Annual General Meetings (AGMs) are considered dull mandatory yearly rituals that provide entertainment to some small shareholders, but, above all, cause many business lawyers and executive officers a headache. The financial markets pay little attention to these meetings, observing them as rubber-stamping bodies required for the sake of compliance issues related to the legal division of powers between shareholders and boards. From a legal perspective, the AGM is given three important functions: the information function, the forum function and the decision-making function. In our paper, ‘Bringing the AGM to the 21st Century’, we claim that there is strong need for the modernization of the AGM. We explore the AGMs’ (lack of) performance of these three functions and propose a decentralized AGM using blockchain technology.
AGMs are governed by many provisions dating back to the 19th century, notwithstanding the modernization of corporate law and decades of evolving corporate governance. Table B of the UK Joint Stock Companies Act of 1856 stated in article 70: ‘[o]nce at the least in every year the directors shall lay before the company in general meeting a statement of the income and expenditure for the past year, made up to a date not more than three months before such meeting’. Note that this provision is very similar to the current requirements in the UK Companies Act 2006, enacted one and a half centuries later.
It should come as no surprise that corporate life has moved on since the 19th century and pays only lip service to the old-fashioned legal requirements of AGMs. Consequently, the AGM’s functions are de facto eroded. First, information that directors still need to ‘lay before the meeting’ is disclosed ad hoc, at certain intervals throughout the year and (unaudited) accounts are available often long before the AGM takes place.
Second, for the forum function there is only limited time available and, in some countries, the speaking time that each shareholder is provided is restricted. While the forum function is important to some and their use of it can be restricted, research has shown that the vast majority of shareholders do not care about this at all.
Third, even the decision-making function, often considered the most important one, suffers from the AGM’s static yearly character. The legislator mitigated the downside of this slow, yearly pace of decision-making with the option to call extraordinary general meetings, but legal requirements make these extra meetings costly. In addition, high shareholder participation costs can prevent small shareholders in particular from participating in the AGM. Empirical evidence confirms the finding that small shareholder participation increases when costs are lowered. Proxy voting and voting by mail were two instruments that lowered these costs but they affected the functions of the AGM. We present evidence that voting by mail has actually replaced all other forms of voting, in particular shareholders’ attendance and voting in personam. This leads to the question of whether the current physical outline of this meeting is desirable.
These obstacles clearly show that the AGM cannot perform optimally in its current form. We make a plea for the modernization of the AGM with the use of blockchain technology and smart contracting. In a private blockchain, managed by the company only accessible for shareholders, the company and shareholders that hold sufficient shares can place proposals. Smart contracting allows for the private ledger to be structured so that all relevant information, such as majority rules and access rights that are contained in the articles of association and the law, is included in the blockchain. Once a certain proposal is placed in the blockchain, shareholders that hold shares in the company are immediately notified and can exercise their voting rights during a short period. With blockchain technology, the voting results become instantly available and majority requirements, necessary to render the decision binding and verifiable, need to be reached in a specified timeframe.
Our proposal decentralizes the AGM in two ways; shareholders can participate in a decentralized blockchain network environment and the centralized yearly nature of the current AGM can be abrogated because voting items can be placed in the blockchain at any time. The technology thus not only reduces voting and meeting organizing costs substantially, but also offers faster corporate decision-making. Although the application of blockchain technology in the field of shareholder voting is still in an exploratory stage and there are many (technical) legal aspects that still need to be considered, the recent cooperation between Nasdaq and Estonia and the formation of the CSD Working Group on DLT have shown that introducing blockchain technology in this field is feasible. The clear benefits of this technology can offer important avenues for further research.
Christoph Van der Elst is a Professor of Business Law and Economics at Tilburg University and Ghent University.
Anne Lafarre is a Lecturer at Tilburg University.