Most listed companies will have begun to think about their 2020 annual general meeting (AGM), with the majority of AGMs set to occur between September 2020 and January 2021. This article sets out some key steps that a company can take to prepare for its AGM taking into account ASIC’s no-action position in relation to AGMs held within seven months of a company’s financial year end and the modification of the Corporations Act 2001 (Cth) to permit virtual meetings as a result of COVID-19.
The trends that arose in the 2019 AGM season look set to continue in the 2020 AGM season. ASIC reported that the key themes of the 2019 AGM season were:
- An emerging theme of accountability from boards, including, where relevant, the board’s response to the effects of COVID-19 on the company.
- Increased strikes on remuneration reports by shareholders. In particular, there is likely to be a focus on board and executive remuneration and variable pay.
- A focus on environmental, social and governance (ESG) issues, with climate change risk and sustainability emerging as the most frequently raised ESG issues.
- An overall improvement in gender diversity.
Determine the time and format of the AGM
While ordinarily companies must hold an AGM within five months of the end of the company’s financial year, ASIC issued a formal no-action position that allows companies to hold their AGMs within seven months from the end of the financial year. This means that a company with a 30 June 2020 financial year end has until 31 January 2021 to hold its AGM. Companies may therefore choose to hold their 2020 AGM later than they usually would.
Holding a solely physical meeting will likely be impossible in 2020 due to limits on public gatherings and social distancing requirements. Boards will therefore need to determine whether to hold the AGM as a virtual meeting or a hybrid meeting, where:
- A hybrid meeting is a meeting where a physical meeting is convened with the minimum quorum, and other shareholders are able to participate in the meeting through an online platform. Hybrid meetings are permitted under the CA 2001, but the board will need to check its constitution to ensure that it allows the use of technology that would facilitate a hybrid meeting and ensure the availability of suitable technology.
- A virtual meeting is a meeting where all persons attend either online or by telephone. It is unclear whether the CA 2001 permits an entirely virtual meeting; however, on 5 May 2020, the federal Treasurer registered the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Coronavirus Determination) which, among other things, temporarily modifies the CA 2001 to permit a company to hold an entirely virtual meeting. The modifications apply for the duration of the Coronavirus Determination, being 6 May 2020 to 5 November 2020; however, the government has announced that the relief will be extended to 21 March 2021.
For more information about:
- holding a general meeting in reliance on the Coronavirus Determination (or any further iteration of that determination), see Checklist, COVID-19: implications for annual general meetings and other shareholder meetings, Modification of the Corporations Act 2001 to permit virtual meetings: COVID-19; and
- the logistics of holding a virtual meeting, see Checklist, Logistics of virtual shareholder meetings and Quick guide to hosting and participating in virtual meetings.
Ensure the company’s annual report is complete and accurate
Companies are ordinarily required to complete their financial reports within three months of the end of financial year. This means that, for entities with a 30 June end of financial year, reports must be lodged by the end of September. In 2020, however, for listed and unlisted entities with balance dates between 31 December 2019 and 7 July 2020, the deadline to lodge financial reports under Chapters 2M and 7 of the CA 2001 has been extended by one month. As such, most companies will have until the end of October 2020 to lodge financial reports.
The board should have close regard to the following when preparing the company’s 2020 annual report:
- ASIC’s COVID-19 implications for financial reporting and audit: Frequently asked questions (FAQs), which relate to the impact of the COVID-19 pandemic on financial reporting and audit matters and are updated as needed in response to emerging issues.
- The joint guidance from the Australian Institute of Company Directors (AICD), Chartered Accountants Australia and New Zealand and CPA Australia Impacts of COVID-19 on annual report disclosures: A guide for directors, preparers and auditors, which provides a summary of key considerations when assessing how best to disclose the effects of the COVID-19 pandemic when preparing annual reports.
For more information about the modified financial reporting and audit requirements in 2020, see Practice note, COVID-19: Corporate FAQs: Financial reporting and audit.
Entities listed on the Australian Securities Exchange (ASX) must also include an operating and financial review (OFR). Importantly, companies should ensure that their OFR discloses key risks, including environmental and other sustainability risks (including climate risk). ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review sets out ASIC’s expectations in respect of a company’s OFR.
Release the notice of AGM to the market as soon as possible
Companies should release their notice of meeting (NOM) as soon as possible. This means that the company will be in a better position to:
- Prepare shareholder communications.
- Respond to any requisitioned resolutions more effectively.
- Engage with proxy advisers at an earlier stage to seek to clarify information in the proxy adviser’s report to shareholders.
For ASX-listed companies, draft NOMs that contain resolutions for Listing Rules purposes must be submitted to the ASX for review before they are sent to security holders (ASX Listing Rule 15.1.7). The ASX may take five business days to advise whether it objects to a draft document and may extend that deadline if it needs further time to review the document (ASX Listing Rule 15.1). Listed entities should keep in mind these timing requirements and allow sufficient time to submit their draft NOMs. ASX has also reminded entities that their 2020 notice of AGM must incorporate amendments made to the Listing Rules on 1 December 2019 (see Listed@ASX Compliance Update number 09/20).
Review the share register
Boards should monitor and analyse the share register, preferably well in advance of the AGM. This may help to determine whether any of the company’s shareholders are known for particular views or action and therefore more likely to engage in shareholder activism. For this reason, boards should also:
- Monitor the share register for any unusual activity before an AGM or for signs of possible collective action or associations.
- If necessary, issue tracing notices to identify who sits behind non-beneficial owners (see ASIC Regulatory Guide 86: Tracing beneficial ownership).
Engage early with proxy advisers
Once the NOM is released, companies can then engage with proxy advisers who are responsible for providing reports to shareholders (typically, institutional investors) that contain the proxy adviser’s voting recommendation for each resolution to be considered at the AGM. Engaging early with proxy advisers allows the company to:
- Ascertain whether proxy advisers will recommend that shareholders vote “against” items at the AGM and get on the front foot with communication to shareholders.
- Best ensure that the report ultimately presented to shareholders presents a balanced view where the company and the proxy adviser reach different conclusions relating to certain resolutions or issues that will be considered at the company’s AGM. ASIC’s view is that companies should engage early with proxy advisers to maximise the quality of information provided to shareholders in proxy adviser reports (see ASIC Report 578: ASIC review of proxy adviser engagement practices: June 2018).
For more information on proxy advisers, see Practice note, Shareholder activism: Proxy advisers.
Engage early with institutional investors
There is increasing pressure on institutional investors (particularly superannuation funds) to take a more active role in their investments. Accordingly, in recent years institutional investors and companies have increased their engagement in corporate governance matters. Institutional investors can be critical to the success or failure of a resolution. Engaging early with institutional investors allows the company to gauge:
- Sentiment towards key items to be considered at the AGM, including the remuneration report. This will be particularly relevant in 2020 given the effects of the COVID-19 pandemic.
- Whether the company’s institutional investors intend to follow the advice of proxy advisers, in particular where the proxy advisers recommend that shareholders vote “against” a resolution to be considered at the AGM.
Carefully consider the remuneration report
The company’s remuneration report is likely to be closely scrutinised at 2020 AGMs, in particular, the board’s decision to pay or not to pay executive variable remuneration. ASIC has published ASIC Information Sheet 245 Board oversight of executive variable pay decisions during the COVID-19 pandemic (INFO 245), which sets out practical guidance to support board oversight and the exercise of discretion on the variable pay outcomes of large listed companies’ senior executives. In INFO 245, ASIC states that boards can consider including the following matters in their remuneration reports:
- The rationale for the exercise of discretion, or reasons that discretion was not exercised, in the final executive variable pay outcomes.
- The governance process and principles adopted in making the executive variable pay decisions.
- How the company’s specific circumstances and issues it faces with the COVID-19 pandemic were taken into account in its decision-making process and that this was done in a manner consistent with the principles adopted.
Prepare to respond to shareholder requisitioned resolutions
In 2019, shareholders of 12 ASX 200 companies requisitioned climate change or human rights related resolutions at the company’s AGM. There was also generally increasing shareholder support for resolutions on ESG issues.
The resolutions were:
- For the most part advisory and required a first resolution to be passed to change the company’s constitution to permit advisory resolutions.
- Usually coordinated by non-government organisations such as Market Forces (a climate change activist organisation, affiliated with Friends of the Earth) or the Australasian Centre for Corporate Responsibility (ACCR) (a not-for-profit association promoting responsible business and ethical investment, particularly through shareholder advocacy).
With this trend likely to continue in the 2020 AGM season, companies should:
- Ensure that, where appropriate, the company’s operating and financial review and directors’ report makes appropriate disclosures relating to ESG issues. For more information, see Checklist, Environmental, social and governance risks: disclosure requirements.
- Engage with key institutional investors to determine whether they intend to requisition resolutions and, if so, the substance of those resolutions.
- Prepare announcements responding to any resolutions requisitioned under section 249N of the CA 2001. A company that has received a notice of intended resolution under section 249N of the CA 2001 must, under the Listing Rules, make an announcement within two business days of its receipt.
- Prepare appropriate responses to any resolutions requisitioned at the AGM.
- Consider putting forward their own resolutions relating to ESG issues.
Pay attention to gender diversity on the company’s board
While gender diversity among the boards of ASX 200 companies improved overall in 2019, shareholder groups, in particular the Australian Council of Superannuation Investors (ACSI), are continuing to push for increased gender diversity on boards. ACSI’s general policy is that where a company has zero women directors, ACSI may make recommendations to vote against any newly appointed male directors (see ACSI website: Gender diversity).
With this in mind, companies whose boards lack diversity should carefully consider the directors being put forward for election or re-election and, where possible, ensure gender diversity on their board to avoid “against” votes on director election resolutions and, potentially, requisitioned resolutions calling for the appointment of new directors.
Prepare for a board spill
While the number of companies that received a first strike on their remuneration report reduced in 2019 compared to 2018, boards should nonetheless remain prepared for remuneration strikes in 2020, particularly given the uncertainty created by the outbreak of COVID-19, and companies that received a first strike in 2019 should prepare to respond to a second strike.
Under the two-strikes rule, a company that received a “first strike” against its remuneration report in 2019 may face a spill resolution if it receives a “second strike” in 2020. Activist shareholders may also attempt to spill the board by voting against the company’s remuneration report.
Companies that received a first strike in 2019 should prepare to respond to a potential spill resolution in 2020 by:
- Engaging with key shareholders, including institutional investors and proxy advisers to discuss its proposed response to the first strike.
- Ensuring that the materials for the AGM refer to the possibility of voting on a spill resolution at the same AGM.
- Understanding the impact of relevant voting restrictions on key management personnel and their closely related parties.
- Considering using a poll to count votes at the second AGM rather than a show of hands (especially if the company knows proxies are going to give a different result from a show of hands in the room).
- Having a draft announcement to the market prepared in case the spill does happen.
Engaging early with proxy advisers and institutional investors can also help a company to gauge whether there may be a board spill.
Practical Law subscribers can access more information on both preparing for an AGM and preparing for and responding to shareholder activism, requisitioned resolutions and board spills in the following checklists and practice notes on the Practical Law Australia site:
- Practice note, Notices of general meeting.
- Practice note, General meetings.
- Practice note, Shareholder activism.
- Practice note, Climate change and shareholder activism.
- Standard document, Notice of general meeting (virtual or hybrid meeting).
- Checklist, Environmental, social and governance risks: disclosure requirements.
- Checklist, Key strategies for preparing for shareholder activism.
- Checklist, Key strategies for responding to an approach by activist shareholders.
- Checklist, Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2017.
- Checklist, Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2018.
- Checklist, Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2018.
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