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 management.

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 be held.

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 meeting.

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.