United States: Delaware Modernizes Various Corporate Statutes In Light Of Developments In Electronic Media

The growth of the Internet and other developments in electronic media have led to rapid and widespread changes in the manner and methods of communications between corporations and their stockholders. Technology now exists by which stockholders may communicate with each other instantaneously on electronic "message boards" and in Internet chat rooms; corporations may electronically deliver annual reports, proxy statements, and voting materials to stockholders; and stockholders may authorise proxies to cast their votes at stockholder meetings by telephone and over the Internet. Sometimes, however, changes to statutes written in pre-Internet days are required in order for corporations and stockholders to use these technologies.

Amendments to the Delaware General Corporation Law (DGCL) that became effective on July 1, 2000 greatly expand the ways in which Delaware corporations and their stockholders may take advantage of these technological developments. Many of the amendments expand the range of actions that may be taken by electronic transmission, which is defined in new DGCL § 232(c) as "any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process." One significant amendment, discussed at length below, expressly allows "cyberspace" stockholder meetings that are held solely over the Internet and not at any physical location.

Other new provisions of the DGCL include the following:

Unless prohibited by the corporation's certificate of incorporation or bylaws, directors may now consent to board actions¹ by electronic transmissions instead of by writings.

Directors may now resign from their positions by electronic transmission rather than by writings.²

Directors may now participate in meetings by means of conference telephone or "other" communications equipment. Previously, permitted participation was limited to conference telephone or "similar" communications equipment.³

The requirement for written ballots in the election of directors may now be satisfied by ballot submitted by electronic transmission, if the board of directors so authorises, and if the electronic transmission may be authenticated.⁴

Corporations may now provide notices of meetings to a stockholder by electronic transmission if the stockholder has consented to the particular form of electronic transmission.⁵

Electronically transmitted stockholder consents are now permitted.⁶

A corporation may comply with the requirement of making its stockholder list available prior to a stockholder meeting by making the list available on an electronic network or at the corporation's principal place of business. The new provision requires that the list be made electronically available if the stockholder meeting is to be held without a physical location.⁷

As of July 1, 2000, more than 30 states, including Delaware, Ohio, California, Illinois, New York, and New Jersey, expressly allow stockholders to cast votes or authorise proxies by electronic media. Many corporations have taken advantage of these provisions in recent years for both annual and special meetings of stockholders.

Before the July 2000 amendments, the DGCL, like other current state statutes, stated that stockholder meetings were to "be held at such place, either within or without this State," as may be designated in the manner provided in the corporation's bylaws, or if the bylaws were silent, at the corporation's registered Delaware office;⁸ cyberspace-only meetings were not expressly authorised. Delaware corporations that wished to integrate the Internet into their stockholder meetings continued to hold their meetings in a physical location but also provided a "Web simulcast" of the meetings. This Web broadcast typically allowed stockholders to access and participate in the meeting from remote locations via the Internet.

In the 2000 proxy season, Intel Corporation, Gateway 2000 Inc., Bell & Howell Company, Ford Motor Company, Hewlett-Packard Company, The Boeing Company, and many others broadcast Web simulcasts of their annual stockholder meetings. Intel Corporation reported that the 2000 Web broadcast of its annual meeting did not diminish the number of analysts and investors who attended the physical meeting but enabled the meeting to reach a larger audience. In a 1999 survey conducted jointly by Ernst & Young LLP and The Nasdaq Stock Market, 40 percent of "New Economy" companies polled indicated that they have decided to, or are considering plans to, broadcast their stockholder meetings on the Web. Not surprisingly, a number of companies have been formed to provide services that help corporations manage the technical aspects of electronic stockholder meetings, including secure telephone and Internet voting sites, electronic proxy distribution, consent registration, and vote reporting and monitoring.

As amended, the DGCL now permits cyberspace stockholders meetings — those that are held solely over the Internet, and not in any physical place, and where, if the directors so authorise, stockholders may participate and vote by remote communication. In addition, stockholder consents by means of electronic transmissions are also permitted, if the transmission may be authenticated. The DGCL now states, "stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication: (A) participate in a meeting of stockholders; and (B) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication."⁹

The "placeless" cyberspace meeting may be especially attractive to technology and Internet-based corporations. We expect that at least a few Delaware corporations will take advantage of the new cyberspace meeting provisions of the DGCL in the 2001 proxy season and that others will follow as the technology for such meetings becomes more familiar.

Although cyberspace stockholder meetings may be appealing, corporate and investor relations officers responsible for the agenda and conduct of the annual stockholder meetings should realise the potential costs associated with cyberspace meetings. For example, there may be high start-up costs associated with holding meetings on the Web, particularly for corporations that have not yet fully integrated the Internet into their businesses and corporate communications. Additionally, if a corporation wishes to introduce new forms of stockholder voting to its stockholders or if a cyberspace meeting will be held, proxy statement disclosure regarding the meeting and the methods by which stockholders can vote and otherwise participate in the meeting will need to be substantially revised.

More importantly, cyberspace stockholder meetings may pose serious complications for management of the meeting. Internet/cyberspace meetings will operate in real time in a manner similar to an Internet chat room, and this may cause problems in the conduct of the meeting. Those wishing to explore cyberspace meetings should consider the following conduct issues, among others:

• how management will respond to unexpected or unwelcome questions;
• how stockholders wishing to "speak" at the meeting will be recognised; and
• how the identity of stockholders wishing to present proposals will be authenticated, and how the proposals will be presented.

Given these troublesome issues, preparation for the moderation of the meeting cannot be overemphasised.

Despite the potential drawbacks, cyberspace stockholder meetings have many potential advantages. Cyberspace meetings will allow technology companies to tout their sophistication in the field and will allow for greater stockholder participation in the meeting. Further, with the ever-expanding access to the Internet, investor interest in corporations that make meetings available online and allow stockholders to participate in the meetings from remote locations may increase. The tradition of the annual stockholder meeting, whether held in a boardroom, convention centre, or auditorium, may decrease as investors become accustomed to attending live stockholder meetings from their own personal computers. Additionally, once a corporation constructs and refines an infrastructure for its cyberspace stockholder meeting, costs should decrease.

Corporate officers should also keep in mind that forums for stockholder and other meetings must also comply with the corporation's bylaws. If the corporation's bylaws only permit meetings at a specified physical location, such as the corporation's headquarters, then cyberspace-only stockholder meetings would be prohibited notwithstanding the amendments to the DGCL. Those interested in exploring the possibility of cyberspace stockholder meetings should carefully review the corporation's certificate of incorporation and bylaws to determine whether this new form of meeting is available, and whether stockholders that participate in a cyberspace or Web simulcast meeting can be deemed to be legally in attendance for quorum and voting purposes.

Readers are encouraged to call their regular Jones Day contacts or any of the following members of Jones Day's Business Practice Group and/or Technology Transactions Practice for more information on the July 2000 amendments to the DGCL, developments in electronic media and stockholder communications generally, or related matters.