Until very recently, there was little if any guidance from the courts as to the scope of a proxy holder’s voting discretion in circumstances where the instruction is to “withhold” voting for the management slate of directors. This changed on September 27, 2010, when the Ontario Superior Court of Justice handed down its decision in Mason v. Augen Capital Corp. 2010 ONSC 5319. The proceeding was started immediately after a shareholder meeting of Augen Capital Corp. (“Augen”), during the course of which the chair had disregarded a ballot cast by a proxyholder (Mr. Mason). Consequently, the slate of directors favoured by management prevailed over an alternative slate proposed by Mr. Mason.
Management had delivered a customary information circular and management proxy to Augen shareholders, soliciting support for, among other matters, a resolution reducing the number of directors on the board of directors from six to four and, in anticipation of that resolution passing, for the election of management’s four nominees to the board. The management form of proxy included two options for the election of directors: “for” or “withhold”.
Mr. Mason held a clear majority of proxies. Once the meeting started, the resolution reducing the number of directors from six to four was defeated. Management then nominated two new candidates from the floor. Mr. Mason nominated four new candidates. Mr. Mason received four ballots (representing all shareholders who had appointed him their proxy), each containing two choices beside the candidates’ names: “for” or “withhold.” Unlike on three of the ballots, on the fourth and disputed one, the scrutineer had preselected the “withhold” option regarding the four management candidates. Mr. Mason checked off the “for” option beside each of his four nominees, which then made it a total of eight marks. The chair rejected this ballot on the basis that Mr. Mason had effectively cast eight votes – four “fors” and four “withholds.”
The Court disagreed with the chair’s characterization of the four “withholds” as equivalent to a vote cast. The Court reasoned that common sense and logic inferred a difference between withholding a vote and casting a vote. Therefore, an instruction to “withhold” is not the same as casting a vote. And, by marking the ballot “withhold” with respect to the four management nominees, Mr. Mason had not exhausted any of the six votes available to him. The Court also held that there was no established practice that once the proxy has been marked “withhold” the proxy holder is precluded from voting the shareholder’s shares for other nominees.
This case will have important ramifications in the context of proxy fights as, for the first time, the “amorphous concept” of “withhold” has been judicially clarified. In the future, management, their proxy solicitation agents and scrutineers will need to be careful to treat “withhold” proxy instructions as, in effect, blank voting instructions with respect to new nominations not contained in the circular materials.