Most listed companies will have started thinking about their 2019 annual general meeting (AGM), with the majority set to occur between September and December 2019. Keeping in mind the trends that arose in 2018, Practical Law has set out a number of steps that a company, and in particular its board, can take to best prepare for their 2019 AGM.
This article outlines the trends that arose in the 2018 AGM season and sets out some key steps that a company can take to prepare for its AGM, drawing from Practical Law resources.
What were the AGM trends in 2018 and will this continue in 2019?
The trends that arose in the 2018 AGM season look set to continue in the 2019 AGM season. The Australian Securities and Investments Commission (ASIC) reported that the key themes of the 2018 AGM season were:
- An emerging theme of accountability from boards.
- Increased strikes on remuneration reports by shareholders.
- A focus on environmental, social and governance (ESG) issues, with climate change risk and sustainability emerging as the most frequently raised ESG issues.
- An overall improvement in gender diversity.
While ASIC’s findings from the 2018 AGM season related only to ASX200 companies, the lessons to be learned and steps that can be taken to prepare for the 2019 AGM season will be of use to all companies holding an AGM in 2019.
Ensure the company’s annual report is complete and accurate
Companies are required to complete their financial reports within three months of the end of financial year. This means that, for entities with a 30 June end of financial year, reports must be lodged by the end of September. Entities listed on the Australian Securities Exchange (ASX) must also include an operating and financial review (OFR). Importantly, companies should ensure that their OFR discloses key risks, including environmental and other sustainability risks (including climate risk). ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review sets out ASIC’s expectations in respect of a company’s OFR.
Release the notice of AGM to the market as soon as possible
Companies should release their notice of meeting (NOM) as soon as possible. This means that the company will be in a better position to:
- Prepare shareholder communications.
- Respond to any requisitioned resolutions more effectively.
- Engage with proxy advisers at an earlier stage to seek to clarify information in the proxy adviser’s report to shareholders.
Listed companies must hold their AGMs within five months of their financial year end. Draft NOMs that contain resolutions for Listing Rules purposes must be submitted to the ASX for review before they are sent to security holders (Listing Rule 15.1.7). The ASX may take five business days to advise whether it objects to a draft document and may extend that deadline if it needs further time to review the document (Listing Rule 15.1). Listed entities should keep in mind these timing requirements and allow sufficient time to submit their draft NOMs.
Review the share register
Boards should monitor and analyse the share register, preferably well in advance of the AGM. This may help to determine whether any of the company’s shareholders are known for particular views or action and therefore more likely to engage in shareholder activism. For this reason, boards should also:
- Monitor the share register for any unusual activity before an AGM or for signs of possible collective action or associations.
- If necessary, issue tracing notices to identify who sits behind non-beneficial owners (see ASIC Regulatory Guide 86: Tracing beneficial ownership).
Engage early with proxy advisers
Once the NOM is released, companies can then engage with proxy advisers who are responsible for providing reports to shareholders (typically, institutional investors) that contain the proxy adviser’s voting recommendation for each resolution to be considered at the AGM. Engaging early with proxy advisers allows the company to:
- Ascertain whether proxy advisers will recommend that shareholders vote “against” items at the AGM and get on the front foot with communication to shareholders.
- Best ensure that the report ultimately presented to shareholders presents a balanced view where the company and the proxy adviser reach different conclusions relating to certain resolutions or issues that will be considered at the company’s AGM. ASIC’s view is that companies should engage early with proxy advisers to maximise the quality of information provided to shareholders in proxy adviser reports (see ASIC Report 578: ASIC review of proxy adviser engagement practices: June 2018).
Engage early with institutional investors
There is increasing pressure on institutional investors (particularly superannuation funds) to take a more active role in their investments. Accordingly, in recent years institutional investors and companies have increased their engagement in corporate governance matters. Institutional investors can be critical to the success or failure of a resolution. Engaging early with institutional investors allows the company to gauge:
- Sentiment towards key items to be considered at the AGM, including the remuneration report.
- Whether the company’s institutional investors intend to follow the advice of proxy advisers, in particular where the proxy advisers recommend that shareholders vote “against” a resolution to be considered at the AGM.
Prepare to respond to shareholder requisitioned resolutions
In 2018, shareholders of seven ASX200 companies requisitioned climate change or human rights related resolutions at the company’s AGM. There was also generally increasing shareholder support for resolutions on ESG issues.
The resolutions were:
- For the most part advisory and required a first resolution to be passed to change the company’s constitution to permit advisory resolutions.
- Usually coordinated by non-government organisations such as Market Forces (a climate change activist organisation, affiliated with Friends of the Earth) or the Australasian Centre for Corporate Responsibility (ACCR) (a not-for-profit association promoting responsible business and ethical investment, particularly through shareholder advocacy).
With this trend likely to continue in the 2019 AGM season, companies should:
- Ensure that, where appropriate, the company’s operating and financial review and directors’ report makes appropriate disclosures relating to ESG issues.
- Engage with key institutional investors to determine whether they intend to requisition resolutions and, if so, the substance of those resolutions.
- Prepare announcements responding to any resolutions requisitioned under section 249N of the Corporations Act 2001 (Cth). A company that has received a notice of intended resolution under section 249N must, under the Listing Rules, make an announcement within two business days of its receipt.
- Prepare appropriate responses to any resolutions requisitioned at the AGM.
- Consider putting forward their own resolutions relating to ESG issues.
Pay attention to gender diversity on the company’s board
While gender diversity among the boards of ASX200 companies improved overall in 2018, shareholder groups, in particular the Australian Council of Superannuation Investors (ACSI), are continuing to push for increased gender diversity on boards. In June 2019, ACSI reported that while the ASX200 had reached the 30% target for women on boards set in 2015, it will continue advocating for increased gender diversity on boards until a reasonable balance has been achieved. Until then, ACSI has stated that it will apply its voting policy to recommend that its members vote against the election of directors on boards with poor gender diversity (see ACSI media release 13 June 2019).
With this in mind, companies whose boards lack diversity should carefully consider the directors being put forward for election or re-election and, where possible, ensure gender diversity on their board to avoid “against” votes on director election resolutions and, potentially, requisitioned resolutions calling for the appointment of new directors.
Prepare for a board spill
In 2018 there was a significant increase in the number of first strikes on the remuneration report, from five in 2017 to 12 in 2018, accompanied by an upsurge in the magnitude of “against” votes (see ASIC Report 609).
Under the “two-strikes rule”, a company that received a “first strike” against its remuneration report in 2018 may face a spill resolution if it receives a “second strike” in 2019. Activist shareholders may also attempt to spill the board by voting against the company’s remuneration report.
Companies that received a first strike in 2018 should prepare to respond to a potential spill resolution in 2019 by:
- Engaging with key shareholders, including institutional investors, and proxy advisers to discuss its proposed response to the first strike.
- Ensuring that the materials for the AGM refer to the possibility of voting on a spill resolution at the same AGM.
- Understanding the impact of relevant voting restrictions on key management personnel and their closely related parties.
- Considering using a poll to count votes at the second AGM rather than a show of hands (especially if the company knows proxies are going to give a different result from a show of hands in the room).
- Having a draft announcement to the market prepared in case the spill does happen.
Engaging early with proxy advisers and institutional investors can also help a company to gauge whether there may be a board spill.
Practical Law subscribers can access more information on both preparing for an AGM and preparing for and responding to shareholder activism, requisitioned resolutions and board spills in the following practice notes and checklists on Practical Law Australia:
- Practice note, Notices of general meeting.
- Practice note, General meetings.
- Practice note, Shareholder activism.
- Practice note, Climate change and shareholder activism.
- Checklist, Environmental, social and governance risks: disclosure requirements.
- Checklist, Key strategies for preparing for shareholder activism.
- Checklist, Key strategies for responding to an approach by activist shareholders.
- Checklist, Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2017.
- Checklist, Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2018.
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