In the Shoes of a Shareholder: Proxies become a Hot Topic
The use of proxies is a critical, and often misunderstood, element of shareholder meetings that is increasing in importance.
Every public and private company must hold an annual general meeting of shareholders (an “AGM”). AGMs can be lavish and sometimes raucous affairs, but most often AGMs are short and underwhelming: the chair reads from a script and the outcome of any vote has already been determined thanks to the advance submission of proxies.
In recent days, as the news of the coronavirus outbreak dominates the headlines, it is possible that an even greater number of shareholders will choose to vote by proxy at shareholder meetings instead of attending an AGM in person.
The submission of proxies by shareholders can be tricky. Soliciting proxies requires adherence to specific rules, and advance planning is advisable.
What are Companies Doing in Light of Coronavirus?
A number of U.S. public companies have announced that they will be altering their plans for AGMs due to the coronavirus outbreak, including Starbucks which will be holding a virtual AGM, and Qualcomm Inc. which is restricting in-person access to its AGM.
The technology to hold virtual AGMs is relatively new to Canada (while many AGMs are webcast, it requires special technology to permit shareholders and proxyholders to vote electronically during the meeting). According to Broadridge, as of December 2019 only five virtual shareholder meetings had taken place in Canada. Enbridge announced today that it would hold a virtual AGM due to coronavirus concerns. Whether a company can hold a virtual AGM will depend on its constating corporate documents and the applicable corporate statute.
Proxies are still an important tool for virtual meetings. The company will want to know in advance that it will meet quorum requirements for the meeting, and that there is sufficient support for the resolutions to be passed.
Rabble-Rousers at the Gate
The rules around proxies come into sharp focus when disgruntled shareholders seek to vote in a different board of directors or oppose a major transaction at a shareholder meeting. The dissidents may run into advance notice by-laws, proxy circular requirements and other hurdles. The solicitation of proxies can also disqualify a shareholder from relying on the alternative monthly reporting regime.
Most of the caselaw on proxies is a result of a proxy battle. Careful planning is required.
What is a Proxy?
The word “proxy” is derived from the same root as “procure” and “proximate”, and in some ways proxies are a blend of the two. In corporate law, a proxy is a written instrument which allows the holder to vote on behalf of a shareholder at a meeting.
A proxy can therefore help to procure votes from a company’s shareholder body to meet quorum and pass resolutions, while also signifying a proximate relationship between the proxyholder and the shareholder.
Aggregation of Voting Power
The proxyholder-shareholder relationship does not need to be exclusive. One person can hold proxies from multiple shareholders, aggregating their collective voting power.
This can serve the interests of management of a company – for example, by gathering advance support for a proposed transaction. However, it can also help dissidents shore up support for their causes.
Proxy Solicitation – What is it, and When is It Required?
Private companies with a limited number of shareholders may prefer to circulate a written resolution for approval rather than go through the effort of holding a meeting. To do so, 100% of the shareholders would need to sign the resolution and proxies would be unnecessary.
If a company holds a shareholder meeting, proxies may be required. Proxies and their solicitation are regulated by both corporate and securities law. Under securities law, “solicitation” is defined broadly, and includes requesting that a securityholder execute or not execute a form of proxy, or revoke a proxy.
In most cases, a person who solicits proxies must also provide an information circular, which is a disclosure document designed to help shareholders make an informed decision in using their proxies. The form of these documents is prescribed by law and can be resource-intensive to prepare.
Public companies must provide shareholders with a form of proxy and an information circular in advance of a meeting. In addition, some corporate statutes like the Canada Business Corporations Act can require private companies with more than 50 shareholders to prepare forms of proxies and accompanying information circulars ahead of shareholder meetings.
We often encounter tricky issues when it comes to proxies. For public company meetings, the form of proxy that the company circulates is typically only for registered shareholders. Most shareholders hold their shares through brokers and need to follow their broker’s process for voting their shares.
Figuring out the back office gymnastics required to give a proxy can be challenging (and can potentially tip off the company about how you’re planning to use your proxy).
Proxies vs. Powers of Attorney
In certain contexts, the court has found that solicitations for powers of attorney in order to effect a merger are not solicitations of proxies.
In Central GoldTrust v. Sprott Asset Management Gold Bid LP, for instance, the bidder attempted to complete a hostile takeover bid of target trusts by requesting that target unitholders sign powers of attorney to effect a merger transaction. One issue before the court was whether this request constituted a “solicitation” of proxies under securities law and would have required the bidder to have prepared and delivered an information circular. Justice Wilton-Siegel found that these requests were not solicitations of proxies.
For an in-depth analysis of this case and the Ontario Securities Commission decision regarding the same facts, see the following article by our very own Diana Nicholls Mutter.
Can Proxies be Revoked?
For anyone who solicits proxies, including management and dissidents, a key question will be whether they can rely on the proxies they solicit. Can a shareholder revoke a proxy, even if the form of proxy says it is “irrevocable”? Most of the time, the answer is yes.
The Canada Business Corporations Act (CBCA)
The CBCA allows for proxy revocations to be delivered in various ways, including by depositing them with the chair of a meeting on the day of the meeting for which the proxy was delivered.
Jurisprudence also helps support the revocability of CBCA proxies. In Pacifica Papers Inc. v. Johnstone, Pacifica sought shareholder support of a merger by means of support agreements whereby shareholders promised to submit proxies to vote in favour of the transaction. The transaction was subsequently approved by a shareholder vote. However, a shareholder alleged that obtaining the support agreements constituted proxy solicitation by Pacifica, and since it was done prior to distribution of an information circular, the process was illegal and rendered the support agreements unenforceable. The trial judge agreed, but found the shareholder votes cast by proxy to nevertheless be valid.
Chief Justice Finch of the BC Court of Appeal agreed that the support agreements could not be used to force shareholders to vote in a certain manner, but not because they were illegal: rather, because “proxies are always revocable”.
It is unclear how the court may have reacted if the shareholders who had signed the support agreements later revoked the supportive proxies. By revoking the proxies, would shareholders be in breach of contract but still within their rights as shareholders?
The Ontario Business Corporations Act (OBCA)
The OBCA has very similar proxy revocation provisions to the CBCA. While the court has yet to consider revocability in Ontario, given the similarities between the two statutes, it appears that proxies in Ontario are also always revocable.
The British Columbia Business Corporations Act (BCBCA)
Neither the CBCA nor the OBCA make a distinction between proxy revocability as it relates to public and private companies. The British Columbia Business Corporations Regulation, however, does make such a distinction. This regulation provides that “every proxy may be revoked”, but then states that this section does not apply to public companies, leaving unstated whether proxies for public company shareholder meetings are revocable.
Notwithstanding this distinction, in Russell v. Synex International Inc., which involved a public company incorporated under the BCBCA, the Supreme Court of British Columbia found that proxies “are fundamentally instruments of agency by which the proxyholder is appointed to present the shareholder’s interests. …As with any agency, the proxyholder’s duty is to carry out the shareholder’s directions, and the proxyholder is bound by any limitations on the agency imposed by the shareholder.”
In other words, just as a principal is typically able to limit and revoke an agent’s authority, so too should a shareholder be able to limit a proxyholder’s authority by revoking a proxy, even in respect of a public company.
Proxies can be a powerful tool, especially in current times when in-person meetings may be on the decline. Soliciting proxies, however, can give rise to significant obligations. If you are considering whether you or your corporation may need or want to solicit proxies, it is best to plan well in advance and consider how the proxy rules may affect your strategy.