On 27 April 2022, the Federal Cabinet adopted the draft bill on the introduction of virtual shareholders’ meetings of stock corporations and amendments to other provisions.
I. Background
The German Act on Measures in Corporate, Cooperative, Association, Foundation and Home Ownership Law to Combat the Effects of the COVID 19 Pandemic temporarily created the possibility of holding shareholders’ meetings exclusively in a virtual format. This special provision is only in force until 31 August 2022. Given that companies have generally had positive experiences with virtual meetings and in view of the continued digitalisation of German stock corporation legislation, the legislator wants to permanently enshrine virtual shareholders’ meetings in the German Stock Corporation Act. To this end, the Federal Ministry of Justice published a draft bill in February 2022, which was revised by the Federal Cabinet on 27 April 2022.
II. New provisions
The aim of the revised bill is by and large to give shareholders the same rights in virtual meetings as they have in physical meetings. The virtual shareholders’ meeting is therefore to be a fully-fledged alternative to the physical meeting (and not merely a “second-class meeting”). In essence, the bill can be summarised as follows:
- Holding virtual shareholders’ meetings is basically contingent on there being a corresponding provision in the articles of association – in the form of either a direct provision or an authorisation granted to the management board – which must be renewed after five years at the latest. It will also be possible to stipulate in the articles of association that certain matters cannot be dealt with in a virtual shareholders’ meeting, e.g. adopting resolutions on a squeeze-out. To avoid legal uncertainty, the approval process is to be extended to cover the resolution amending the articles of association so that virtual shareholders’ meetings can be anchored therein. During a transitional period up to and including 31 August 2023, the management board will, with the consent of the supervisory board, be able to convene a virtual shareholders’ meeting even without the appropriate authorisation having been laid down in the articles of association.
- If a virtual shareholders’ meeting is held, the entire meeting must be broadcast with sound and image. Shareholders must be able to exercise their voting rights by way of electronic communication and by granting proxies. In addition, it must be possible for shareholders to submit motions during the shareholders’ meeting and to object to resolutions that have been passed. In contrast to the initial draft, the motions include not only procedural motions but also countermotions and election proposals. Finally, the management board’s report, or at least the key parts of it, must be made available seven days before the meeting.
- Shareholders are granted a right to information by way of electronic communication, which has been made more shareholder-friendly by the revised bill: the management board may decide that shareholder questions must be submitted no later than three days before the meeting. However, the company must then also answer these questions at the latest one day before the meeting and in return does not have to provide any more information at the meeting itself. The scope of the questions submitted may be restricted as appropriate in the notices convening the meeting, for example by stipulating a maximum number of questions per shareholder and a maximum number of characters used. Each shareholder is entitled to ask follow-up questions at the meeting as well as questions on new issues. Questions that could have been asked before the meeting must also be allowed, provided that there is sufficient time available.
- The shareholders’ right to speak at meetings has also been significantly expanded as compared to the initial draft: it must be possible for shareholders to speak at the meeting via video communication. The right to speak at the meeting also includes the right to ask follow-up and new questions. Whereas the initial draft stipulated that requests to speak had to be submitted at least four days prior to the shareholders’ meeting and that the company could within reasonable limits specify the number of shareholders permitted to speak and set an overall time for all their contributions, the revised bill no longer contains these requirements. The aim is to bring virtual shareholders’ meetings in line with physical meetings as far as possible, including allowing debate as a central element of the meeting. As in the case of physical meetings, measures are to be put in place to ensure that the virtual shareholders’ meeting is properly conducted, for example shortening the time allowed for shareholders to speak at the meeting. All in all, the time allowed for virtual shareholders’ meetings should be more or less the same as the time allowed for physical meetings. According to suggestion A.4 of the German Corporate Governance Code, the chair should allow four to six hours per meeting.
- Finally, shareholders have the right to submit comments on agenda items no later than five days before the virtual shareholders’ meeting. These comments are then to be made available to all shareholders no later than four days prior to the meeting. Companies may allow comments to be submitted later. Comments may be restricted to a certain number of characters or a certain amount of time, and companies may specify what formats are permitted, e.g. text or video form.
- As already stipulated in the initial draft, the existing provisions of the German Stock Corporation Act, which restrict the options for contesting resolutions in the event of technical malfunctions, are to be extended to virtual shareholders’ meetings. The right to contest resolutions in cases not involving technical malfunctions remains in force.
- The provisions apply not only to stock corporations, but also to partnerships limited by shares (KGaA), European stock corporations (SE) and mutual insurance associations (VVaG).
III. Gleiss Lutz comments
Even if the move towards enshrining virtual shareholders’ meetings in law is to be welcomed, the currently envisaged structure is not likely to encourage companies to introduce virtual shareholders’ meetings on a permanent basis. On the contrary, according to the current draft, companies would have to grant all the key rights associated with physical meetings and then grant the additional shareholder rights in advance of the meeting as well as make the necessary technical arrangements. Unfortunately, the positive insights gained from holding virtual shareholders’ meetings in recent years are hardly taken into account in the draft bill. Instead, it creates the impression that the conventional format of the physical meeting is to be transferred to an extended virtual format. The option of holding a hybrid meeting has already shown that such an approach, which entails significantly greater effort and additional costs, is not attractive. Even though hybrid meetings have been possible for some time, very few companies have actually held one. It will be interesting to see how the legislative process evolves – as things stand at present, it is more likely that the vast majority of companies will hold a physical shareholders’ meeting again next year. Given that the special provision is due to expire soon, it is likely that the Bundestag will vote on the bill before the summer break.
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