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

AGMs and dividends 2020: COVID-19 implications

Overview

This year's AGM season looks set to face disruption from the COVID-19 outbreak.

Companies will need to consider:

  • the practical implications of holding a meeting, including potential closure of venues, travel restrictions and the negative perception of encouraging a physical gathering of shareholders;

  • 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

Will access to the venue be restricted?

Where a venue is closed following publication of the AGM notice, the company will need to consider whether to postpone or adjourn the meeting.

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.

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 that the company considers practicable.  The chair will generally hold sufficient proxies (giving discretion on procedural motions) to allow an adjournment motion to pass.

Meeting may continue if a quorum is present: The directors should be aware that even if they do not attend, but a quorum is otherwise present, the attendees may appoint a chair and go ahead in their absence. Therefore it may be sensible to ensure that the chair, or at least one of the directors, and enough "friendly" shareholders to make up a quorum, should attend the place of the meeting at the appointed time.

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.

Will government action prevent the meeting from being held?

In the event that Government action would prevent the AGM from taking place, the company will need to consider whether postponement is an option (see above).  It is possible that the Government may introduce some concession as to the timing of AGMs in the event of restrictions on public gatherings. In Singapore, some listed companies have been given an extended AGM deadline. Otherwise, depending on the relevant restrictions, the meeting could be opened with minimal participation and then adjourned.

Will travel restrictions affect attendance?

If the meeting is to go ahead, the company should ensure that it will have at least one director and sufficient shareholders at the meeting so that a quorum is present.  It may wish to consider publishing an RNS announcement urging shareholders to send proxies as soon as possible, in case physical attendance is not possible due to travel restrictions. Shareholders may also be encouraged to submit questions in advance of the meeting.

Can members attend remotely?

In order to protect the health and safety of the attendees at their AGM, companies should follow the advice and guidance from Government and relevant authorities, such as Public Health England.

With this in mind the company should consider:

  • making an RNS announcement encouraging shareholders to:

    • submit their proxy forms, rather than attending in person; and

    • check the company's website for further developments, including travel restrictions or government restrictions on public gatherings;

  • whether to exclude those who are unwell or have travelled to certain countries on the grounds of security, and the basis on which exclusions are permitted under the company's articles; and

  • whether the meeting can be postponed to a later date (see above).

Health and safety: should certain people be encouraged or required to stay away?

Before sending out a notice, companies should consider whether their articles allow for hybrid meetings (i.e. meetings where there is a physical meeting but members can attend electronically instead of being physically present) and whether they have the mechanisms and procedures in place to be able to hold such a meeting. If the decision is taken to hold a hybrid meeting, 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.

Where the AGM notice has already been published, it may be possible 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). Companies may wish to provide for shareholders to submit questions to the board in advance of the meeting.

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.

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.

Once the AGM notice has been issued, the company will not be able to withdraw the resolution approving the dividend prior to the meeting, and the chair cannot unilaterally decide not to put the resolution to the meeting.

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 would be within the scope of the meeting to amend a resolution relating to it. However, this may be difficult to explain to shareholders to the extent that a majority has already voted by proxy to declare the 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.

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 issues such as venue closure, restrictions on public gatherings and possible postponement or adjournment. 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.

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