The recent victory on October 16, 2012, by a dissident slate of candidates for the board of directors of Mosquito Consolidated Gold Mines Limited (the Company) illustrates the potentially significant consequences that the improper use of televoting to solicit proxies and voting instructions can have in the context of a shareholders' meeting. The recent vote was a "do-over" of the Company's last annual and special meeting, after a court overturned that meeting's results due in part to improper use of televoting.
While televoting has the potential to facilitate shareholders' meetings, televoting systems may also lack sufficient safeguards to ensure that proxies and voting instructions are properly given and shareholders are able to vote freely. Televoting is a new process in the context of the Canadian securities industry and there is little guidance on protocols for its use, particularly in contested shareholders' meetings.
Importantly, the British Columbia Supreme Court decision did not prohibit the use of televoting per se, and can serve to provide guidance to companies wishing to utilize televoting in the future. This article examines the safeguards necessary to ensure that televoting is conducted in compliance with securities laws and policies.
Background Facts to the Decision
The Company, a TSXV-listed mining company, held an annual general and special meeting that was contested by a dissident group which proposed its own slate of directors. As its proxy solicitor, the Company retained Georgeson Shareholder Communications Canada Inc., which deployed a televote system to obtain proxies and voting instruction forms (VIFs) from shareholders. The Management's slate of directors won by a small margin. This caused the dissidents to challenge the use of the televote system in court.
The proxy solicitor's televote system used call-centre operators to telephone registered shareholders and non-objecting beneficial owners to take their votes. The proxy solicitor asked for verbal authorization to execute a proxy or VIF on behalf of the shareholders. The operators followed a script and the conversations were recorded. The operators encouraged votes in favour of management's recommendations, but shareholders had the option of voting for or against the motions set out in the management proxy.
Deficiencies of the Televote System
The Court found that the thrust of the applicable securities legislation, policies and guidelines was to establish safeguards to ensure that proxies and voting instructions were provided by those having the authority to give them. In a decision that turned on examining the reasonable expectations of shareholders, the Court's view was that televote, as used by the proxy solicitor in this case, was deficient in a number of ways.
The following were problems with the manner in which the proxy solicitor used the televote system:
- The Oral Grant of Authority was Insufficient – The televote system's reliance on an oral grant of authority, without a link to a verifiable and written confirmation, was inconsistent with legislative requirements.
- No Unique Identifier for Votes – The absence of a unique identifier made it difficult to scrutinize the process. The televote system neither had a reliable means of identifying the person giving the instructions, nor ensuring the integrity of the information contained in the proxy or VIF.
- No Complete Record – The record of the oral grant of authority, consisting of a printout of the votes entered by the proxy solicitor into its proprietary software, was not regarded by the Court as creating a full record.
- Problematic Agency Relationships – The proxy solicitor's dual agency role in soliciting and recording votes raised the potential for a conflict of interest, a lack of proper disclosure and confusion amongst shareholders.
- Lack of Prior Disclosure – Televote was not mentioned in the management circular, management proxy or any of the Company's news releases. While shareholders might otherwise reasonably expect to be contacted by phone, 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 the Company's written materials.
- Lack of Sufficient Safeguards – Appropriate checks and balances were absent and the extent of the proxy solicitor's quality control analysis was unclear. When partisan solicitation is combined with vote-taking, the potential for abuse exists and, 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.
The Court concluded that the dissidents proved that the Company, in authorizing the proxy solicitor to use televote, failed to act fairly, and that this constituted oppressive and unfairly prejudicial conduct.
The Court set aside the results of the meeting and declared the meeting invalid and all resolutions passed as null and void. The Court ordered that the Company reconvene an annual and special general meeting. The order included, inter alia, a condition that the Company not solicit proxies or voting instructions using televote.
The "do-over" annual and special meeting was recently held and the dissidents' slate of directors was elected.
Repercussions of the Decision for Televoting in Canada
The Court noted that televote is relatively new in Canada and encouraged the securities industry to establish appropriate protocols for its use.
The Court made clear that televoting must have sufficient safeguards built into it to ensure that instructions are properly given and shareholders have the freedom to vote as they choose. The Court suggested that this may involve a system that allows the operator to transfer callers to an automated system where they can place their votes privately using their unique identifiers, or at least some kind of immediate and independent confirmation, perhaps by email, of the shareholder's identity and the votes taken. While the Court did not specify exactly what standard must be met by televoting systems, the case can serve as guidance in the deployment of televoting in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.