On March 28, 2020, the Act on Measures in Corporate, Cooperative, Association, Foundation, and Home Ownership Law to Combat the Effects of the COVID-19 Pandemic (COVID-19 Act) entered into effect. Among other things, the COVID-19 Act provides for substantial facilitations for stock corporations to hold general meetings. The most important innovation for use in practice is the possibility of holding general meetings entirely virtually, i.e., without the presence of shareholders and their proxies. Ever more large and medium-sized companies are currently making use of this option in the current 2020 general meeting season. This article presents selected individual issues relating to preparing and holding virtual general meetings and offers practical advice.
The COVID-19 Act provides that the period of notice for convening general meetings may be shortened by nine days. According to the wording of the law, the meeting should then be convened on the 21st day before the general meeting. The provision that the day on which the meeting is convened is not to be counted was, however, not expressly excluded by the pandemic legislation (Section 121(1) sentence 2 Stock Corporation Act). Against this backdrop, if the shortened period is used in practice, the notice convening the general meeting should be published in the Federal Gazette on the 22nd day before the general meeting to be on the safe side.
If the shortened notice period is used, the COVID-19 Act stipulates that the proof of share ownership must refer to the beginning of the 12th day (instead of to the regular beginning of the 21st day) prior to the general meeting. In this case, however, a purely practical risk exists that, taking into account regular postal delivery times, the required evidence, especially where shareholders are residing abroad, might not be provided in due time. Against this backdrop, and also in the general interest of shareholders, it therefore appears advisable to make use of the standard deadline, unless there are compelling reasons for making use of the shortened deadlines under the COVID-19 Act.
If, as is customary in practice, the virtual general meeting is only conducted by postal vote and the possibility of authorizing a third party or the company’s proxy, shareholders generally have no rights to propose motions at the general meeting. It is therefore questionable how potential (counter)-motions or election proposals from shareholders are to be dealt with in practice. With reference to the explanatory memorandum to the COVID-19 Act, some companies refrain entirely from considering (counter)-motions or election proposals of shareholders at the general meeting. In most cases, counter-motions or election proposals submitted by shareholders within the period stipulated in Sections 126, 127 Stock Corporation Act are simply considered as having been submitted at the meeting. Alternatively, counter-motions and election proposals submitted within the deadline will only be considered if the proxy actually makes the relevant proposal at the general meeting on the basis of the respective shareholder’s authorization and instructions. Although this is unusual, the option of also giving shareholders the opportunity to authorize the proxy to make motions even after the deadline imposed by Sections 126, 127 Stock Corporation Act and also during the general meeting is practicable.
If companies are considering applying for state funding loans, i.e., KfW entrepreneurial loans, it should be noted that no dividends may be distributed during the entire term of the KfW loan. An exception is to apply where a distribution is required by law. For stock corporations, there is a legal obligation to distribute dividends due to the provisions of Section 254(1) Stock Corporation Act, according to which at least the “guaranteed dividend” of 4% of the share capital must be distributed. The German Stock Corporation Act provides for an exception from the distribution obligation, however, particularly in the event that it is necessary to allocate the profit to reserves or carry it forward to new account in accordance with sound business judgement to ensure the company’s viability and resilience for a period of time that is foreseeable in terms of economic and financial necessities. Accordingly, this exception will probably always apply to those companies that are experiencing financial difficulties as a result of the COVID 19 pandemic and therefore apply for state funding loans. Referring to the “guaranteed dividend” of Section 254(1) Stock Corporation Act would therefore probably not be sufficient to avoid the contractual prohibition of dividend payments.
It would be welcome if the legislator were to incorporate the regulations for modernizing the general meeting into the Stock Corporation Act on a permanent basis, even independently of the effects of the COVID-19 pandemic. In particular, the holding of purely virtual general meetings should be made permanent. It is likely that additional fine-tuning of the regulations will be necessary to find a balanced compromise between the interests of issuers in a practicable implementation of virtual general meetings and the participation interests of shareholders. All in all, the practical experience gained in the coming months will certainly help to shape the regulations appropriately.