General meetings are just around the corner for most listed companies. Given the ban on contact and events due to the COVID-19 pandemic, the legislature has opened up greater leeway for holding shareholder meetings. The German Law to Mitigate the Consequences of the COVID-19 Pandemic (C19-AuswBekG) extends the deadline for holding the general meeting to the end of the financial year, allowing it to be postponed to a later date. And, for the first time ever, companies will have the option of hosting a purely virtual general meeting. We talk to hkp/// group experts Nina Grochowitzki and Dr. Pia Lünstroth about the questions facing the Supervisory Board as well as the Management Board in this situation, primarily with regard to issues of compensation.
Ms. Grochowitzki, Dr. Lünstroth, virtual general meetings are seeing German stock exchange-listed companies enter into uncharted territory. What framework is applies for the virtual hosting of this year’s shareholder meetings?
Nina Grochowitzki: The Management Board can decide to hold the general meeting as a virtual general meeting, i.e. without the physical presence of shareholders or their authorized representatives. There are however some requirements which must be met: First of all, an audio and video transmission of the entire meeting is required; second, the shareholders may exercise their voting rights on the granting of proxies, postal voting or electronic means of communication; third, shareholders will be granted the opportunity to ask questions via electronic communication; and fourth, shareholders which have exercised their voting right will be given the opportunity to lodge an objection against a general meeting resolution without having to be physically present.
Dr. Pia Lünstroth: The decision of the Management Board to hold a virtual general meeting does however require the approval of the Supervisory Board.
How exactly will shareholders be given the opportunity to pose questions electronically?
Dr. Pia Lünstroth: The actual means of communication used will be chosen at the discretion of the Management Board. This could for example include sending questions via email or using an online portal. In such cases, the Management Board can restrict the opportunity to ask questions to those shareholders that are registered.
Is there a risk of companies being overloaded with questions via a chat function during the general meeting, all of which must be answered?
Dr. Pia Lünstroth: Companies can stipulate that questions be submitted at least two days before the general meeting. The explanatory memorandum indicates that questions and answers to these may be published on the website of the company in advance of the general meeting.
Nina Grochowitzki: The Management Board or, as the case may be, the Supervisory Board may, by way of derogation from Section 131 of the German Stock Corporation Act (AktG), decide which questions will be answered at its due discretion. According to the explanatory memorandum, not all questions need to be answered. When it comes to responses, questions may be summarized, selected in line with the interests of the other shareholders or priority may be given to certain investor groups like shareholder associations or institutional investors with significant voting rights.
So, companies have considerable room for maneuver...
Dr. Pia Lünstroth: Indeed they do. However, it will be important to weigh up the shareholder’s interest in disclosure and the interests of the smooth running of the general meeting. Shareholders may for instance be alerted to the fact that certain information is available from other sources, such as the annual report. In such cases there is no need to provide an answer.
So is it important to ensure detailed preparation for the general meeting in advance?
Nina Grochowitzki: Yes, absolutely. The back office is under pressure not just on the day of the general meeting, but in the days running up to it – especially were the “two-day rule” for submitting questions is used. The questions received must be viewed, sorted, summarized and answers prepared. Looking at the Q&A catalog of previous general meeting questions can be helpful in the preparation stage in order to prevent information from having to be gathered together at short notice. Using an – if need be virtual – back office on the day of the general meeting is only necessary in this case for queries or additions, if at all.
Dr. Pia Lünstroth: The speech of the Chairman of the Supervisory Board and the Chair of the Management Board could also be published on the homepage in advance. On one hand this would give shareholders the opportunity to ask questions about the speech. It would also provide information which might answer any questions in advance of the meeting.
What issues with regards to Management Board compensation do you anticipate at the 2020 general meeting?
Nina Grochowitzki: This year’s shareholder meetings will of course be shaped by the COVID-19 pandemic. Its impacts on the company and the way the company will handle this challenge will account for the lion’s share of the questions and answers.
Will Management Board compensation take a back seat?
Nina Grochowitzki: That depends on the individual circumstances. Possible questions might relate to current salary amounts as well as potential salary waivers, but also to the payment of variable compensation for 2019.
The variable compensation components for the 2019 financial year are now due for payment. These have not yet been influenced by the COVID-19 pandemic.
Dr. Pia Lünstroth: That’s correct. The annual reports have opened up some high payments for past successes to public scrutiny and these have come at an inopportune moment in light of the current situation. With this in mind, the social responsibility of the company is likely to be emphasized in communications during the general meeting. It would be no bad thing to demonstrate how executives are doing their bit – including, but not limited to, a voluntary compensation cut.
Nina Grochowitzki: We are also anticipating questions specific to 2020 regarding whether the variable compensation targets set are still attainable or whether there are any plans to intervene in predetermined targets or to use discretionary room for maneuver.
Dr. Pia Lünstroth: This raises a question mark over how the compensation system can respond to situations like the COVID-19 pandemic and continue to set the right incentives in such cases. This is all the more relevant given that the compensation system must be submitted to the general meeting this year, or next year at the latest, in accordance with the Act Implementing the Second Shareholder Rights Directive (ARUG II).
Do you recommend that a vote takes place this year or next?
Dr. Pia Lünstroth: It is important to take timing into consideration. If companies avail themselves of the option of postponing the general meeting to later in the year, it would be worth considering planning the vote on the compensation system at this year’s general meeting, even if there is not yet any obligation to do so.
Nina Grochowitzki: The postponement would provide time to prepare for this. But this a very company-specific decision and one which depends heavily on the current company situation, previous votes with investors as well as whether the compensation system is ready.
Ms. Grochowitzki, Dr. Lünstroth, thank you for your time.