The Impact of New Technology on Investor Relations

© Copyright 1999, Michael D. Goldman, William R. Denny,
Michael A. Pittenger and Eileen M. Filliben.
All rights reserved.

Corporate boards seeking to improve investor relations have found an ally in the Internet.  More and more corporations are taking advantage of widespread access to and use of the Internet, its improved security, and the tremendous cost-savings of Internet publishing by offering their investors opportunities to receive documents electronically, designate proxy voting instructions online, and even view annual stockholder meetings online.[2]  With so many changes taking place in the way companies interact with their investors, many jurisdictions, including Delaware, are reviewing and revising their corporation statutes as appropriate to fit the new business practices.[3]  This article examines how Internet usage is treated today under the Delaware General Corporation Law ("DGCL") and how the law is evolving to keep pace with the new technology.[4]

II. Electronic Proxies

1. 1990 Revisions to the DGCL Permit Electronic Transmission of Proxies.

While Section 212 of the DGCL governs the use of proxies, Delaware law does not require a proxy to take a particular form.  See In re Mesa Ltd. Partnership Preferred Unitholders Litig., Del. Ch., C.A. No. 12,243, 1991 WL 285590, at *2, Hartnett, V.C. (Dec. 31, 1991); Lobata v. Health Concepts IV, Inc., Del. Ch., 606 A.2d 1343, 1347 (1991).  All that is required is a document that appoints someone to vote the shares and some indication of authenticity (often a signature).  Lobata, 606 A.2d at 1347.  As is routinely proven in litigation discovery, the concept of a "document" is broad enough to include electronic transmissions.  Furthermore, in the field of proxy voting, courts have been sensitive to the "practicalities of corporate life."  Schott v. Climax Molybdenum Co., Del. Ch., 154 A.2d 221, 222-23 (1959) (proxies that were rubber-stamped with the owners’ names were "signed" and therefore properly counted).

In part because of this recognition of practicalities, Section 212 of the DGCL was amended in 1990 to add subsections (c) and (d).[5]  Those amendments specifically validate certain types of electronic proxies, including those sent via facsimile and those registered via "proxygrams" or "datagrams."[6]  Prior to the amendment, the use of datagrams had been severely restricted by the Court of Chancery in Parshalle v. Roy, Del. Ch., 567 A.2d 19 (1989), which involved a challenge to the datagrams in question because there was no procedure to verify that the person who called the toll-free number was either the record holder or someone authorized to act on the record holder’s behalf.  Accordingly, the datagrams lacked the one "fundamental" attribute required in all proxies, i.e., "to be accepted as valid evidence of an agency relationship, the proxy must evidence that relationship in some authentic, genuine way."  Parshalle, 567 A.2d at 27.  The 1990 amendments to Section 212 represented an effort to keep the law current with evolving technology.  Accordingly, a stockholder should be able to grant a proxy using the Internet, provided it can be determined that the transmission pursuant to which the proxy was granted was authorized by the stockholder.  Such verification information may include a Social Security number, birthdate, or other fact known only to the stockholder.  The use of a personal identification number or control number also may be appropriate.  If a company sought greater security than it could achieve through use of unique control numbers, it could encrypt its transmissions.[7]

2. Logistical Issues Associated With Electronic Proxies

Unique logistical issues may arise in the context of electronic proxies.  One such issue will be resolving conflicting proxies.  A proxy may be revoked in one of three ways:

1. express revocation; see Schott v. Climax Molybdenum Co., Del. Ch., 154 A.2d 221, 223 (1959) ("[c]learly a later proxy revokes an earlier one when such instructions appear on the face of the later proxy");

2. subsequent execution of another proxy; see, e.g., Standard Power & Light Corp. v. Investment Assoc., Inc., Del. Supr., 51 A.2d 572, 580 (1947); Parshalle v. Roy, Del. Ch., 567 A.2d 19, 23 (1989); Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651, 666 n.12 (1988); Schott, 154 A.2d at 223;[8] or

3. an actual vote at the annual meeting, see Elgin Nat'l Indus., Inc. v. Chemetron Corp., 299 F. Supp. 367, 371-72 (1969), although mere attendance at the meeting does not constitute revocation.

Where identical, conflicting proxies exist, but none bear any facial indication that the person executing that proxy was unauthorized, then all are entitled to a presumption of validity.  Parshalle, 567 A.2d at 23.  The proxy that governs is the one that was executed latest:  "[W]hen two proxies are offered bearing the same name, then the proxy that appears from the evidence to have been last executed will be accepted and counted under the theory that the latter – that is, the more recent – proxy constitutes a revocation of the former."  Standard Power & Light, 51 A.2d at 580.  Accord Parshalle, 567 A.2d at 23 (inspectors correctly gave effect to later-dated proxy even where party argued that later-dated proxy was result of internal mistake or misunderstanding); see also Blasius, 564 A.2d at 666 n.12 ("later proxy not only revokes an earlier one, but acts as an affirmative vote").  Where two proxies are undated or dated the same day, a later post mark is sufficient to show later execution.  See Standard Power & Light, 51 A.2d at 580.  Accord Concord Fin. Group, Inc. v. Tri-State Motor Transit Co. of Delaware, Del. Ch., 567 A.2d 1, 7-8 (1989).  When the conflict cannot be resolved from the face of the proxies themselves or from the books and records of the corporation, however, then all identical but conflicting proxies must be rejected.  Williams v. Sterling Oil of Oklahoma, Inc., Del. Supr., 273 A.2d 264, 265 (1971) (inspectors acted improperly by rejecting one proxy on basis of an affidavit submitted by counsel for the management group).  Accord Concord, 567 A.2d at 6.[9]

Where one or more of the conflicting proxies are electronic, the analysis may be more complicated.  Issues will arise as to which electronic voting instruction controls or whether a particular electronic voting instruction was prior or subsequent to another form of communication.  For example, what happens if a stockholder were to mail a proxy card on Friday afternoon but then change his mind over the weekend and send electronic voting instructions on Monday.  The company would receive the electronic instructions nearly instantaneously on Monday but might not receive the proxy card in the mail until Tuesday or Wednesday.  Under the revocation rules discussed above, the later executed proxy governs.  While unresolved under Delaware law, the critical time of "execution" of an electronic proxy is likely to be the time it was sent, assuming the relevant authentication procedures were followed.  Under the hypothetical, then, the proxy that should count would be the earlier-received electronic proxy of Monday.

This analysis also raises interesting questions regarding what evidence comparable to a postmark, if any, could be considered in connection with resolving a timing conflict regarding that electronic proxy.  See Williams, 273 A.2d at 265 (generally, no extrinsic evidence can be considered to resolve conflict between proxies).  The electronic statement declaring when the electronic voting instructions were "sent" that accompanies most, if not all emails, would likely be considered part of the "face" of the proxy for such purposes.  Cf. Concord, 567 A.2d at 8 (envelope and postmark considered "face of the proxies themselves").  Therefore, courts will likely look to the electronic statement in the "header" portion of the electronic voting instructions transmissions showing the date and time of transmission to determine the timing of a proxy.

A related problem arises regarding how late stockholders should be able to cast electronic proxies.  Given the instantaneous nature of Internet communications, absent a cut-off, stockholders could conceivably be changing and/or revoking proxies even during the meeting.  One way to address this problem is by cutting off the right to submit proxies by phone or electronically at a specified time the day before the meeting.  An earlier cut-off would make good business sense where, for example, additional logistical steps (such as filing the proxies with the secretary) are required before the vote of the proxy may be cast at the meeting.

3. Electronic Provision of Notice

Section 222(b) of the DGCL provides that "written notice" of a stockholder’s meeting must be given to the stockholders.  8 Del. C. § 222(b).  While it is unresolved under Delaware law whether notice via the Internet and/or email would satisfy the written notice requirement for purposes of Section 222(b), it is reasonable to conclude that electronic notice would be sufficient.

First, Section 222(b) provides, "If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation."  Id.  The use of the qualifier "if mailed" suggests that other methods of delivery are contemplated.

Second, although decided long before electronic transmissions were even possible, several Court of Chancery cases lend support to the idea that notice can be given by means other than the mail.  See Bryan v. Western Pac. R. Corp., Del. Ch., 35 A.2d 909, 913 (1944) ("Ordinarily, the requirement of notice is met if the shareholders registered on the corporate books are given some appropriate form of notification.") (emphasis added); Hall v. Trans-Lux Daylight Picture Screen Corp., Del. Ch., 171 A. 226 (1934) (costs incurred in notifying stockholders of special meeting by publication instead of by mail, which was required under the bylaws, could properly be paid out of corporate funds).  Cf. Petrick v. B-K Dynamics, Inc., Del. Ch., 283 A.2d 696 (1971) (issues of material fact precluded summary judgment on whether corporate bylaws requiring mailing of written notice had been amended by implication through the practice of delivering written notice to stockholders' desks at their place of business).[10]  In another context, the United States District Court for the District of South Carolina held that a computer disk mailed or delivered to an insurance agent could constitute "written notice" to an agent required in order to cancel a policy for nonpayment of premiums.  See Clyburn v. Allstate Ins. Co., 826 F. Supp. 955, 956-57 (D.S.C. 1993). ("In today's 'paperless' society of computer generated information, the court is not prepared, in the absence of some legislative provision or otherwise, to find that a computer floppy diskette would not constitute a 'writing' within the meaning of § 38-75-730.") (footnote omitted).  Thus, while the legal sufficiency of electronic notice has not been definitively adjudicated, it is reasonable to conclude that such notice would suffice.[11]

In all events, even if email notice did not satisfy Section 222(b), stockholders wishing to receive notice electronically can request to do so and in effect "waive" the "written notice" requirement.  See 8 Del. C. § 229 (written waiver of notice signed by person entitled to notice shall be deemed equivalent to notice).[12]

Electronic notice also raises the issue of proof or presumption of receipt. Section 222(b) of the DGCL presumes receipt of notice in the event the U.S. mail is used, an obvious advantage for the corporation.  It is unclear as to when notice would be deemed given if it is not given by mail.  Compare SEC Release 33-7233 (Oct. 6, 1995) (electronic verification of receipt is sufficient proof of delivery).  If notice is given other than by mail, it is likely that the corporation will bear the burden to prove that the stockholders received notice of the meeting.  In the event a corporation utilizes procedures for noticing meetings of stockholders other than the mail, it may be advisable to include a provision in the corporation’s bylaws concerning the time at which notice via such other means is deemed to have been given and received.  See 8 Del. C. § 109(b).

4. Electronic "Attendance" at Annual Stockholder Meetings

While an increasing number of companies allow stockholders to view annual meetings via the Internet, a corporation cannot conduct a meeting strictly over the Internet nor may a stockholder "attend" a meeting over the Internet.

An annual meeting must be conducted at a specified time and place.  See 8 Del. C. § 222(a) (requiring notice of the time and place of the annual meeting).  It is unlikely that an Internet Web site or chat room would constitute a "place" under Delaware law.  Indeed, Section 219 would appear to indicate that "place" refers to a geographic location.  See 8 Del. C. § 219(a) (requiring that list of stockholders be made available prior to meeting either at the place of the meeting or "at a place within the city where the meeting is to be held").  Nevertheless, even if cyberspace were a "place," the absence of a physical location would deprive the meeting of a quorum and prevent those "attending" via cyberspace from voting.  Under Section 216 of the DGCL, both quorum and the attainment of the vote of sufficient shares depend upon stockholders being present "in person" or represented by proxy.  8 Del. C. § 216.  See also Berlin v. Emerald Partners, Del. Supr., 552 A.2d 482, 491-94 (1989) (discussing distinction between quorum and voting power and stating "If a stockholder is not present in person, and if he is not given a proxy to vote on the proposed Business Combination, his stock cannot be regarded as ‘voting power present,’ for purposes of the vote required under the supermajority provision.").[13]  Accordingly, pursuant to the current state of Delaware law, a stockholder purporting to "attend" the meeting electronically would not be considered "present in person".  Therefore, that stockholder would not be counted for quorum purposes and would not be entitled to vote.

A number of companies have allowed stockholders to view their annual meetings on the Internet and to ask questions during the meeting.  The first such company to allow investors to the view the annual stockholder meeting while it was in progress was Bell & Howell, a Delaware corporation.  After going public (for the second time) in 1995, it was seeking a way to improve its image as a high-tech company.  It also wanted to get its message out to stockholders around the world.  Therefore, it allowed stockholders to view its first meeting online in May 1996.  While only 40 stockholders physically attended the meeting, more than 950 watched online.  Investors could hear what was going on through the Web site audio function and could simultaneously view the charts and graphs presented on PowerPoint slides.  In addition, the online viewers were permitted to email questions to directors as early as two days before the meeting and while the meeting was in progress, all of which were read and answered during the meeting.  Those persons monitoring via the Internet were not, however, considered "present" for quorum or voting purposes.

* * * * *

By specifically authorizing the grant of electronic proxies, Delaware law is evolving to address the practicalities of modern corporate life.  Companies seeking to enhance investor relations, increase stockholder participation, reduce costs and strengthen their reputations as technological frontrunners should strongly consider harnessing the Internet as a valuable corporate governance tool.

Notes:

1. Mr. Goldman, Mr. Denny, and Mr. Pittenger are partners and Ms. Filliben is a former associate at Potter Anderson & Corroon LLP in Wilmington, Delaware.  The views and opinions expressed herein are those of the authors and do not necessarily represent those of Potter Anderson & Corroon LLP or its clients.

2. For example, ADP Shareholder Services, which handles distribution of proxy materials for virtually every major bank and brokerage firm, offered telephonic and Internet voting to stockholders of approximately 1,000 companies during the 1998 proxy season.  According to a survey that the American Society of Corporate Secretaries is compiling, approximately 200 companies offered telephonic voting and 50 offered Internet voting during that same proxy season.  Not surprisingly, most of the participating companies were technology or telecommunications companies.  Other companies offering Internet voting include McDonald’s, First Chicago, and Ameritech.  Dozens of companies are also enabling investors to view their annual meetings on the Internet.

3. The SEC rules on delivery of materials also allow corporations to take advantage of the Internet.  For example, the SEC’s guidance on when electronic delivery is permitted includes the following:  (1) the company must have a way to ensure that the investor is notified that the data has been sent in electronic form or can be accessed on a Web site; (2) the company must be sure that the investor has access to the Web site or email; (3) the investor must be entitled to request and receive a paper copy; and (4) there must be evidence of delivery, either in the form of (a) informed consent as to the manner of delivery, (b) electronic verification of receipt, (c) use of data by the investor, or (d) issuer-provided access with the expectation of regular use.  See, generally, SEC Release No. 33-7233 (Oct. 6, 1995); SEC Release No. 33-7288 (May 9, 1996).  As a result of these changes, the vast majority of public corporations with Web sites are publishing their annual reports online.  The Public Register’s Online Annual Report Services, for example, found at www.annualreportservice.com, quickly links investors to over 1,629 annual reports.

4. While this article focuses on the DGCL and case law interpreting it, a necessary starting point for any Delaware corporation considering using the Internet in the ways described herein is to have Delaware counsel review the corporation’s bylaws and certificate of incorporation to ensure they are consistent with the practices being contemplated.

5. Section 212 (c)(2) now permits a stockholder to authorize another person "to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm … provided that any such … means of electronic transmission must either set forth or be submitted with information from which it can be determined that the … electronic transmission was authorized by the stockholder."  8 Del. C. § 212(c)(2) (emphasis added).  Section 212(d) now allows for the use of copies or reproductions of proxies for any purpose for which the original could be used provided that the entire proxy is reproduced.  8 Del. C. § 212(d).

6. These terms refer to a procedure in which a record shareholder, by using a toll-free telephone number, communicates his or her vote in telegraphic or datagram form.  See Parshalle v. Roy, Del. Ch., 567 A.2d 19, 25 (1989).  See also Concord Fin. Group, Inc. v. Tri-State Motor Transit Co. of Delaware, Del. Ch., 567 A.2d 1, 18 (1989).  This practice has become widespread among professional proxy solicitors.  Parshalle, 567 A.2d at 25; Concord, 567 A.2d at 18.

7. One method of encryption is the "digital signature", an encoded message that assures the recipient of the identity of the sender.  Creation of the digital signature involves encryption of the message using a "private key" known only to the signer, and a "public key", available to anyone who may read the sender’s message.  Anyone who has the public key can send messages that only the private-key owner can read, and the private key can be used to send messages that could only have been sent by that private-key owner.  In 1996, the American Bar Association published "Digital Signature Guidelines: Legal Infrastructure for Certification Authorities and Secure Electronic Commerce."  Since then, thirty states and the District of Columbia have enacted legislation on the use of digital or electronic signatures.

8. Revocation by subsequent proxy does not apply, however, where a series of proxies is submitted by a broker, but the total number of shares covered by the proxies does not exceed the total number of shares registered in the proxy-giver’s name.  See Schott, 154 A.2d at 223 (inspectors could conclude brokers were expressing views of varying beneficial owners).

9. However, where stockholders are forced by statute to hold their shares beneficially, and a clerical mistake results in irreconcilably conflicting proxies that ordinarily would be disregarded under the rule of Williams, a court can intervene to effectuate the beneficial stockholders’ voting instructions.  See Preston v. Allison, Del. Supr., 650 A.2d 646 (1994).

10. Petrick involved a bylaw that expressly required written notice by mail.  As mentioned previously in footnote 3, supra, a corporation's bylaws and certificate are the necessary starting point in any consideration of using the Internet to facilitate corporate governance.  This is particularly true in the context of notice because many bylaws still require notice by mail.

11. By comparison, the SEC requires that the method of delivery of the data be at least as reliable as the U.S. mail.  Therefore, a company must have reason to believe that the delivery method selected will result in the satisfaction of the delivery requirement.  Examples provided by the SEC include (1) obtaining an informed consent from an investor to receive the information through a particular electronic medium coupled with assuring appropriate notice and access; (2) obtaining evidence that an investor actually received the information, for example, by electronic mail return-receipt; and (3) disseminating information through certain facsimile methods.  Delivery and notice can be assumed, however, when materials are provided by an employer through an email to employees who regularly receive electronic communications during work.

12. By analogy, the SEC typically requires that a stockholder consent to electronic delivery of corporate documents.  It may be possible to couple this securities law election to receive proxy materials electronically with a consent/waiver regarding electronic notice of annual or special meetings.

13. Compare Section 211 of the DGCL which contains provisions relating to the conduct of an annual meeting that has been ordered by the Court under that section.  Subsection (c) expressly provides:  "The shares of stock represented at such meeting, either in person or by proxy, and entitled to vote thereat, shall constitute a quorum. . . ."  8 Del. C. § 211(c).