) (in German) at the beginning of the pandemic in late March 2020 are to be extended until 31 December 2021.
The draft bill’s explanatory memorandum contains the following core statements:
- With the extension, affected companies can continue to make use of the possibility of holding AGMs as virtual AGMs in accordance with section 1(2) COVID-19 Act until 31 December 2021. This applies to both ordinary and extraordinary general meetings.
- Companies should only make use of this instrument in individual cases if this appears necessary in view of the specific pandemic situation. The extension is therefore intended to create planning security, especially for those companies that intend to hold their ordinary or extraordinary AGM in the first months of the calendar year 2021. If large gatherings are possible again, the companies are by no means forced to hold a virtual AGM, but can return to in-person meetings or choose hybrid dual-track formats. They should also use opportunities to adapt their articles of association or bylaws accordingly.
- In the event that an AGM is held as a virtual AGM, a central element of the meeting’s organisation is how the possibility of shareholders asking questions is to be handled, which is a right to which shareholders are entitled. The management board continues to decide at its own reasonable discretion on how to answer questions and may require that questions be submitted by electronic communication at least two days before the meeting. Companies should continue to be as shareholder-friendly as possible with regard to this possibility of asking questions, especially when questions are submitted in advance. In this respect, the management board primarily has the option not to make use of the requirement that questions be submitted at least two days before the meeting. If need be, it should be made possible – within the limits of the technical possibilities available in the individual case – that questions can still be submitted during the AGM. In addition, the management board should exercise its reasonable discretion to answer as many of the questions submitted as possible.
This means that public limited companies (AGs), public companies limited by shares (Kommanditgesellschaften auf Aktien - KGaA) and European companies (SEs) will probably also be able to make use of the possibility of a virtual general meeting next year.
However, the reasons given for the ordinance according to the draft bill’s explanatory memorandum make it clear that an even more comprehensive consideration of interests will have to be carried out next year if the management board decides on an alternative virtual AGM. This consideration of interests should – as has been the case so far – be carefully documented.
***** Updated on 29.05.2020: EU Regulation extending the deadline for general meetings of European public limited companies (SE) has come into force *****
On May 28, 2020, the Regulation proposed by the European Commission to extend the deadline for holding SE Annual General Meetings came into force.
Companies in the legal form of an SE now also have the option of holding their Annual General Meeting within 12 months of the end of the financial year instead of within six months (Art. 54 (1) sentence 1 SE Regulation), provided that the Annual General Meeting is held by 31 December 2020 at the latest.
***** Update on 4 May 2020: EU Commission proposes extended period for AGM of European public limited companies (SE) *****
On 29 April 2020, the European Commission published a proposal for a Regulation which allows European public limited companies (SE) to postpone their 2020 AGM until the end of the year.
In general, SEs are required to hold their AGM within six months after completion of the financial year (Article 54(1) sent. 1 SE Regulation). The simplifications under the Corona emergency legislation, by which the statutory period for holding the AGM of public limited companies and public companies limited by shares has been extended until the end of the 2020 financial year, does not apply to the SE due to the lack of legislative competence of the German federal government (see 4. of the update on 23 March 2020 below).
The European Commission has now addressed this situation and published a proposal for a Regulation that will also allow an SE to postpone its 2020 AGM until the end of the financial year, but no later than until 31 December 2020. The Regulation is to be adopted by the Council of the European Union with the consent of the European Parliament and is to enter into force as soon as possible, in particular by waiving the generally applicable eight-week period for submitting the draft to the national parliaments.
Even after entry into force of the Regulation, SEs are required when planning the AGM to take account of the applicable restrictions on holding an AGM and to examine whether the AGM should be held as a virtual AGM in accordance with the Corona emergency legislation.
***** Updated on 30 March 2020: Corona emergency legislation enters into force *****
The provisions of the Coronavirus emergency legislation relevant to the AGM entered into force on 28 March 2020. The adopted version of the law does not contain any significant changes in content compared to the federal government’s draft bill (see our update dated 23 March 2020).
1. Decision required on the use of the new options
Companies whose AGM is about to be held should check, in consultation with their legal advisors and the technical service providers for the AGM, to what extent a virtual AGM is possible for them or whether the AGM should initially be postponed to a later date in order to hold it as a face-to-face event, provided that events are then permitted again. If the AGM has already been convened as a meeting held in person and is now to be held virtually, it must first be cancelled and reconvened by adjusting the conditions of participation in the invitation.
When making use of the new legal options, companies must also decide whether to make use of the shortened deadlines prior to the AGM (see under 3. in the following update dated 23 March 2020). If the AGM is to be held virtually, it is particularly important to consider the lead time required to implement the requirements for a virtual AGM in the processes to date. Companies that have issued bearer shares should also examine whether intermediaries can actually handle the resulting shortening of the time periods for sending the convening notice and the proof of share ownership. If the company makes use of the shortened convening period under the coronavirus emergency legislation by going below the previous 30- or 36-day period (section 123(1) and (2) sentence 5 German Stock Corporation Act), a voluntary scheduling of the record date on a date earlier than the 12th day prior to the AGM with the aim of extending the transmission period in the interest of the intermediaries seems in any case not to be possible. In this respect, the explanatory memorandum refers to the requirements of the Shareholder Rights Directive (Directive 2007/36/EC), according to which at least eight days must elapse between the last legally permissible day for convening the AGM and the record date.
2. Virtual AGM removes the basis of fast-track administrative court proceedings
If companies use the option of holding the AGM exclusively virtually, at the same time basis for possible motions by activist shareholders in fast-track administrative court proceedings is removed. At the Frankfurt Administrative Court (in German) last week, an applicant who described himself as a ‘critical shareholder’ had applied for a temporary injunction to prohibit the holding of an AGM with personal attendance scheduled for May 2020. The motion was unsuccessful. If AGMs are to be held purely virtually in the future, then there is already a lack of an ‘event’ within the meaning of section 28(1) sentence 2 German Act to Prevent and Combat Infectious Diseases in Humans (IfSG).
***** Updated on 24 March 2020: Corona emergency legislation, including virtual AGM 2020 *****
Following the example of its European neighbour countries, Germany’s Federal Government published a draft act to further mitigate the negative effects (in German) of the corona crisis on companies and individuals on 23 March 2020. The draft act’s provisions include rules to simplify conducting (regular annual and extraordinary) general meetings of public limited companies (AGs), public companies limited by shares (Kommanditgesellschaften auf Aktien - KGaA) and European public limited companies (SEs) in the calendar year 2020 and/or to mitigate the negative consequences of postponing an annual general meeting (AGM). The rules regarding AGMs enter into effect on the day after the act is published. Because the Bundesrat is sitting on 27 March 2020 for this purpose, the act could enter into force by this coming weekend. The provisions initially apply until the end of the year, but can be extended until 31 December 2021 by the Federal Ministry of Justice and Consumer Protection. Please read on for an overview of the most important content of the planned emergency act and a discussion of the first questions regarding its application.
1. General meeting in person with online participation and postal voting without authorisation in the articles of association
It will be easier to conduct a meeting in person with the option of online participation and postal voting. The management board will be authorised, with the consent of the supervisory board, to provide the option to exercise rights in a general meeting without physically attending the meeting (see 1. in the following article from 9 March 2020) as provided in section 118 German Stock Companies Act (AktG) even if this is not authorised in the articles of association.
2. Virtual AGM possible for the first time
However, as long as the administrative orders applicable throughout Germany prohibit events regardless of the number of participants (see 1. in the following update dated March 19, 2020), only a virtual AGM will help. This possibility is now being created by law for the first time. With the approval of the supervisory board, a management board will now be permitted to provide for the AGM to be held virtually without the physical presence of shareholders and shareholders’ representatives. The notary and the chair of the meeting should be present (at the same place) for the preparation of the minutes. The proxy designated by the company also remains permissible. If the meeting is only conducted by postal and proxy voting, all rights to submit motions "in" the AGM are waived; these rights are only possible if the meeting is attended electronically. Further prerequisites for the permissible conduct of a purely virtual AGM are
- Transmission of the entire AGM: The entire AGM must be transmitted with audio and video. The restriction of live transmission to the reports of the management board and the supervisory board, which has been practised at many companies to date, is not sufficient. General debate and voting must also be transmitted (e.g. by live stream on the internet). According to the explanatory memorandum to the draft act, it is not a prerequisite that this transmission is technically undisturbed and in particular that it reaches every shareholder.
- Exercising voting rights: It must be possible for shareholders to exercise their voting rights by means of electronic communication and by issuing a proxy. The decision on the voting procedure is at the discretion of the management board. In addition to the possibility of granting a proxy, one of the two variants of electronic communication (electronic postal voting or electronic participation) is sufficient. Conceivable options are, for example, using an online form or setting up an internet dialogue. The purpose of the regulation, i.e. to put a virtual AGM on an equal footing with an AGM in person, probably requires allowing the granting of a proxy until the end of the general debate and electronic voting until the end of the virtual voting.
- Questions and answers: Shareholders must also be given the opportunity to ask questions via electronic communication. It is not permissible to completely exclude the right to ask questions. The procedure is at the discretion of the management board. Conceivable methods include sending questions by e-mail or using an input field that is available online. However, the management board does not have to grant a comprehensive right to speak by transmitting video and audio of an individual shareholder to all those connected to the system. Notwithstanding section 131 of the German Stock Corporation Act (AktG), the management board must allow and answer questions transmitted by electronic means at its own discretion and in accordance with its duties. Even if the management board is thus not restricted to the rights to refuse to provide information provided in section 131(3) Stock Corporation Act, it may i.a. base its decision on allowing questions on the types of situations included therein. However, the management board can also refuse to answer questions or summarize its answers in other situations, especially if there is a flood of questions. In the necessary weighing of the interest in information and the interest in the proper conduct of the AGM, it will have to be taken into account, among other things, whether the requested information can be obtained elsewhere, whether it appears necessary for the assessment of the items on the agenda of the AGM, and whether it is relevant for the shareholders as a whole or is merely in the individual interest of the person asking the question. The management board may also expressly stipulate that shareholder questions must be submitted by electronic communication, e.g. to a designated e-mail address, at least two days before the meeting. In addition, according to the explanatory memorandum for the draft act, preferential treatment of questions posed by shareholder associations or institutional investors with significant voting interests is possible. The management board may limit the option of asking questions to registered shareholders, but may also offer this option to all shareholders if it is technically easier to do so. It does not need to consider questions in foreign languages. Answers will be provided during the virtual AGM.
- Online objection by shareholders: It must be possible for shareholders participating virtually to raise an objection to be recorded in the minutes even without being in the physical presence of the notary, thereby preserving the authority to bring an action for avoidance pursuant to section 245 no 1 Stock Corporation Act. To this end, the company must provide the option of filing an electronic objection with the notary. It would be conceivable, for example, to provide an additional button to be clicked in the online platform to raise the objection or to set up a central e-mail address to which the notary has access. According to the wording of the draft law, this extended right to raise an objection must in any case only be granted to shareholders who have also exercised their voting rights either electronically or by proxy, i.e. conversely not to all virtually participating shareholders. Objection by electronic communication is likewise only possible until the end of the AGM.
In addition to the existing limitations on the right to bring actions against the validity of the resolutions adopted in connection with technical disruptions in electronic participation and voting (section 243(3) no 1 Stock Corporation Act), actions against the validity of the resolutions adopted in relation to virtual general meetings will be further severely restricted. A violation of the above requirements for a purely virtual AGM does not constitute a legitimate basis upon which to challenge a resolution unless the company can be proven to have acted intentionally. The same applies to violations of the future obligation to confirm receipt of votes cast electronically (section 118(1) sentences 3 to 5, (2) sentence 2 Stock Corporation Act), which (according to the current status) applies for the first time to AGMs convened after 3 September 2020. This is deliberately intended to make the basic decision for a purely virtual AGM largely free of challenge, so that companies will not shrink back from using this option solely because of the risk of challenges.
"Acceptance" of the violation (so called conditional intent (bedingter Vorsatz)) is probably sufficient for an intentional violation of the regulations, which will continue to be a legitimate basis for avoidance. In this respect, the company is only responsible for its own IT infrastructure. Further, the burden of proof for the company’s intentional conduct, as in the context of section 243(3) no 1 Stock Corporation Act, lies with the plaintiff. However, in order to avoid remaining risks, the concrete feasibility and implementation of the above technical requirements must nevertheless be discussed and documented at an early stage and in close collaboration with legal advisors, the technical service provider for the AGM, and the notary who prepares the minutes of the meeting.
3. Shortening of deadlines prior to the AGM
With the approval of the supervisory board, a management board may also shorten the statutory deadlines prior to the general meeting:
- Notice period: The 30-day notice period (section 123(1) sentence 1 Stock Corporation Act) may be reduced to 21 days. In deviation from section 123(2) sentence 5 Stock Corporation Act, this minimum period is not extended by the registration period.
- Registration period: The rules on the registration period have not been changed; i.e. registration must be received by the company at least six days before the meeting, unless the articles of association provide for a shorter deadline. The management board can still only shorten the registration period accordingly if it is authorised to do so by the articles of association (section 123(2) sentence 3 Stock Corporation Act).
- Record date: The record date for bearer shares of listed companies (section 123(4) sentence 2 Stock Corporation Act) will be postponed from the 21st day to the 12th day before the general meeting. The record must be received by the company - subject to a shorter period of notice stated in the invitation – at least by the fourth day prior to the general meeting. It has not (yet) been expressly stipulated that the shortened record date only applies if the AGM has also been convened with the shortened notice period. In any event, however, according to the draft law’s explanatory memorandum, these two situations are intended to be linked, and a corresponding clarification in the wording of the act would therefore be desirable.
- Notification according to section 125 Stock Corporation Act: The deadline for notifications to intermediaries, shareholders and shareholders' associations pursuant to section 125(1) sentence 1 and (2) Stock Corporation Act is postponed from 21 days to 12 days at the latest before the AGM. However, this only applies if the AGM has been convened with the shortened notice period of 21 days.
- Requests for additional agenda items: Requests by shareholders for additional agenda items (section 122(2) Stock Corporation Act) must be received by the company at least 14 days prior to the meeting instead of 24 or 30 days. Again, this will probably only apply if the AGM was convened with the shortened notice period of 21 days.
4. Extension of the deadline for ordinary general meetings; extension of the balance sheet reporting date under corporate transformation law
In addition, the possible legal consequences of a necessary postponement of the AGM to the second half of the year due to the corona crisis will be mitigated:
- With the consent of the supervisory board, the management board of an AG or the personally liable shareholder of a KGaA may also postpone the AGM in 2020 beyond the eight-month period (section 175(1) sentence 2 Stock Corporation Act). The threat of a penalty payment in section 407(1) Stock Corporation Act therefore definitely no longer stands in the way of postponement (see under 4. in the following article dated 9 March 2020).
This simplification is expressly not applicable to SEs. In principle, SEs remain obliged to hold their AGM in the first six months of their financial year (Art. 54(1) sentence 1 SE Regulation). The German legislator does not have the authority (Gesetzgebungskompetenz) to change this. Companies in the legal form of an SE are therefore particularly advised, due to possible extensions of the administrative prohibitions on holding events, to discuss in the near future with their legal advisors and technical service providers for the AGM the above-mentioned possibilities of a virtual AGM or an AGM in which presence of shareholders is reduced.
When applying for the registration of mergers and demergers with the commercial register, the reporting date for the closing balance sheet of the transferring legal entity will be extended from a maximum of eight months (sections 17(2) sentence 4 and 125 sentence 1 German Company Transformation Act (UmwG)) to a maximum of twelve months prior to application for registration.
5. Interim payments on prospective net income
The requirement that interim payments on the prospective net income be authorised in the articles of association is temporarily rescinded. With the approval of the supervisory board, a management board may now decide to disburse an interim dividend. The same is probably also intended to apply to advance payments toward compensation (section 304 Stock Corporation Act) to outside shareholders within the framework of an intercompany agreement; moving the provision for this in article 2 section 1(9) sentence 2 of the draft act to the provision on interim payments in section 1(4) would be desirable for clarification. Of course, the new regulation does not exempt the management board from taking the interests of the company into account when deciding on the interim payment. The limited permissible scope of the interim dividend must also be observed (see 5. in the following update from 19 March 2020).
6. Simplified approval by the supervisory board
Notwithstanding Section 108(4) Stock Corporation Act and any provisions in the articles of association or rules of procedure, the supervisory board is to be able to pass resolutions in writing, by telephone or in a comparable manner without the physical presence of the members regarding the approvals required in this context.
7. Need for further regulation?
In this respect, the content of the draft act falls short of current requests for the most comprehensive emergency legislation possible. Useful additions could, for example, consist of
- extending the deadline for disclosure of accounting documents for certain capital market-oriented companies beyond the current deadline of four months after the balance sheet date (section 325(4) German Commercial Code (HGB)),
- temporarily suspending the obligation to convene a general meeting without undue delay in the event of a loss of one-half of the share capital (section 92(1) Stock Corporation Act) in order to avoid the need to implement the above rules at short notice, and
- postponing at European level the applicability of the new provisions of ARUG II relating to AGMs after 3 September 2020 (section 26j(4) Introductory Act to the German Stock Corporation Act (EGAktG)).
***** Updated on 19 March 2020: Handling administrative prohibition orders, delays in appointing auditors and distributing dividends, etc. *****
Throughout Germany, competent authorities or the respective states are currently issuing orders (Allgemeinverfügungen) and ordinances (Verordnungen) prohibiting events on the basis of section 28(1) sentence 2 German Act to Prevent and Combat Infectious Diseases in Humans (IFSG) and section 32 sentence 1 German Act to Prevent and Combat Infectious Diseases in Humans. The term "event" is interpreted broadly in each case with the consequence that AGMs are also covered by it. In the following, we provide a current overview of the orders and ordinances at the main venues of AGMs. In addition, we focus on the following questions which are currently being asked in practice:
- Since the current trend is clearly towards events being temporarily banned regardless of the number of attendees, the necessity of postponing the AGM is approaching for many companies - and with it the question of whether and when this will trigger an ad hoc disclosure obligation.
- In the event that prohibition orders continue to permit AGMs with a certain number of attendees or will permit them again in the medium term, it is necessary to carefully predict numbers of attendees.
- Postponement of the AGM also means delays in appointing auditors for the annual financial statements and the semi-annual financial report and in distributing any dividends. In this respect, the question of possible (interim) solutions arises.
- In addition, it remains to be seen whether the German legislator will introduce temporary emergency legislation to facilitate the legally secure conduct of 2020 AGMs in light of the corona crisis.
1. Applicable orders and ordinances at key venues for AGMs
Companies which are currently in the acute planning phase of their general meeting or whose general meeting has already been convened must inform themselves in good time about the specific content of the applicable orders or ordinances and keep themselves apprised of current information. In the following overview, we have compiled the applicable orders and ordinances at selected key AGM locations. However, it should be noted that many authorities are currently issuing new rulings at regular intervals, the conditions for which are becoming increasingly restrictive, particularly with regard to the number of attendees permitted. The following overview can therefore only reflect this moment in time, and the continued relevance of any given order must be verified before considering any measures in an individual case.
2. Postponement of the AGM and ad hoc disclosure
If, as a result of an administrative order applicable to the venue of an AGM, the only remaining option is to cancel or postpone the AGM, the question arises for listed companies whether this circumstance must be published as relevant insider information without undue delay by way of an ad hoc announcement in accordance with the provisions of Art. 17(1) of the Market Abuse Regulation (MAR). This question becomes particularly important in the case of companies where shareholders (can) expect to receive a dividend and therefore, in some cases, such as pension funds, typically schedule the inflow of dividends at a certain point in time.
- However, the cancellation or postponement of an AGM due to an administrative ban on the event is not in itself likely to have any effect on share price and should therefore not generally trigger an ad hoc disclosure obligation, even if the cancellation or postponement results in a delay in the payment of dividends to the company’s shareholders. This should apply regardless of whether the concrete proposal for the appropriation of profits has already been published by the management board and the supervisory board, for example in the context of convening the AGM.
- If, on the other hand, the cancellation or postponement of the AGM has other foreseeable consequences, it must be further examined on a case-by-case basis whether this results in an ad hoc disclosure obligation. If the postponement of the AGM results, for example, in the company being unable to carry out a planned important capital or structural measure as planned, it must be examined whether the consequences for the company are relevant to its share price.
- In addition, there is an ad hoc disclosure obligation in any case if the notification of the cancellation or postponement of the AGM includes further circumstances which in themselves constitute inside information. If, for example, the management board uses current developments as a reason to change a proposal for the appropriation of profits that has already been published, this circumstance alone may trigger an ad hoc disclosure obligation.
3. Dealing with prohibition orders conditional on number of attendees
In some cases, regulations are still allowing events to be held under restrictive conditions, in particular a maximum number of attendees. Depending on the course of the corona crisis, it is also conceivable that, after the very restrictive regulations currently in force, new decrees will be issued which will once again allow events with a limited number of attendees. If the time and place in which the general meeting is to take place falls under such a prohibition order, the decision on the scheduled execution of the AGM stands and falls with a prediction of whether the relevant maximum number of attendees will be exceeded. This decision is to be made by the management board and should be carefully justified and documented. The following aspects are to be taken into account within the framework of the necessary examination of each case:
Identifying persons who are considered “attendees” based on the wording of the order
According to the wording of administrative orders issued so far, employees of the company who are present and other contributors engaged by the company (e.g. back office consultants, employees of the technical service provider for the AGM, service staff, etc.) are typically not counted as attendees of the AGM relevant to the threshold value. However, this is to be checked in each individual case on the basis of the applicable order. Doubts in the interpretation of a particular order should be resolved in consultation with the authority issuing the order, in particular if clarification is relevant in the individual case (e.g. due to the expectation that the threshold will already almost be reached by the shareholders present).
Determination of the expected number of attendees requires forecast by the management board
In order to determine the relevant number of attendees, the company must forecast the expected number of attendees in advance. This applies regardless of whether the wording of the respective applicable prohibition order is based on the actual or merely the expected number of attendees.
Particularly if attendance figures of past AGMs suggest that the number of this year’s attendees will come close to the threshold value, it is not a wise alternative to count the shareholders requesting admission at the entrance control on the day of the AGM and hope that the permitted number of attendees will not be exceeded. If the number of attendees exceeds the permissible threshold spontaneously – possibly during the course of the AGM that has already been opened – the management board will no longer be able to cancel the AGM. Instead, the AGM would have to be formally opened and adjourned by resolution of the shareholders (see 4. in the article dated 9 March 2020). Formally opening the AGM despite exceeding the maximum permitted attendance could also constitute conduct under criminal law within the meaning of section 75(1) no 1, (3) German Act to Prevent and Combat Infectious Diseases in Humans. At the same time, the management board and the chair of the meeting may be liable to pay damages to the company, including for any fines imposed by the authorities or costs associated with the dissolution of the AGM by way of administrative enforcement (for the consequences of the violation, see also section 5. in the article dated 9 March 2020).
The forecast of the expected number of attendees must be based on sufficient information, and its content must be logical. Essentially, the following circumstances can be taken into account:
- attendance figures of the last AGM(s),
- any changes in shareholder structure that may have occurred in the meantime, suggesting significantly lower attendance at the forthcoming AGM,
- preliminary registration figures and forecasts of the technical service provider of the AGM based on these figures, and
final registration numbers as on the date of the registration deadline.
A reduction in the forecast based on the expectation that many shareholders will make use of the opportunities offered for online participation, postal or proxy voting due to the corona crisis and for this reason – or solely to reduce their personal risk of infection – will not attend the AGM can be justified in individual cases, although it is difficult to quantify it reliably. If the predicted reduction proves to be too large and the threshold for the prohibition order is exceeded on the day of the AGM, the consequences described above may apply in this case as well.
Consideration of clusters in risk assessment
If events with a limited number of attendees are (once again) permitted at the planned location of the AGM, the management board's deliberations on whether to take any measures cannot be based solely on the recommendations for action published a few days previously by the Robert Koch Institute and the risk clusters of some municipalities based on them. Since the presence of particularly vulnerable groups of people and the formation of queues at the entrance control cannot be ruled out, the AGM is likely to always involve a high risk in terms of these risk clusters.
4. Delay in appointing an auditor for annual financial statements and semi-annual financial reports
The consequences of postponement of an AGM also include a delay in appointing an auditor for the annual and consolidated financial statements for 2020 and, in the case of listed companies, also for the review of the condensed financial statements and interim management report within the framework of the semi-annual financial report 2020 (section 115 Securities Trading Act (WpHG)). With regard to the semi-annual financial report, it is therefore possible that the AGM may even be too late to appoint the auditor for the voluntary audit review. It may also affect the timing of the regular audit, especially in the case of extensive audits. Solutions must be found for this in individual cases.
The semi-annual financial report must be published without delay, at the latest three months after the end of the first six months of the financial year, and must be submitted to the management of the stock exchange. Like the auditor of the annual financial statements, the auditor for the review of the semi-annual financial report is to be appointed by resolution of the AGM. If the review is to be carried out before the AGM of the current financial year, consideration could be given to referring the matter to the auditor of the previous financial year in analogous application of section 318(2) sentence 2 German Commercial Code (HGB). Alternatively, after the first six months of the fiscal year, an application for an appointment by court could be considered (see section 115(5) sentence 2 Securities Trading Act in conjunction with section 318(4) German Commercial Code). However, the admissibility of both variants has not been conclusively clarified in court. Since the review of the semi-annual financial report is voluntary (section 115(5) sentence 1 Securities Trading Act), the companies could also waive the review of the semi-annual financial report in consideration of the associated consequences. This would have to be noted in the semi-annual financial report (section 115(5) sentence 6 Securities Trading Act).
In order to comply with the timetable for the audit of the annual and consolidated financial statements for 2020 even if the AGM and the election of the auditor are postponed, the supervisory board should examine on a case-by-case basis whether it can issue the audit engagement to the auditor prior to the election subject to appointment by the annual general meeting. This is because an appointment of an auditor by court order is in principle only possible after the end of the financial year (section 318(4) sentence 1 German Commercial Code).
5. Interim payments on the prospective net income
If there is a delay in dividend distribution as a result of the postponement of an AGM, it must be examined on a case-by-case basis whether interim payments on the prospective net income can be made. However, the interim payment, which can be made without a resolution of the AGM but with the approval of the supervisory board, requires authorisation in the articles of association and limits the possible interim payment in terms of amount (section 59 German Stock Company Act). In addition, the management board must take the interests of the company into account when deciding on the interim dividend and must therefore, when examining this option, also take into account the company's current and expected liquidity situation. In times in which the effects of the corona crisis are not foreseeable or have already led to considerable economic losses, an interim dividend is not likely to be considered even if the articles of association authorise it.
6. Coronavirus emergency legislation?
Against the background of the uncertainties as to whether and when an AGM for 2020 can be held with legal certainty in times of the corona crisis, the German legislator is currently being requested to support the affected companies with emergency legislation for the current general meeting season. To ensure the greatest possible protection of shareholders' interests, possible special regulations could, for a limited period of time, for example, aim at:
opening up the possibilities of online participation and postal voting even without authorisation in the articles of association,
- clarifying the (limited) scope of the shareholders' right to speak and ask questions in the case of online participation and
- creating a framework to deal with legal certainty with suspected coronavirus cases among shareholders which adequately counteracts the otherwise existing risks of challenges if shareholders' participation rights are restricted.
Further developments in this respect remain to be seen.
***** News published on 9 March 2020 *****
The coronavirus and its economic consequences are currently a matter for concern for companies and the capital markets at various levels. Currently, listed public companies are in the intensive phase of preparing their annual general meeting (AGM) for 2020. They are now forced to look into the possible effects of the corona crisis on the conduct of their AGM at short notice. In times when trade fairs and other largescale events are being cancelled as a precautionary measure, companies are confronted with the question of whether the AGM can or should take place as planned. On the other hand, the corona crisis entails new special challenges in relation to the conduct of an AGM. This article focuses on what key aspects companies have to concentrate on in this context when carrying out the necessary examination of their individual case to make sure that any resolutions adopted are not open to challenges due to formal errors. We also explain how administrative orders aimed at restricting or prohibiting the AGM can or must be dealt with.
1. Attendance in person, online participation and postal vote, proxies
The various possibilities of taking part in an AGM online or voting by post that are being promoted again in the light of current developments are suitable tools for allowing shareholders to exercise their rights without being present in person and for reducing the risk of infection for all those involved. However, in order to use these options at short notice, the company’s articles of association have to authorise the management board to make use of them (section 118(1) sentence 2 and (2) German Stock Corporation Act), as is meanwhile customary practice. On top of this, the terms of online participation and postal voting have to be announced in the notice convening the AGM as part of the details of the procedure for voting (section 121(3) sentence 3 no. 2(b) Stock Corporation Act).
If the AGM has already been convened without such information or if the notice convening the AGM is just about to be sent out, these options will often no longer be possible. Companies whose articles of association contain an authorisation to make use of these options and which are still in a position to add the details to the notice in time should check whether it is possible to technically implement these options with their legal advisors and the technical service providers for the AGM.
In addition, companies already often designate proxies who can be given power of attorney by the shareholders and are bound by instructions to vote in a particular way (section 134(3) sentence 5 Stock Corporation Act). This measure can be made a priority and actively promoted without investing a great deal of time and effort in modifications.
At the same time, the above measures are always just an offer made to the shareholders. The AGM cannot be held as a completely virtual event. By law, it is still an event requiring participants to be physically present. The shareholders’ right to take part in the AGM in person therefore essentially cannot be excluded even in times of the corona crisis.
2. Other specific measures before and during the AGM – main guiding principles
Even if allowing for online participation or a postal vote does not, or no longer, comes into question, there is a range of other options for dealing with the corona risk situation before and during the AGM. Providing hand sanitisers or displaying (non-binding) hygiene guidelines during the AGM is possible, for example. Depending on the venue of the AGM, dividing up the shareholders attending the AGM into several smaller rooms equipped with video broadcasting equipment comes also into question.
How far specific hygiene measures can actually be implemented, how they are implemented and other organisational precautions (e.g. catering for the shareholders) in view of the risk of infection for those participating in the AGM and any of the company’s employees taking part should be reviewed together with legal advisors and the technical service providers for the AGM. Essentially, taking such organisational steps in advance of the AGM is at the due discretion of the management board, who is responsible for its organisation, whereas taking them during the AGM is at the discretion of the person chairing the AGM.
From a legal perspective, the following rules of thumb generally have to be observed when taking additional measures in response to the corona crisis:
- Requirement of neutrality and equal treatment: No shareholder group, such as major shareholders or principal shareholders, may be treated preferentially in relation to other shareholders. The principle of equal treatment (section 53a German Stock Corporation Act), which is measured by headcount and not by number of votes, requires that the shareholders are granted the right to exercise their shareholder rights in a relatively uniform manner (“under the same conditions”). Establishing separate areas for “VIP shareholders” is therefore not possible, for example.
- Relevancy requirement: This requirement states that an objective reason has to exist when ordering regulatory measures. The risk of infection only constitutes an objective reason if the measure is objectively capable of reducing the risk to health.
- Principle of proportionality: When intervening in the shareholders’ membership rights, the principle of proportionality requires especially that when ordering regulatory measures, above all (i) the specific measure ordered is capable of ensuring that the AGM continues to run smoothly, (ii) represents the mildest intervention in the rights of the shareholder concerned from several suitable measures and (iii) in a narrower sense, is proportionate in relation to its reason.
When weighing up “whether” and “how” a supplementary measure should be taken in the light of the corona crisis, the additional circumstances of each individual case have to be taken into account, e.g. the legal urgency of the resolutions to be passed by the AGM, the spread of the coronavirus at the planned location, the number of participants expected, the facilities and number of meeting rooms available, and the possible consequences for the company’s reputation.
After weighing up these factors, possible measures will come into question on a sliding scale depending on their severity. Particularly severe measures such as calling off or postponing the AGM are generally only ultima ratio.
3. Avoiding procedural errors that could lead to challenges
Additional measures in the light of the corona crisis taken before or during an AGM only make sense if they do not at the same time lead to a procedural error justifying an action against the validity of the resolutions adopted (Anfechtungsklage). The following guidelines can be referred to in this context:
- Simply refraining from taking special protective measures to possibly lower the risk of infection for the shareholders taking part may in principle not lead to a breach of the shareholders’ right to participate, even if individual shareholders decide to stay away from the AGM for fear of infection. Apart from the individual rights to be actively involved, the right to participate merely conveys a right to security that the AGM proceeds in an orderly fashion. Only if there is a danger that the proceedings of the AGM may be adversely affected is the person chairing the AGM subsequently obliged to take measures, which themselves have to be proportionate. The company is also not obliged by other means to protect its shareholders from possible risks of infection during the AGM. Although the legal relationship between the company and its shareholders leads to duties to protect and duties of loyalty, these duties are only aimed at preventing dangers which fall within the company’s sphere of influence, and are therefore attributable to it, from being realised (e.g. specific dangers in the rooms where the AGM takes place such as slippery surfaces or uneven floors) and affecting the shareholders. In contrast, the latent risk of infecting oneself with coronavirus through contact with people already infected or suffering from it is one of the general risks in life, which is not attributable to the company. If we were to see the key source of risk as already being in holding the shareholders’ meeting and were to regard the company as being obliged to take certain corona-related safeguards from the aspect of duty of safety towards third parties (Verkehrssicherungspflicht) in the interest of those participating in the AGM, no procedural deficiency of the resolutions adopted could be inferred from the failure to take such safeguards.
- Regulatory measures against individual shareholders regardless of whether they exhibit any relevant symptoms of illness, enter the AGM with protective masks or even allege that they are suffering from coronavirus have to be examined particularly carefully, as there is always a risk that their right to participate will be breached. A restriction on the right to participate (e.g. by denying them access or referring them to a standby medical service following screening at the entrance, also including temperature measurements, or by sending them out of the conference room) that is not justified can mean that all the resolutions adopted by the AGM may be subject to actions against their validity. Even if the affected shareholders only hold insignificant voting rights, in such cases the breach is to be seen as having the required relevance for the results of the resolution. Thus where several measures come into question, the measure that safeguards the right of the person concerned to participate to the largest possible extent is to be chosen. In the above situations, it is worth considering separating shareholders into smaller, additional meeting rooms with audio and visual transmission (on a voluntary basis). The possibility of spontaneously giving power of attorney to a third party or proxy of the company in order to exercise their shareholder rights should be pointed out to any shareholders who feel negatively affected by the presence of a shareholder who is alleging to be infected or showing signs of an infection during the AGM.
- Considerations on whether to no longer offer catering for shareholders during the AGM so as to prevent the risk of participants being infected when eating from the buffet together entail some legal risk. Depending on the duration of the AGM, keeping sufficient food available for the shareholders is certainly relevant under their right to participate. Thus if there is no food at all, in exceptional cases this may lead to it being possible to challenge the resolutions on account of a breach of the law on participation. In contrast, a situation where the catering has been adapted (e.g. by handing out packed lunches) is unproblematic in this respect. It also makes sense to ensure that the rooms available for eating the food are large enough, so that the shareholders do not have to eat close together.
- In contrast, if individual members of the management and supervisory boards who are generally required to take part in the AGM (section 118(3) sentence 1 German Stock Corporation Act) stay away due to illness or official quarantine orders targeted at them, this generally does not have any consequences for resolutions from a legal point of view.
- However, other rules may apply if the chairperson of the AGM specified in the articles of association, generally the chair of the supervisory board, is ill or in quarantine. Whether the determination of a resolution by the wrong chairperson leads to the resolutions being open to actions against their validity is determined on the basis of the relevance of the error for the result of the resolution. To avoid any risks in this context, safeguards should be taken together with legal advisors well in advance of the AGM, for instance by the chairman of the supervisory board or plenary supervisory board (depending on the provision in the articles) already designating one or more deputies to chair the AGM in the event that the chairman is incapacitated.
4. Relocating, postponing and cancelling the AGM
If the company’s registered office is located in an infection hub, the company should consider relocating the AGM to another venue permitted under the articles of association (section 121(5) sentence 1 German Stock Corporation Act), or for listed companies to the location of the stock exchange (section 121(5) sentence 2 German Stock Corporation Act), if the AGM has not been convened yet. It may also be possible to move the venue of the AGM away from the place the company’s registered office is located without authorisation in the articles of association providing that there is an objective reason for this. But since choosing an inadmissible venue makes it possible to challenge the resolutions passed, companies should be very reserved about relocating the AGM if this is not provided for in their articles of association.
It is also possible to postpone an AGM that has not been convened yet within the eight-month period applicable to German public limited companies (AGs) and public companies limited by shares (KGaA) (section 175(1) sentence 2 German Stock Corporation Act) and within the six-month time limit applicable to SEs (Article 54(1) sentence 1 SE Regulation) each beginning at the end of the business year. In this case, postponing the AGM does not result in resolutions being open to challenge in the sense of a “late” AGM. There is also generally no risk of the registry court imposing an administrative fine (Zwangsgeld) on the management board (section 407(1) German Stock Corporation Act) or the management board being held liable towards the company (section 93(2) German Stock Corporation Act) and its shareholders (section 117(1) sentence 2 and(2) German Stock Corporation Act and section 826 German Civil Code) in cases where the time limit is not kept to for an important reason that is in the interest of the company or the shareholders.
In extreme cases, cancelling an AGM which has already been convened can come into consideration. The AGM has to be cancelled by the governing body that convened the AGM (thus as a rule the management board) and on the basis of a relevant resolution by that governing body. From a formal point of view, a clear communication is required ensuring that shareholders may acknowledge the cancellation as well as possible and in a timely manner. It is not essential to keep to the same form as the notice convening the AGM. In order to be in a position to take action and publish at short notice if required, it is advisable to prepare the draft of such a cancellation at an early stage. The possibility of a cancellation ends in any case when the shareholders appearing at the venue have already entered the meeting room after the time stated in the notice as being the start of the AGM. From this time, the AGM can only be adjourned by a resolution of the AGM (see under 5 regarding special situations where an authority possibly breaks off the AGM).
5. Responding to administrative orders or recommendations
The competent regulatory authority may restrict or prohibit events at the suggestion of the responsible health authority provided that and as long as this is necessary in order to prevent the spread of contagious diseases (section 28(1) sentences 1 and 2 and (3) and section 16(6) sentence 1 German Act to Prevent and Combat Infectious Diseases in Humans). The order is at the discretion of the authority.
- The management board is in principle obliged to implement the administrative order, e.g. by cancelling the AGM. Any breaches of the order are subject to a fine (Strafe) (section 75(1) no. 1 German Act to Prevent and Combat Infectious Diseases in Humans). Cancelling the AGM as a result of the administrative order does generally not have any relevance for the validity of the resolutions. However, other rules can apply if the management board decided to carry out the AGM contrary to the administrative order and the authority forces an AGM that has already been opened to be closed by way of administrative enforcement (Verwaltungsvollstreckung).
- If there are legitimate doubts about the lawfulness of the administrative order, the management board may be required to look into and to possibly file an objection (Widerspruch) or legal action to set aside (Anfechtungsklage) against the order in the interests of the company, depending on what is permitted under regional law.
- As the official order remains enforceable despite a remedy having been filed, i.e. the AGM may not be carried out contrary to the contested administrative order (section 28(3) and section 16(8) German Act to Prevent and Combat Infectious Diseases in Humans; section 80(2) sentence 1 no.3 German Administrative Courts Regulation), in this case it would be necessary to consider additionally applying for a legal injunction (einstweiliger Rechtsschutz) (section 80(5) sentence 1 German Administrative Courts Regulation). Such an application aimed at making it possible to carry out the AGM despite the administrative order may be worth considering in particular exceptional cases if conducting the AGM is especially urgent, e.g. because it is intended to decide on a capital measure to secure the company’s economic survival. However, when actual-ly deciding on such a course of action, the potential risk for the company’s reputation should be carefully weighed up. The prospects of the application for an injunc-tion being successful are essentially based on the prospects of success of the main proceedings, i.e. the lawfulness of the administrative order.
If there is no binding prohibition by the responsible authority but a recommendation by the Robert Koch Institute or the crisis task force set up by the German government advising that the AGM is cancelled or postponed, this is not legally binding for the company. In this case, the company has the burden of assessing and deciding how to deal with the impending AGM. This decision should be made in close consultation with the health authorities; the information underlying it, the decision-making process and the grounds for it should be carefully documented.
Any questions? Please contact: Ralph Schilha, Lisa Guntermann
Practice group: Capital Markets