Legal briefing | Corporate Advisory, Corporate and M&A |

AGMs and dividends 2020: COVID-19 implications

Overview

This briefing was updated on 22 May 2020.

This year's AGM season season is facing unwelcome disruption from the COVID-19 outbreak. On 26 March 2020, the Government's compulsory Stay at Home Measures were passed into law in England and Wales, with immediate effect. The measures prohibit, amongst other things, public gatherings of more than two people. 

In light of this, companies will need to consider:

  • the practical implications of not being able to hold a meeting as planned,;

  • the business of the AGM and, in particular, the company's normal dividend programme;

  • the need to ensure authorities put in place at the AGM give maximum flexibility in order to deal with any impact on the company's financial position and cash flow; and

  • directors' duties to stakeholders and the market.

Practical implications

The Stay at Home Measures will prevent shareholders from attending AGMs in person as they prohibit public gatherings of more than two people. Attendance at a general meeting by a shareholder (other than where their individual attendance is specifically required to form the quorum for that meeting) is not "essential for work purposes", which is the only relevant exception.

The company should make it clear in its notice of the meeting, or by RIS announcement and on its website where the notice of meeting has already been published, that the Stay at Home Measures mean shareholders cannot attend the meeting in person and should attend by proxy. The wording should make it clear that anyone seeking to attend the meeting will be denied entry1. The provisions of the Corporate Insolvency and Governance Bill, if passed, will ensure that shareholders will not have a right to attend in person. 

Can the meeting go ahead?

For most companies, the preference will be to hold the AGM on the proposed date, as the business of the meeting will include obtaining annual renewal of authorities from shareholders including for share allotments, disapplication of pre-emption rights and share buybacks buybacks. It may also include approval of key documents such as employee share schemes.  The government has introduced measures in the Corporate Insolvency and Governance Bill which will assist companies in holding general meetings in compliance with the Stay at Home Measures. These would include (a) the ability for an AGM to go ahead with a minimum quorum of shareholders (usually two), and (b) the ability for those shareholders to attend remotely without the requirement for all shareholders to have access to an electronic meeting and electronic voting, which can be complex and costly, and (c) the ability to hold a fully "virtual" meeting (i.e. without the requirement for a physical place of meeting). The Bill, if passed, will allow companies whose meetings are, or were, due between 26 March 2020 and 30 September 2020 to delay their AGM until 30 September.

In the meantime, several companies have held their AGMs with a minimum quorum present at the intended venue, or an alternative venue, and have instructed shareholders to vote by proxy as physical attendance would not be in compliance with the Stay at Home Measures.

Postponement or adjournment

If a company wishes to change the time or place of the meeting, it has the following options:

Postponement: The articles of association may allow postponement of the meeting.  The company will need to comply with the requirements of its articles as regards publicising the postponement and new arrangements. It will also need to consider whether the company has time to postpone the AGM, given the statutory requirement to hold it within six months of its financial year-end.

Change of venue: The company's articles may allow it to change the venue of the meeting without the need for an adjournment as set out below. If this is not the case then a quorum of shareholders will need to open the meeting at the original venue in order to adjourn to a more suitable one.

Adjournment: If the company's articles do not allow it to postpone the meeting, then the chair and sufficient shareholders to constitute a quorum should attend the venue (remaining outside if necessary) in order to adjourn the meeting to a date and time, and/or a venue, that the company considers practicable.  The chair will generally hold sufficient proxies (giving discretion on procedural motions) to allow an adjournment motion to pass.

Time-sensitive matters: If a meeting is to be postponed or adjourned, companies will need to check that the expiry dates of their existing share capital authorities (e.g. the authority to buy back shares) do not affect any planned corporate actions or existing programmes. In most cases it will be preferable to go ahead with the meeting as planned if possible.

Can members attend remotely?

The Corporate Insolvency and Governance Bill provides that companies may hold fully virtual or "hybrid" meetings (i.e. meetings where there is a physical meeting but members can attend electronically instead of being physically present). If the decision is taken to hold a virtual or hybrid meeting and all shareholders are permitted to attend, the notice will have to contain the procedures which shareholders will need to follow in order to attend electronically.

Hybrid meetings have historically been quite rare, but we expect that there will be increasing demand in the coming months on a limited number of service providers.  Therefore if a hybrid meeting is proposed, arrangements should be made as soon as possible.

As an alternative to a hybrid meeting, some companies are providing for members to join a call or a live-stream webcast so that they can follow the proceedings remotely, although they will not count towards the quorum or be able to vote at the meeting (other than by proxy). Other companies are simply providing for shareholders to submit questions to the board in advance of the meeting.

1  As stated in the ICSA guidance: AGMs and impact of Covid-19: Supplement

Dividends

The AGM usually includes the declaration by the shareholders of a final dividend, in an amount recommended by the directors.

Given the sharp and dramatic impact of the virus on trading in many sectors of the economy, companies will need to think carefully before proposing a final dividend in their AGM notice: the trading environment could change even during the notice period so that the proposed dividend is no longer prudent or even viable.

Can a dividend be paid?

Under the Companies Act 2006, whether a dividend can be paid depends upon whether the company has sufficient distributable reserves, as demonstrated by stand-alone accounts. In addition, for a public company, its net assets following the distribution must be at least equal to the aggregate of its called-up share capital and undistributable reserves.

However, although the statutory test refers to a company's latest accounts, under common law directors have a duty to take account of more recent matters and events and therefore may not be able to pay a dividend even though it is justified by the company's annual accounts.  In addition, the directors should consider their wider duties to the company.

If a dividend that has already been announced will no longer be paid, the company will need to make an announcement to update the market. This information will be inside information for the purposes of the Market Abuse Regulation.

Before sending the AGM notice

The directors should consider whether the risks to the company's financial position could affect its ability to lawfully pay the proposed dividend. Where the financial position of the company has been affected by COVID-19, it will be prudent to prepare current management accounts and forecasts ahead of recommending a dividend.

A company which anticipates that its financial position may change between the publication of its AGM notice and the time of proposed payment may wish to consider the board approving an interim (rather than final) dividend, and explaining to shareholders that the board intends to pay it so long as it is in the interests of the company to do so.  In contrast to a final dividend, an interim dividend can be withdrawn at any time prior to payment.  Notwithstanding the necessary and unappealing communications around such a decision, it would provide a company with greater flexibility at a time of uncertainty.

After sending the AGM notice

If the AGM notice has already been sent to shareholders, and there is doubt as to whether the proposed dividend may lawfully be paid under common law, the company will need to consider what action to take.

Where a company's articles include the common provision limiting the final dividend to an amount recommended by the directors, the resolution proposing a final dividend may be withdrawn where the directors can no longer recommend the dividend at the proposed level. If the Notice of Meeting has been published and the Board decides to withdraw or amend the dividend resolution, the company should notify shareholders accordingly and explain the reasons the resolution is being amended or withdrawn. Listed companies should notify shareholders by way of an RIS announcement.

At the meeting, the chair may propose a motion to the shareholders either to withdraw the relevant resolution or to reduce the dividend. As the dividend is a tabled resolution, it will be within the scope of the meeting to amend a resolution relating to it.

Several companies have withdrawn resolutions authorising a final dividend. 

Once a final dividend is approved

Once a final dividend has been declared by the company in general meeting it will become a debt due to the shareholders. 

Authority for equity fundraising

The AGM notice will usually contain resolutions authorising non-pre-emptive issues of shares.  If the company is likely to need to raise extra capital as a result of COVID-19, it may wish to consider seeking approval for a higher level of pre-emption disapplication in order to provide flexibility for fundraising: there may not be sufficient time to effect a rights offering.

The Pre-Emption Group ("PEG"), which represents certain investor protection committees, has temporarily relaxed its guidance setting limits on the size of non-pre-emptive offerings. The guidelines generally provide for a limit of 5% of a company's issued share capital, plus an additional 5% for acquisitions and specified capital investments.  PEG has stated that in the current climate it recommends that shareholders approve disapplication authorities of up to 20%. For further details please see our Listed Companies: FCA Fundraising Measures briefing.

Serious loss of capital and solvency issues

Impairments (e.g. in the carrying value of subsidiaries) can cause balance sheet difficulties both in terms of dividends and net assets. Public companies should check that the AGM agenda need not include an item in light of a serious loss of capital: if a public company's net assets fall to half or less of its called-up share capital, the directors are required, within 28 days of becoming aware of the fact, to call a general meeting to consider what steps should be taken.

This briefing assumes that companies feel they can trade out of the current headwinds, but clearly directors need to consider their duties and take legal advice if in doubt on debt covenants or solvency matters.

Disclosure obligations

Finally, to the extent that the effects of the pandemic are likely to lead to events or circumstances which, if known, would affect the company's share price, the board should bear in mind its obligations to update the market on any such price-sensitive information.

Conclusions

For companies preparing to convene their AGM, it will be necessary to give serious consideration to how the meeting will be held in light of the Stay at Home Measures, and whether it should go ahead or be adjourned or postponed . Company secretaries will need to be familiar with the relevant provisions of the a company's articles in order to deal with these issues as they arise.  If the articles allow for hybrid meetings, it may be helpful to take advantage of this facility.

Where a final dividend is proposed, companies should consider their continued ability to pay that dividend, if their finances have taken a significant hit due to the spread of COVID-19. It may be advisable for the directors instead to approve an interim dividend, subject to the company's financial position at the time for payment.

Companies may also wish to ensure that they put in place authorities giving them the maximum flexibility to raise funds if necessary.

In addition to issues surrounding AGMs and dividends, directors must keep abreast of the risks which the pandemic poses to their business, and consider their duties to shareholders, creditors and the market.

For further information, please contact

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