Online shareholder meetings: corporate law anomalies or the future of governance?

• Author: Birnhak, Daniel Adam

1. INTRODUCTION

   Individual shareholders with a small stake in corporations rarely attend annual shareholder meetings. (1) Whether they are reluctant to spend the time and money to travel to the meetings, or they believe that their presence is unlikely to impact the proceedings, the reasons for shareholders' lack of participation are debatable. (2) Large individual shareholders and institutional investors thus tend to comprise most of the audience at annual shareholder meetings. (3)

   In 2000, Delaware changed its shareholder meeting statute to permit corporations to hold their annual meetings solely on the Internet. This Note analyzes the amended statute, the current technical feasibility of online shareholder meetings, and their future viability.

   Part II of this Note discusses the background corporate theory behind the shareholder/director relationship and shareholder meetings in general; Part III analyzes Delaware's stockholder meeting statute prior and subsequent to the 2000 revision; Part IV examines the current state of technology involved in online meetings; Part V surveys corporations that have used the Internet for their shareholder meetings; Part VI recounts Massachusetts' failed attempt at allowing corporations incorporated in that state to hold their stockholder meetings online; and Part VII provides some conclusions regarding the future of companies using the Internet as a forum for their shareholder meetings.

2. BACKGROUND CORPORATE THEORY

   1. The Shareholder/Director Dichotomy and Shareholders' Rights

      The corporate form embodies a dichotomy between shareholders and directors. (4) Shareholders, the providers of money capital, (5) own the corporation. (6) Yet, despite their ownership interest, shareholders elect a board of directors to oversee their investment. (7) This division between financers and managers works well because it "creates an investment vehicle for raising large amounts of capital and operating large enterprises." (8)

      Shareholders' rights are contractual in nature; they arise out of a corporation's "charter, articles of incorporation, bylaws, provisions of the stock certificate, and pertinent statutes." (9) By virtue of their investment, shareholders have "[the] right to share in the management of the corporation (right to vote)...." (10) Traditionally, shareholders exercise their management rights either by voting at shareholder meetings where they are physically present or by proxy voting. This Note addresses a key change in the physical presence requirement. (11)

   2. Shareholder Meetings

      Shareholder meetings generally are held for "business [that] requir[es] the action or consent of the shareholders." (12) Both state law and corporate bylaws dictate their location. (13) The two types of shareholder meetings are annual meetings and special meetings. (14)

      State law usually requires that corporations hold annual shareholder meetings. (15) Corporate bylaws dictate the time for annual meetings, which often occur in the spring. (16) The most important item on an agenda is often the election of directors, but other activities are permitted as well. (17) For instance, reports may be read, corporate matters may be discussed, and resolutions may be introduced. (18) Also, bylaws occasionally are amended or repealed. (19)

      Special meetings, on the other hand, are conducted at any time between annual meetings. (20) They may only be called for "appropriate purposes." (21) Furthermore, the corporation must adhere to its agenda, unless the voting shareholders and proxy holders consent otherwise. (22)

      Shareholder meetings are invalid unless attended by a required number of people. (23) This requisite number, known as a quorum, is "regulated by statute, charter, or bylaws...." (24) Unless a provision provides otherwise, both shareholders and non-shareholders may be counted for purposes of establishing a quorum. (25)

      Generally, "only those who have the right to vote have the right to be present at [shareholder] meeting[s]." (26) However, shareholders can vote to allow non-shareholders to attend. (27)

3. THE DELAWARE STOCKHOLDER MEETING STATUTE

   Prior to its 2000 amendment, Delaware's shareholder meeting statute provided that meetings "may be held at such place, either within or without this State, as may be designated by or in the manner provided in the bylaws or, if not so designated, at the registered office of the corporation in this State." (28) Therefore, although corporations could hold meetings in any state, they were required do so at a "place." The statute does not define this term, but presumably the legislature used "place" in the traditional sense of the word, meaning a physical location. The Internet thus did not qualify as such a place.

   The new stockholder meeting statute retains the old statutory language that permitted corporations to conduct meetings in any state. (29) Immediately following that text, however, the provision states:

   If, pursuant to this paragraph or the certificate of incorporation or the bylaws of the corporation, the board of directors is authorized to determine the place of a meeting of stockholders, the board of directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication.... (30) Hence, the Delaware legislature no longer requires that corporations hold shareholder meetings in a physical location, but now allows them to occur entirely on the Internet.

   As a means to maintain parity between online shareholder meetings and their non-virtual counterparts, the statute provides that shareholders and proxyholders, through remote communication, may "[p]articipate in ... meeting[s] of stockholders." (31) They may "[b]e deemed present in person and vote" as well. (32) Online "attendees" retain these rights, regardless of "whether such meeting[s] [are] to be held at ... designated place[s] or solely by means of remote communication." (33) Thus, Internet participants count towards the quorum requirement and can vote just as if they attended the meetings in person.

   Finally, the statute establishes certain requirements for online shareholder meetings to protect their integrity. First, corporations must "implement reasonable measures" to ensure that individuals "deemed present and permitted to vote at the meeting by means of remote communication" are actually stockholders or proxyholders. (34) This provision ensures compliance with the traditional requirement that restricts participation in shareholder meetings to stockholders and proxyholders, absent a vote to the contrary by the stockholders in attendance. (35)

   The statute also requires corporations to take reasonable steps to ensure that those who attend online meetings have "a reasonable opportunity to participate" and to vote. (36) To that effect, these shareholders must have "an opportunity to read or hear the proceedings of the meeting[s] substantially concurrently with such proceedings...." (37) Corporations, therefore, must give online attendees the chance to follow the meetings in real-time.

   Finally, the statute imposes a duty on corporations to keep records of shareholders' and proxyholders' votes and actions at meetings taking place through remote communication. (38) This requirement prevents shareholders from perpetrating a fraud on the corporation by either voting when they do not have the right to do so, or by submitting multiple votes. Furthermore, stockholders are assured that corporations document their actions and votes; if a technical glitch occurs, corporations can determine attendance and votes by reviewing their records.

4. ONLINE SHAREHOLDER MEETINGS: TECHNOLOGICAL PERSPECTIVE

   Delaware's cutting-edge shareholder meeting statute can be utilized only to the extent permitted by technology. Since technology constantly evolves and is gradually assimilated into common use, corporations will be able to make better use of this statute over time. Current technology, however, provides corporations with the opportunity to capitalize on this development today.

   Corporations that conduct shareholder meetings over the Internet need to afford participants the chance to follow the proceedings as they occur and to vote. (39) Therefore, to comply with the Delaware shareholder meeting statute, corporations must, among other things, provide shareholders with real-time content and the ability to transmit their votes. (40)

   Participants in online stockholder meetings have numerous means to transmit votes, including email and Internet messaging. (41) Therefore, the larger issue is whether technology permits shareholders to follow online meetings in real-time.

   1. Corporations' Technological Perspective

      Many factors determine the quality of broadcasts streamed over the Internet. The initial quality of the audio and video is one important consideration. (42) For instance, corporations must be mindful that the cameras and microphones they use to record meetings comprise the first link in a complicated process.

      While cameras and microphones capture meetings, computers with special video cards must take the content from those cameras and microphones, compress the data, and "convert it into streamed media format." (43) These computers are commonly known as encoders. (44)

      Encoders can cost from $20,000 for modest setups (45) to millions for larger applications. (46) For example, CNET, CNN, Fox News, FoxSports.com, NFL Films, Radio Canada, weather.com, and ZDF use Anystream Inc.'s Agility Enterprise software solution (47) to encode video for their websites. (48) According to Anystream's CEO, the Agility Enterprise application minimally costs $50,000. (49) The Agility Enterprise software requires a computer with dual Pentium three or four processors and "[d]isk drives capable of supporting eighty Mbps sustained write speed." (50) Additional encoders may be installed "to create multiple simultaneous streams." (51)

      The encoded audio...