Improper use of telephone proxy solicitation renders results of AGM invalid due to a lack of procedural safeguards and a verifiable record.
In the recent decision of International Energy and Mineral Resources Investment(Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited, 2012 BCSC 1191, the Supreme Court of British Columbia overturned the results of a contested annual meeting due, primarily, to the improper use of a telephone proxy solicitation system ("TeleVote") by the company's proxy solicitation agent.
Mosquito Consolidated Gold Mines Limited ("Mosquito"), a public mineral exploration and development company, held its annual general and special meeting of shareholders (the "AGM") on December 16, 2011. The AGM was contested as shareholders were asked to choose between two competing slates of directors – one nominated by management and the other nominated by a group of dissident shareholders. While both groups retained proxy solicitation agents in their respective bids to secure shareholder votes, it was Mosquito's proxy solicitation agent that employed the relatively new TeleVote system.
Through TeleVote, call centre operators employed by a proxy solicitation agent contact shareholders by phone, encouraging votes in favour of the position of the party employing the proxy solicitation agent. The operator takes verbal voting instructions from the shareholder in order to execute a proxy or voting instruction form on the shareholder's behalf. Aside from obtaining the postal code of the shareholder, operators take no further steps to confirm the identity of the shareholder, or the authority that the shareholder has to exercise voting rights. Contrast this system with traditional telephonic or internet voting systems, where shareholders can only access such systems using a unique control number found on the proxy or voting instruction form mailed to them with the meeting materials. Although Mosquito informed shareholders that proxies could be solicited by telephone, its management proxy circular, form of proxy and its four subsequent news releases did not specifically mention that Mosquito would be using the TeleVote system.
Ultimately, at the AGM, management's slate of directors prevailed by a slim margin – however, if the votes obtained by TeleVote were not counted, the dissidents' slate of directors would have been elected. While the dissident shareholders objected to the votes cast by TeleVote, the Chair chose to recognize those votes at the AGM. As a result, the dissident group petitioned the Court to set aside the results of the AGM and order a new meeting of shareholders.
The Court's Decision
The main issue before the Court was whether the use of the TeleVote system was oppressive or unfairly prejudicial to the dissident shareholders.
In applying the first part of the two-pronged test for oppressive conduct previously established by the Supreme Court of Canada in BCE Inc. V 1976 Debentureholders, 2008 SCC 69, the Court concluded that the dissidents had a reasonable expectation that the voting procedures used in advance of and at the AGM would be conducted properly, in accordance with accepted methods and protocols, and consistent with the methods discussed in management's proxy circular.
The Court reached the conclusion that the reasonable expectations of the dissident group of shareholders were not met due to the following problems associated with the manner in which TeleVote was used:
- Mosquito's reliance on an oral grant of authority is inconsistent with legislative requirements. Both the BC Business Corporations Act and the Securities Act (BC) define proxy in terms of a written or printed form. The TeleVote system, as implemented in this case, did not provide a direct and immediate link to a verifiable, written confirmation of voting instructions.
- Shareholders placed their votes without using a unique identifier, which is a required "electronic signature" for regular telephone or internet voting. The only unprompted identifier used by the proxy solicitation agent was the shareholder's postal code.
- The proxy solicitation agent did not have a well defined and complete record of the oral grants of authority, particularly in relation to the nonobjecting beneficial owners. The only record was a printout of the votes entered by the proxy solicitation agent into its proprietary software along with a blank proxy and voter information form executed by the proxy solicitor, neither of which incorporated by reference the printout of votes. Absent from this record, as pointed out by the Court, was anything directly from the shareholder that could be readily checked or verified if challenged.
- The proxy solicitation agent was contemporaneously soliciting proxies on behalf of management and recording shareholders' voting instructions. This dual agency role raised issues of conflict of interest and proper disclosure of the proxy solicitor's relationship to management.
- Mosquito's use of the TeleVote system was not specifically disclosed in management's proxy circular, proxy or any of Mosquito's subsequent news releases. Given how relatively new the TeleVote system is in Canada, the Court found that shareholders did not reasonably expect to be solicited for the purpose of having their votes taken in a relatively new process that was not disclosed in any of Mosquito's written material.
- The TeleVote system did not have appropriate and necessary checks and balances to ensure that instructions were properly given and shareholders had the freedom to vote as they choose. The Court explained that in a contested vote, care must be taken to ensure that votes are solicited 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.
- As the dissident group was limited to the use of traditional paper, telephone and internet processes in soliciting proxies, management's use of the TeleVote system gave them an unfair advantage.
The Court found that Mosquito's conduct was unfairly prejudicial and oppressive to the dissidents. Consequently, the Court ordered a new shareholders meeting to be reconvened within 60 days of the Court's judgement. The Court also set aside the original AGM, declaring the AGM, and all resolutions passed at the AGM, null and void. Finally, the Court imposed a number of conditions upon the new meeting, including that TeleVote could not be used to solicit proxies or voting instructions.
While the Court ultimately rejected the use of TeleVote in this case, the Court did acknowledge that "[t]hese telephone solicitation systems are a legitimate attempt to streamline shareholder proxy solicitations." However, the Court also noted the need for market participants to "take steps to establish appropriate protocols for its use, particularly in contested meetings." The Court acknowledged that with sufficient safeguards in place to ensure that proxies and voting instructions are properly given and shareholders having the freedom to vote as they choose, systems like TeleVote may become widely used to facilitate shareholder meetings.
Nevertheless, companies who employ proxy solicitation agents should take appropriate steps to ensure that the methods employed to solicit shareholder votes are not unfair or oppressive. As it may be some time before the necessary protocols for the use of TeleVote are generally established and accepted, companies should be especially cautious in their use of telephone proxy solicitation.About BLG
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