Can Director and Shareholder Meetings Be Held via Internet?

New Jersey Law Journal   April 8, 2015   

Bick is of counsel at Brach Eichler in Roseland. He is also an adjunct professor at Pace and Rutgers law schools, and the author of "101 Things You Need to Know About Internet Law" (Random House 2000).

Proper corporate governance normally requires director meetings and shareholder meetings. Appropriate use of existing technologies, and modifications in entity procedures and governance documents, allow Internet communications to be lawfully integrated into director meetings and shareholder meetings.

Typically, state laws require public and private entities to hold director meetings as well as annual meetings of their members to elect directors and act upon other matters properly brought before the meeting. From an entity governance perspective, directors meet to enable them to discharge their responsibility to control the company's overall situation, strategy and policy, and to monitor the exercise of any delegated authority.

The primary purpose of shareholder meeting is to elect the corporation's board of directors for the next year; however, other important issues may also be addressed and other votes taken. Both types of meetings require trustworthy communications. Amendments to business law statutes, e.g., N.J.S. 14A:5-1, now authorize "cyber meetings."

The Internet allows an efficient method for directors and shareholders to participate in meetings without incurring the expense and inconvenience of traveling to a mutual meeting site. This in turn allows for higher levels of meeting attendance and participation. However, it may be argued that Internet meetings may not substitute for traditional meetings because they do not allow participants to benefit from the physical cues available at face-to-face meetings, thus decreasing the quality of meeting communication. This argument is supported by the courts, which have found that physical meetings have certain unique characteristics. For example, the court in Hoschett v. TSI Int'l Software, 683 A.2d 43 (1996), found that a physical gathering provides a unique forum for deliberation and confrontation.

It has also been argued that Internet meetings are more susceptible to technology-based fraud than traditional meetings. Traditional meetings allow participants to identify each other and to assess which participant is responsible for each meeting comment. Due to Internet techniques commonly known as "spoofing" (the forgery of an email header so that the message appears to have originated from someone or somewhere other than the actual source) and "phishing" (messages that appear to be sent from a legitimate company's website or domain address, but in fact are not), result in email identity fraud. Internet server hacking (invasion) may result in fraudulent impersonations.

Even when participants of an Internet meeting have accurately identified each other, the Internet meeting platform controller may serve different images and sound communications to each participant, thus fraudulently misrepresenting the intent of participants. Similarly, the Internet meeting platform controller may serve different results of meeting votes to each participant, thus fraudulently misinforming participants.

Some features of Internet meetings are common to both director and shareholder meetings. In particular, the Internet can be used to facilitate voting and meeting-related communications. Internet proxy voting, Internet direct voting, Internet meeting notices (N.J.S. 14A:1-8.1 permits certain notices to shareholders to be given via the Internet) and meeting transactions are elements of both director and shareholder meetings.

Such features require trustworthy communications, since the authentication of votes cast, confirmation of the identity of the Internet speaker and the trustworthiness of corporation-sponsored Internet facilities are common to both director and shareholder meetings. The Internet's traditional approach to communications is based on a client-server model of interaction; communicating parties establish a relationship and then proceed to transfer information where data contained within IP packets are transported along a single path.

This approach is easily subverted, particularly due to the use of proxy servers which would enable one party to fraudulently represent itself as another. However, this issue may easily be ameliorated or eliminated by the use of Named Data Networking (NDN) architecture, which prevents the use of proxy servers by naming data instead of their location (IP address), NDN transforms data so as to allow trustworthy Internet communications. Alternatively, entities may use encryption to bolster the trustworthiness of Internet meeting communications.

While the current Internet secures the communication channel or path between two communication points and sometimes the data with encryption, NDN secures the content and provides essential context for security. This approach allows the decoupling of trust in data from trust in hosts and servers, enabling trustworthiness beyond encryption. An entity worried about fraudulent Internet director and shareholder meetings need only change its entity governances to require NDN or strong encryption (i.e., encryption requiring at least 512 bits) be used for its Internet meeting communications.

Internet shareholder meetings may be divided into two distinct types. The first, an Internet-only meeting, is a meeting among shareholders at which all participants communicate exclusively via the Internet. The second, an Internet-enabled meeting, is a meeting among shareholders at which some remote shareholders communicate to an assembled physical meeting and participate.

Internet proxy voting issues related to the authentication of the appointment can generally be overcome with the use of technology, such as the use of a password and log-in identification, which has regularly been used to substitute for a handwritten signature. Internet direct voting issues can in part be resolved using similar technology, but both are subject to a claim that the use of the Internet deprives some potential meeting participants of the opportunity to participate because of differential access to technology. This in turn may result in challenges contending the Internet-submitted votes are invalid, thereby opening corporate resolutions to challenge.

Internet direct voting can take a number of different forms. Such voting may take place via the Internet during a meeting in real time or may take place via email during a set period prior to the meeting. When the two are combined, the issue becomes are those not "present"—in person or by proxy—able to vote.

Director and shareholder meetings are considered differently by the courts. Internet director meeting rules have been considered by the courts and codified by legislatures for more than two decades. Inspired by Freedom Oil Co. v. Ill. Pollution Control Board, 655 N.E.2d 1184 (1995), which found that administrative agencies have wide latitude to accomplish their official duties, and that meeting by telephone conference call did not violate Illinois open meetings laws, courts have found that any forum director meetings that constitute a meeting of the minds will count as a meeting, even if it takes place using technology (such as a telephone or the Internet).

Most states' corporate governance allows a vote of the board of directors by written consent, so a board of directors could use an Internet meeting to discuss matters and take action, such as vote using traditional writing. Prior to using an Internet meeting in this manner, the entity's bylaws and state law should be reviewed. It is also possible that the written consent for this use of the Internet may have to be unanimous.

Internet meetings typically satisfy the letter of the law in most states. A minority of states, beginning with California and Illinois, changed their corporate law to allow the board of directors of a corporation to meet in any manner in which all members can "communicate" with one another (rather than "hear" one another). The word "communicate" in the laws in these states would allow Internet meetings of a corporation board of directors.

Section 5211, Section 6 of the California Code, exemplifies the elements for a valid Internet director meeting. Specifically, participants communicating via electronic video screen constitutes presence in person at that meeting, so long as: all directors participating in the meeting are able to hear one another; each director participating in the meeting can communicate with all of the other directors concurrently; and each director is provided the means of participating in all matters before the board, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the corporation.

The choice between traditional and Internet director meetings need not apply to all meetings. Certain issues are more suitable to Internet meeting discussion than others. Internet meetings generally work best for straightforward discussions with no controversy, such as program updates or formal approval of a policy or budget discussed in detail at a traditional meeting that was held earlier. Internet director meetings also may prove useful for relatively brief meetings needed to obtain board approval for an urgent action.

Entity governance of Internet shareholder meetings is not as liberal as Internet director meetings. Some Internet shareholder meeting activities are allowed with consent.

The Securities and Exchange Commission allows companies to use the Internet as their primary means of furnishing proxy materials to shareholders, including proxy statements and annual reports, so long as the shareholders elect to receive such material via the Internet. Companies must also provide notice to shareholders of how they may obtain paper copies of such materials, if they so choose.

Neither courts nor legislatures have fully authorized Internet shareholder meetings. A proposed amendment has been made to the Model Corporation Act to permit directors to authorize shareholders to participate in meetings via the Internet, subject to certain conditions.

Most statutes dealing with entity governances that allow Internet meetings require assurance that certain reasonable measures are taken so as to insure that an Internet meeting will serve substantially the same purpose as a traditional meeting. Due to the changing nature of the Internet, most statutes do not set forth the precise nature of those reasonable measures. Reasonable measures to ensure the validity of an Internet meeting most likely include the following: proper notice of the Internet meeting, including acceptable instructions detailing how to participate; prior consent to using the Internet meeting format from all the participants; sufficient Internet communication security to ensure the participants' communications and voting are trustworthy; all participants are able to hear and concurrently speak with one another, as well as participate in all meeting matters; and securing evidence that an Internet meeting is allowed by appropriate legislative statute and entity governance.