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Is This a Constitutional Crisis?

Several weeks ago we published our thoughts on how to run an AGM in the midst of a Government mandated lock-down and “physical” distancing, a term used by the author Isabel Allende who suggested that at this time we should be more social with all the technology on hand! In our last article we defined how the Australian Securities and Investment Commission (ASIC) has suggested that each organisation should follow their Constitution documents.

That’s all very well if the Board or management of the company has kept up to date with the evolution of a Constitution document. This is a live example of what I have been dealing with recently – and I’m sure it applies to a lot of small organisations, especially incorporated social clubs. I am the President of a local motoring based social club whose committee typically meet monthly and discuss events for the membership, the management of vehicle registrations under the NSW Roads and Maritime Services (RMS) Historic Vehicle Scheme and what is happening within the eco-system surrounding the marque.

It is now time for our AGM to take place and a quick review of the Constitution showed that there were no clauses for technology use during general meetings, meaning that we had to hold a physical meeting. Why didn’t the Constitution allow for technology? Simply because the Constitution was based on model rules for associations incorporated under the Associations Incorporation Act, 1984! This model was great when the club was founded in 1989 however, times have moved on although there was no pressing need to update the Constitution. The club was running smoothly, members enjoyed meeting regularly and having a good lunch or dinner as part of the AGM. With hindsight, when we added an addendum to cover the RMS Historic Vehicle Scheme, it would have made sense to check to see if the main document was still fit for purpose. Again, there was no urgency because things were running OK.

There are probably hundreds of social clubs and associations in the same position – happily the NSW Department of Fair Trading has a more recent set of model rules, albeit dated 2009, that have many of the clauses that are now needed to support a modern entity. If you are involved in any social organisation, regardless of whether it is incorporated or not, it is still important to check that the foundation documents are up to date – you never know when you will need to lean on them for support!

So is this really a “Constitutional Crisis” – it could be if the organisation is large and delivers support to a wide section of the community that would be harmed by the loss of a service or would be hurt by a local public relations disaster if a member agitates because the organisation is late in dealing with this issue. In reality though, its probably not a crisis as most organisations still running a Constitution based on 1984 model rules would be small social clubs that can easily change.

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Annual General Meetings in the Age of Isolation

This is an issue that was raised during a conference call last Monday with one of my Boards and was then discussed again on Saturday with another of my committees. How do you run an Annual General Meeting (AGM) when we are self isolating and many businesses have mostly shutdown? The answer to this will certainly affect all the Boards and committees I sit on – and for many organisations across Australia.

Why has this come up now? The Corporations Act 2001 (Cth) states that public listed and unlisted companies must hold an AGM within five months of their financial year – with many companies running on a calendar year, this  means that the AGM must be held by the end of May. Under the current health crisis, the Australian Securities and Investment Commission (ASIC) has stated that they will take no action if a company misses this deadline and has extended the requirement to the end of July – assuming that Australia is returning to some form of normality by then! Smaller companies, incorporated clubs and not-for-profits also have to consider what they do with their AGMs, my Boards and committees sit in the not-for-profit or incorporated club space, so this has become timely.

Virtual or Hybrid AGMs

Traditionally, AGMs have been held in one location with in-person attendance and organised to ensure all shareholders, members and relevant employees can be present, however this is not possible in these times of isolation. Therefore virtual or hybrid AGMs can be considered where attendees use technology to access the meeting. Historically in Australia virtual AGMs have not been allowed, however in current times, ASIC has relented somewhat to allow hybrid AGMs provided attendees can a) ask questions and b) vote. ASIC is still not fully comfortable with virtual AGMs, mainly because of the concern that attendees may not get their voice heard.

A virtual AGM is a meeting that is online only and a hybrid AGM has a location with attendees accessing the meeting through voice or video. In reality, a virtual and hybrid AGM are possibly the same – the host still has to be in one location, the difference appears to be in the meeting invite, where for a hybrid AGM the base location is specified and a certain number of people are in that location. In a virtual AGM, you may get a group of senior management and auditor in a room to host the meeting with all other shareholders or members connecting through technology. On paper that is the same structure, although I’m sure legal minds would find some subtle nuances between them!

Virtual and hybrid AGMs aren’t new by any means, the first one was held in the US in 2001 and according to an article published by the ASX in 2018, there were a number of technology failures that made them unpopular. Bearing in mind that the technology has dramatically improved, along with the communications infrastructure, they are now being considered by more organisations and with Government requirements on the number of people in a group, perhaps now is the time that they become the new normal for AGMs.

Questions & Voting

Logistically, this is a hard issue. For smaller companies or small member-based organisations, a hybrid AGM may not be an issue technologically or logistically, because meetings are always easier with fewer people! I can see legal issues arising for much larger meetings where many more people typically attend. There could be cases where online attendees feel that they cannot ask questions or are concerned that their votes are not being registered. The Chairperson running the AGM must ensure that every attendee has the right and ability to ask questions and therefore two items need to be managed effectively. The first is that the documentation provided to the meeting should be as complete as possible, providing several views of the financial data for example. This should help to concentrate the intent and length of each question. Secondly, the agenda must allow enough time for questioning because it is likely that more questions will be asked simply because of the lack of social time prior to an AGM where many questions are asked in person to the Board members or senior management.

The Australia Shareholders Association issued guidelines in May 2019 that recommended formal polling at AGMs because it gives a better record of the decision. The voting method really has to be done well to protect all parties. Perhaps this has to be a recorded online poll or even a postal vote that is sent out with the agenda. This is actually something that my incorporated club is considering as an option. Our members are wide spread and we have typically held the AGM over a lunch or dinner to make it a formal event.

A simple show of hands will not work in this new domain and care has to be taken to ensure that any technology-based votes are accurate. Importantly, the Board needs to record the break-down of any vote in case it is challenged later.

Issues with Constitutions

Whilst on a Board call on Monday night an issue with the organisation’s constitution was raised. This appears to be at the core of many of the concerns around holding an AGM over the next few months. Although I find this surprising, some organisations have rules in their constitution that explicitly ban the use of technology for their meetings therefore including the AGM. What would be more common is a constitution that has no rules around the use of technology and my incorporated club has an old constitution with none of those clauses defined. In other constitutions I have seen, there are clauses for the use of technology yet still define that the AGM needs to have in person voting.

So it is important to read the constitution of your organisation and see what rules have been defined. Also remember that the constitution is based on the Corporations Act 2001 (Cth) which does have rules for technology use in AGMs, however … ASIC has stated that an organisation cannot run a hybrid AGM if their constitution does not explicitly say they can. This will certainly impact many companies or organisations that must hold an AGM. This only means one thing: it is important to protect your own organisation by adopting some new rules to ensure that technology use is acceptable – along with clauses for voting and maybe even questioning. This may also mean delaying the AGM until these new rules are in place and it is important to notify the regulator that controls your industry or style of corporation if you have to delay the meeting.

For your reference, Chapter 2G, Part 2G.2, Division 5, Section 249S and Section 1322 of the Corporations Act 2001 (Cth) define the use of technology and I would recommend that all directors review this and their organisations constitution to ensure you are covered – and make any changes as soon as possible.

This is a time of change in many aspects of our lives and I hope that the Luddites don’t block what is in essence a sensible update to your governing document!