The 'Paperless' Paper Trail

Lost in the debate over the increased costs that Sarbanes-Oxley has imposed on U.S. companies are some largely unnoticed changes to state corporate law that can help companies reduce their corporate governance costs.

These state law changes embrace, perhaps a bit belatedly, the revolution in electronic communication by allowing e-mail to satisfy statutory notice and consent requirements. The potential savings will vary, depending on the size of the company and the size of its stockholder pool.

Companies with a large number of stockholders will see a greater return on these techniques than companies with a handful of stockholders. Yet, all companies will benefit from this new approach.

Delaware and Massachusetts now allow directors and stockholders to take corporate action by written consent through the use of “electronic transmissions.” Prior to this change, companies that took corporate action by written consent had to circulate and receive original or facsimile signature pages from each party to record the action taken. It was a cumbersome and costly process.

With these recent statutory changes, any computer-to-computer transmission that may be reduced to paper form, such as an e-mail, may be used to evidence a written consent.

A company may now receive consent for certain actions simply by e-mailing its directors and/or stockholders the proposed resolutions and have those parties send reply e-mails evidencing their consent. In addition, a company can receive responses to consent requests almost immediately via e-mail in lieu of waiting for mail or fax responses to be collected.

Even greater savings can be achieved by using electronic means to deliver notice mailings. Companies are typically required by law to provide notice to their stockholders prior to annual and special meetings as well as after certain actions taken by the stockholders by written consent.

Distributing notice packages to each individual stockholder takes time and can be costly, due to the effort and expense of copying documents, preparing individualized packages and mailing these materials. Now, the company or its counsel can simply attach the materials to an e-mail addressed to each of the stockholders entitled to receive the packages, thereby reducing preparation time and eliminating the copying, packaging, and delivery charges.

Delaware and Massachusetts also allow a company to post the materials required to be mailed to stockholders on a website and simply e-mail each stockholder a notice as to where they may find the materials, further streamlining the process.

In order to take advantage of these time- and cost-saving opportunities, a company must first confirm that its current organizational documents allow for electronic notice and voting, or otherwise allow for notice and voting to the full extent authorized by state law. If these provisions are absent, the company can amend its organizational documents.

Second, the company must request that its stockholders provide to the company their e-mail address as an alternative address for receiving and responding to important company information. An appropriately drafted change of address form from a stockholder would allow the company to use the e-mail address provided to deliver documents to such stockholder as well as to use responses from the e-mail address, such as consents to actions, as evidence of written approval/rejection on stockholder actions.

As new technologies are created and recognized by corporate law, companies should embrace them in order to reduce corporate overhead, helping their bottom line and allowing them to focus on their core businesses. As faxes were recognized during the 1990s, e-mail and other means of electronic communication are only the next stages in which companies can conduct their corporate affairs more efficiently.

Hal N. Schwartz is a partner in the corporate law department of the Boston office of McDermott Will & Emery LLP. Mr. Schwartz can be reached at [email protected].