Covid 19 Business Continuity: Corporate Governance in the time of crisis
It has been just over a month now since the regular businesses have been disrupted by the government imposed lockdown to fight the spread of Covid 19. In these tough and uncalled times (though not unprecedented: we have been through harsher lockdowns, strikes and curfews, natural disasters, the 2015 devastating earthquake being the most notable), there are still ways companies and businesses can keep up with their corporate governance.
Meetings are the first and primary start to corporate governance. But are meetings without physical presence possible; or more importantly allowed under the law?
The rules regarding meetings of the board of directors (“BoD”) of private companies shall be as provided for in their articles of association and or any other agreements between the shareholders of the company such as the shareholders’ agreement, joint venture agreement, debenture trustee agreement as such. If such is not provided for in those documents, then one will have to refer to Section 97 of the Company Act, 2007 (“Company Act”) that generally provides for all companies and specifically for the public companies; which does not provide for “where” meetings should be held. So, the place of meeting of BoD could be anywhere like the registered address of the company, restaurant or more virtual addresses pleasant for times like these, such as zoom, hangouts, skype among others. The more important thing is to follow the right procedures for conducting and recording the decisions of the meeting.
The rules for the general meetings (“GM”) of private companies shall also follow their articles of association or any other agreements between the shareholders of the company. If such documents provide that GM can be held online or offline in virtual addresses, then there will be no problem in conducting them online or offline even in this period of lockdown. However, if it is not provided for in private companies’ documents, then, proviso of Section 67(4) of Company Act provides that GM should be conducted in Nepal or in any place other than Nepal, indicating that there must be physical presence of the address and the participants. For GM of public companies, Section 67(4) of Company Act has rather strictly provided for where GM shall be conducted. It provides that GM must be conducted in the district where the registered office is located or any adjoining district feasible for the majority of its shareholders. However, shareholders unable to be present at the location of GM due to unforeseen events may be allowed to the affairs of GM and even cast votes through video conferencing or similar other methods. For any other address than these for conducting GM, public companies must take prior approval of the Office of Company Registrar (“OCR”). So, if public companies wish to conduct GM in virtual addresses, it must first seek permission of OCR. And, likewise for the BoD, even if the GM is conducted in virtual places, the right procedures for conducting and recording the decisions of the meeting must be followed.
- Dispatch Notice: Section 15 (3) provides that a company may dispatch its notice or information to its shareholders, debenture holders or director under the Act or receive any information from them in the electronic communication address exchanged between them and the company through electronic communication device as provided in the articles of association of the company or they so agree. If the articles of association of the company does not provide for such provision, then the shareholders, debenture holders or directors might be allowed to not consent to the service of such notice or information through electronic communication device or medium. In that case information must be dispatched through post or other reliable sources and most likely hold off till the situation returns to normal again.
- Quorum: Rules regarding quorum shall stand the same even if the meetings of any kind are conducted in virtual spaces. The records of quorum have to be maintained clearly. Under normal circumstances, the quorum required for conducting meeting of any kind (BoD or GM) is more than 50% with the presence of at least three members, or it shall be as specified in their organizational documents.
- Proceedings: Just as usual the chairperson shall chair the meeting and discussions shall be held and decisions shall be made (count the majority and note dissents, if any).
- Record: Section 172 requires companies to keep record of any minute book, shareholders or debenture holder register, index of shareholders, books of account, accounts etc. required to be maintained by a company pursuant to this Act may be maintained either by making entries thereof in separate books or by recording the same by any electronic communication device and computer in a non-legible form or in any other manner, without prejudice to the provisions in the Act. Companies shall make adequate arrangements that no one can destroy or alter the records and that matters recorded therein can be easily traced and inspected and copies thereof can be obtained. Companies may sign the resolutions of the meetings in counterparts and circulate it for records as well. If they would like to use digital signatures in such documents, they will have legal validity pursuant to Section 5 of Electronic Transactions Act, 2063 (2008) (“ETA”) but such has to follow certain procedures.
Section 77(4) also provides that a public company may dispatch its notice of the AGM and related documents through electronic media. Section 98(3) provides that the rules regarding the meetings of the board of directors will be directed by the articles of the company. If such is not provided for then, a written notice of the meeting of the board of directors of the company and agenda thereof shall be sent to every directors at the address provided by them to the Company and such notice may be dispatched through electronic means of communication.
Also, companies shall be required to follow the notice period as required and stated in their organizational documents or Company Act; which generally would be at least 21 days for annual GM, 15 days for extraordinary GM.
ETA has provisions for authentication of documents through digital signatures but the implementation has not been as expected and the adoption is also lacklustre. The adoption was expected to pick up after the establishment of the Office of Controller of Certification in 2015 but nothing significant has happened so far. The government could have used these times to promote the practice of using digital signatures but clearly have missed the opportunity.
So, as a whole, there are various ways to keep up with your meetings, strategies, planning, discussions and decisions even in these situations. Especially, the law has provided various ways but ultimately it comes down to implementation by the government and adoption by the businesses concerned.