If you are formed as a corporation, whether you are a small start-up or a larger business, you will almost certainly need to hold an annual meeting of shareholders. An annual meeting of shareholders is a statutorily required meeting to be held once a year subject to the laws of the state of incorporation.
Many corporations decide to incorporate in Delaware due to the various regulatory advantages. For more information on some of practical advantages of Delaware incorporation, please read our previous post: The Convenient and Practical Features of a Delaware Corporation. This article focuses solely on the Delaware General Corporations Law, but it is still a great starting point for any corporation because many states have analogous provisions.
When setting up your annual meeting of shareholders, planning will be essential. Setting up a successful annual meeting requires a firm understanding of the purpose of the meeting, an understanding of what options your state law and company bylaws allow, a proper navigation of voting rights, and a balanced approach to cost considerations.
What is an annual shareholder meeting?
An annual shareholder meeting is a meeting held for the primary purpose of electing a new board of directors. When setting up the meeting, the sources of authority that corporations need to consider are (1) the law of the state of incorporation, (2) the certificate of incorporation, and (3) the company bylaws.
Delaware General Corporation Law (hereafter referred to as DGCL) states that each corporation incorporated in Delaware shall hold an annual shareholder meeting. While the primary purpose of the meeting is to have a shareholder vote, the annual meeting of the shareholders is also a great time to review the success of the past year and to present the general vision for the upcoming year. For many corporations, this meeting will also serve as the only face-to-face interaction between shareholders, corporate officials, and investors.
The Nuts and Bolts of a Notice of Meeting
Each shareholder must be informed that the meeting is taking place. Corporations must provide this notice to shareholders so they can make an informed decision about whether or not they wish to exercise their right to appear and vote. DGCL has five key elements that each notice must include to ensure that shareholders are fully informed.
The DGCL states that, (1) a written notice of the meeting shall be given, (2) the notice shall state the place of the meeting, if any, (3) the date and hour of the meeting, (4) the means of remote communications, if any, and (5) the record date for determining the stockholders entitled to vote at the meeting. Each of the aforementioned items must be included in the notice, however, it’s important to remember that these are the minimum requirements and the company’s bylaws can provide additional notice requirements.
1. Written Notice
DGCL states that a written notice must be given to shareholders to notify them of the meeting. Traditionally, this meant that a paper version had to be mailed to each shareholder to provide proper notice. Many shareholders and corporations now prefer notice by email, therefore, the DGCL was amended to allow notice by electronic transmission. While Delaware acknowledged the need for this new option, they also did not want to force shareholders to receive notice by electronic transmission if they preferred paper copies. In order to properly send notice by email, corporations must obtain an electronic transmission consent form from a shareholder.
While sending the electronic consent waiver to each shareholder may sound like a burden, the effort invested will make subsequent notices more efficient because the waiver can be applied to future notices beyond the immediate shareholder meeting.
Some considerations of choosing a location for the meeting include: convenience to the shareholders, cost of the location, and the amount of shareholders that will be participating. Keep in mind that if you hold an election for the board of directors during your annual shareholder meeting, the Delaware default rule for voting is voting by written ballot. Many states allow you to opt-out of voting by written ballots, so check the laws of your state of incorporation. Delaware allows for corporations to opt-out of the default written ballot rule so long as language allowing electronic voting is included in the company’s certificate of incorporation.
Delaware also allows corporations to take advantage of evolving technology by allowing meetings to be held solely through means of electronic transmission such as conference calls or Skype. These options can be used to hold your meeting thereby allowing shareholders a convenient way to participate in the meeting.
3. Date and Hour
The date and hour of the annual shareholder’s meeting shall be designated by or in the manner provided in the bylaws. When setting the date and hour of the meeting, it is best to consider a time that will allow the most participation as there is a minimum amount of shareholders that need to be present for a valid meeting. (See Quorum below).
4. Remote Communication
In the sole discretion of the current board of directors, shareholders and proxy holders not physically present at a meeting of shareholders may be deemed present in person and vote by means of remote communication in accordance with DGCL. Remote communication gives corporations the ability to conduct a hybrid meeting with some shareholders participating in person and others present by means of remote communication such as conference call, Skype, or any other service.
5. Record Date
A record date represents the cutoff date for the eligibility of voting. Shareholders who have purchased after the record date will be precluded from voting at the annual shareholder meeting. The record date may be fixed at the Board of Directors discretion, but it shall not be less than 10 days nor more than 60 days before the date of the annual shareholder meeting.
Timing of the Meeting
Similar to the record date timing, the notice of the annual meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting. This allows shareholders enough time to make plans should they decide to attend, but not so much time that they forget about the meeting, resulting in low attendance.
Voting Rights and Requirements
Now that each shareholder has proper notice of the meeting, they will want to exercise their right to vote their shares for each board of director seat. We’ve put together a list of five factors to consider regarding shareholder rights and requirements.
1. How Many Votes Do Shareholders Have?
Unless otherwise provided in the certificate of incorporation and subject to DGCL Section 213 (record date shareholders), each shareholder shall be entitled to 1 vote for each share of capital stock held by such shareholder. In other words, one share, one vote.
2. Written ballot.
All elections of directors shall be by written ballot unless otherwise provided in the certificate of incorporation. If it is authorized by the board of directors, such a requirement shall be satisfied by a ballot submitted by electronic transmission in compliance with the DGCL Section 211(e).
Each shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act for such shareholder by an instrument in writing or by an electronic transmission permitted by DGCL and your company bylaws.
In order for an election of the board of directors to take place, there must be a minimum number of shareholders entitled to vote present at the election. This is called a Quorum. The articles of incorporation or bylaws of a corporation may specify the number of members having voting power required to be present, or represented by proxy, at any meeting in order to constitute a quorum in accordance with DGCL. Note that in most instances no quorum may consist of less than 1/3 of the shares entitled to vote at the meeting, except where a separate vote by a class or series or classes or series is required. Generally, a majority of voting shares are needed to be present at a meeting to constitute a quorum, and subsequently a valid meeting and vote.
If a quorum is not present, the corporation will have to adjourn the meeting and reset it, conforming with all applicable restrictions mentioned in this post. This adds undue delay and cost to the meeting, which can affect your relationship with your shareholders.
Once a quorum is present at the annual shareholder meeting, a plurality vote is required for a nominee to be elected to the board of directors. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directions according to DGCL. Note that this does not mean that the nominee has to receive a majority of the votes (i.e. 51 percent), it means that the nominee has to receive more votes than other nominees. For example, if there are three nominees for one seat of the board of directors, two of the candidates could receive 30 percent each of all votes cast, while the remaining candidate receives 40 percent of all votes cast. While the candidate that receives 40 percent did not receive a majority of all the votes cast, this nominee would prevail as they received more votes than the other nominees.
Navigating the laws of your state and the bylaws of your corporation will allow you to reduce the cost of the annual meeting of shareholders. To ensure that your meeting is effective and efficient, consider options that are convenient to your shareholders. For instance, if your shareholders are located throughout the state, you may want to consider holding the meeting through electronic communication or allowing certain shareholders to participate through remote communication.
Additionally, if your shareholder base is small, DGCL allows the shareholders to elect the board of directors, and complete other corporate actions through unanimous written consent. The key here is having unanimous consent, which gets much harder to accomplish as your company grows.
Setting up your corporation’s annual meeting of shareholders is a technical task that, when done correctly, can be advantageous to both the corporation and the shareholders. Make sure to check your corporate bylaws to see if there are efficient options that allow for the best meeting for you and your shareholders. If you begin planning your annual meeting of shareholders early, the corporation will be able to host a cost effective performance of official business while building strong relations with key shareholders.
If you have any questions, or need assistance as you start to plan for your annual meeting of shareholders, please give us a call at (415) 633-6841 or send us an e-mail at firstname.lastname@example.org.
Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.