The Supreme Court of British Columbia has overturned the result
of the annual meeting of Mosquito Consolidated Gold Mines Limited
("Mosquito") and ordered that a new meeting be held. At
issue was a contested director election and the methods used by the
issuer's proxy solicitor in order to solicit votes on behalf of
Mosquito is a British Columbia issuer, engaged in mineral
exploration and development and listed on the TSX Venture Exchange.
At its annual meeting in December 2011, a group of shareholders
challenged management's recommendation to re-elect the existing
board and put forward a recommendation for a reduced board, with a
change in some of the directors. Management won the vote by a small
margin. The Supreme Court of British Columbia found that certain
voting irregularities in connection with the meeting constituted
conduct that was oppressive and unfairly prejudicial to the
dissidents. It declared the meeting invalid, all of the resolutions
passed at the meeting null and void, and ordered that a new meeting
One of the voting irregularities with which the Court took issue
was the use of the "Televote" system by Mosquito's
proxy solicitors. The Televote system involves the use of call
centre operators to contact registered shareholders and
NOBOs1 and take oral instructions to execute a proxy or
voting instruction form on their behalf. The operator encourages
shareholders to vote in favour of management recommendations.
According to the decision, this approach to proxy solicitation has
been used by more than one proxy solicitor as well as by Broadridge
over the last few years.
The call centre operators are instructed to accept an oral
representation of the person with whom they are speaking that they
have the authority to vote. The Court found that the Televote
system does not provide contemporaneous, reliable and verifiable
voting instructions and that this is inconsistent with the
legislation, policy and guidelines relevant to shareholder voting.
Moreover, the Court was critical of the fact that Televote was not
described in any of the issuer's disclosure relating to the
The Court noted that, in a contested vote, care must be taken to
ensure that votes are taken in a manner that allows the shareholder
to make his or her choices privately, on a fully informed basis and
without undue pressure from a proxy solicitor. Where partisan
solicitation is combined with vote taking, there is a danger for
abuse. The decision notes that a type of oral vote-taking system
with appropriate safeguards could survive the scrutiny of the
Court, "...but it must have sufficient safeguards built into
it to ensure that instructions are properly given and shareholders
are free to vote as they choose."
The Court also found that the use of Televote by the management
side after the dissidents had emerged and the contest began created
an obvious imbalance in the way votes were taken between management
and the dissident group and that this gave management an
"unfair advantage." Thus, even if Televote had had
sufficient safeguards built into it, its use exclusively by the
management side would have been problematic.
The appropriateness of using Televote was previously called into
question in connection with the meetings to approve the merger of
the VenGrowth funds with Covington. In that contest, the votes
obtained through Televote were ultimately not material to the
outcome, so no formal challenge was made. The testimony in the
Mosquito case confirmed that Televote has in fact been used
sparingly in contested situations - in only three instances in
Canada. Notably, in the recent high profile Canadian Pacific
Railway proxy contest, which was waged after the Mosquito
litigation had been commenced, neither Televote nor any similar
oral vote-taking system was used.
The Mosquito decision is an important development in the
escalating scrutiny of the proxy voting system in Canada and
elsewhere. This decision focuses on the need for appropriate
practices when there is a contested director election, but is
likely to have an impact on proxy solicitation practices across all
types of shareholder votes.
1 "NOBOs" (or "non objecting beneficial
owners") are investors who do not object to the issuer knowing
that they hold a position in the issuer's securities or the
issuer contacting them.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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