Two court rulings were issued this quarter that touched on shareholder democracy issues - the first criticized “empty voting” and the second nullified results of an AGM because of improper proxy solicitation. The OSC also released its 2012 report on August 22, 2012, which covered shareholder democracy topics including director elections and the proxy voting system.
Court Criticizes “Empty Voting” by Hedge Fund
On September 11, 2012, the British Columbia Supreme Court released its decision in Telus Corporation v CDS Clearing & Depository Services Inc. in which it roundly rejected a hedge fund’s practice of “empty voting”. Empty voting is a practice that results in a separation (either full or partial) of the right to vote at a shareholders’ meeting from beneficial ownership of the shares on the meeting date. It can result from several different circumstances from the benign (shares bought and sold between the record date and the meeting) to the potentially dangerous (hedging or borrowing techniques that permit activist investors to gain votes while avoiding market exposure).
The fund in this case caused CDS to requisition a meeting of TELUS’s shareholders. TELUS’s board refused to call the meeting, in part, because it alleged that the requisition was invalid because the hedge fund is an “empty voter”. While the result did not turn on empty voting, the court took the opportunity to make some strong comments on it: “the practice of empty voting presents a challenge to shareholder democracy” because “the interests of such an empty voter and the other shareholders are no longer aligned and the premise underlying the shareholder vote is subverted.”
The fund has appealed the decision and it will be important to note how the B.C. Court of Appeal sees the practice. Shareholder democracy has also been top of mind for the OSC and the regulator has stated its goal of facilitating shareholder empowerment in director elections by advocating for the elimination of slate voting, the adoption of majority voting policies for director elections and enhancing disclosure of voting results for shareholder meetings.
Court Finds “TeleVote” Proxy Solicitation Improper
On August 8, 2012, the British Columbia Supreme Court released another notable decision in International Energy and Mineral Resources Investment (Hong Kong) Company Limited v Mosquito Consolidated Gold Mines Limited. The court overturned the results of an annual general and special meeting of shareholders (“AGM”) of a public mineral exploration and development company because of improper proxy solicitation.
The AGM was contested with management and a group of dissident shareholders each proposing a different list of directors. Management retained proxy solicitation agents that utilized a “TeleVote” system (a process of collecting shareholder voting information over the phone), which the Court ruled was oppressive and unfairly prejudicial to the dissident shareholders because (i) the oral grant of authority used was inconsistent with the legislative requirements, (ii) no unique identifier was used when shareholders placed their vote (only the shareholder’s postal code was noted), (iii) the proxy solicitation agent did not have a properly defined and complete record of oral grants of authority which could be readily checked for accuracy, (iv) the proxy agent faced a conflict of interest because it was soliciting proxies on behalf of management and also recording shareholders’ voting instructions, and (v) the use of the “TeleVote” system was not While being critical of the particular techniques used in the case before it, the Court also noted that telephone proxy solicitation was “a legitimate attempt to streamline shareholder proxy solicitations” and that if proper protocols were put in place, it could be an appropriate choice to facilitate shareholder meetings.
OSC 2012 Annual Report Highlights Corporate Governance Issues
On August 22, 2012, the OSC released its 2012 Annual Report, which details the Commission’s significant activities in 2011-12. Shareholder democracy issues were highlighted in the report as the OSC is working toward increasing shareholder engagement by strengthening shareholders’ rights and facilitating the effective exercise of voting rights. In particular, the OSC is considering specific policy initiatives that would support the role of shareholders with regard to uncontested director-elections, which the OSC sees as a significant governance issue. As well, the report examines concerns about the effectiveness of the proxy voting system and states that the OSC is currently investigating concerns raised by market participants about the transparency, efficiency and accountability of the proxy voting system.
The Report also mentioned the OSC’s Emerging Markets Issuer Review, released earlier in 2012, which assessed the quality and adequacy of the disclosure and corporate governance practices of 24 emerging markets issuers, and examined the manner in which they accessed Ontario’s markets. That review raised concerns about governance practices by reporting issuers that were listed on Canadian exchanges and had significant business operations in emerging markets.