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Focus: Corporate Governance – December 2008

Is your proxy valid – vote yes or no?

In brief: In a recent case, the Federal Court of Australia considered the validity of shareholder proxy forms that are forwarded via an intermediary to the company holding the general meeting. Justice McKerracher found that, although there is no express requirement under the Corporations Act, for practical reasons, proxy forms should be returned directly to the company holding the general meeting, rather than via an intermediate party. Partner Wendy Rae (view CV) and Senior Associate Christalyne Look report on this Federal Court decision and its practical implications.

How does it affect you?

  • The Federal Court's recent interpretation of section 250B(1) of the Corporations Act means that parties who request proxies from shareholders should be mindful that there is a risk that these proxies will be declared invalid if they are returned to an intermediate party before being forwarded to the company holding the general meeting.

Facts


The plaintiff, Portman Iron Ore Ltd, held 19.2 per cent of ASX-listed company, Golden West Resources Limited.  On 20 June 2008, Portman served a notice on Golden West under section 249D of the Corporations Act 2001 (Cth.) requesting that Golden West call a meeting of its shareholders to consider resolutions proposed by Portman to replace two existing directors with two new directors.


In response, Golden West called a meeting of its shareholders to be held on 29 August 2008.  The notice of meeting set out the resolutions requested by Portman, along with other resolutions proposed by Golden West, and enclosed a proxy form that was to be returned to the company.


Subsequently, Portman wrote to all shareholders of Golden West and included a pre-completed proxy form in favour of the resolutions proposed by Portman. Portman requested that the completed proxy forms be returned to its office by a certain date so that Portman could deliver them to Golden West before the general meeting, as required by s250B(1) of the Corporations Act. 


While Portman delivered the proxy forms to Golden West before the lodgement deadline, on the day before the meeting was due to be held, the chairman of the meeting informed Portman that the proxies it had delivered to Golden West were invalid and would be disallowed. Consequently, Portman sought, among other things, declarations that the chairman was wrong in disallowing the proxies and that they were not invalid.

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Federal Court decision


The Federal Court declined Portman's application for declaratory relief on the basis that it would have no real, practical effect. That is, even if the Portman proxy forms had been treated as valid and included in the vote, the resolutions proposed by Portman would not have been passed.


Nevertheless, Portman submitted, among other things, that it wished to know for future meetings whether collecting completed proxy forms before forwarding them to the company is consistent with s250B(1) of the Corporations Act.

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 Practical considerations


In deciding the case, Justice McKerracher considered the relevant sections of the Corporations Act, including s250B(1), which specifies that for an appointment of a proxy for a meeting of a company's members to be effective, the proxy's appointment must be received by the company at least 48 hours before the relevant meeting. 


On the issue of whether there is a requirement to return proxies directly to the company holding the general meeting, Portman contended that there is no such requirement contained in s250B(1). Such a requirement would need, it was submitted, the insertion of the word 'directly' after the word 'received' or some other clear statutory imperative that proxies must only be sent to the company.1

  
Despite this argument, the Federal Court held that while the Corporations Act does not expressly 'spell out' that proxy forms are to be returned only to the company or directly to the company, forwarding proxies to the company via an intermediate party is, for practical reasons, contrary to the requirements of s250B(1). In reaching this decision, Justice McKerracher applied the principles expressed on the issue by the Supreme Court of Victoria in Bisan Ltd [2002] VSC 430, on the basis that the decision reflects a 'good deal of common sense'.2


According to Justice McKerracher, although there was no suggestion of tampering with the proxies, on the facts of the case, if the proxies are returned directly to a company, the need to investigate or prove tampering with proxies by intermediate parties, who are not under any fiduciary duties or other apparent obligations in relation to their safeguarding, is eliminated. That is, any doubt needs to be avoided so as to protect the apparent, as well as the actual, integrity of the corporate electoral process.3


In addition, his Honour recognised the practical difficulties for Golden West in having little time to process the large volume of proxies received just before the general meeting and also to analyse whether or not shareholders giving those proxies had also previously signed the Golden West proxy forms. If shareholders returned proxies directly to the company, it would be more likely that they would be received by the company in a more even flow, rather than in large bundles at the last minute.

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Conclusion


According to the recent Portman decision, proxies forwarded to the company holding the general meeting via an intermediate party may be treated as invalid. This means that in order to avoid the risk of proxy forms being treated as invalid, shareholders 'campaigning' on resolutions to be considered at a general meeting of a company should request that the proxy forms be returned directly to the company, or the place nominated by the company.


If shareholders adopt the approach of requesting that proxy forms be returned directly to the company, or the place nominated by the company, they may also request that a duplicate of the proxy form be forwarded to them, should they wish to monitor their support.


However, it is possible that the Portman decision will be challenged. While the Portman decision might be said to make 'a good deal of common sense', the legislative basis for it is not strong. Therefore, it is possible that, where circumstances differ, courts may seek to distinguish the Portman and Bisan decisions.
If you have any queries about this or any other corporate governance issue feel free to call us.

Footnotes

  1. Portman Iron Ore Limited, re Golden West Resources Ltd (2008) 67 ACSR 676 at para 686-687.
  2. Bisan was also considered in Lion Selection Ltd (No 2) (2008) 66 ACSR 656, a decision in June 2008 of the Australian Takeovers Panel. In that case, the Panel declined to conduct proceedings, on the basis that undertakings were given, the proxies were voted in accordance with their instructions and there was no impact from the duplicate proxies.
  3. Portman Iron Ore Limited, re Golden West Resources Ltd (2008) 67 ACSR 676 at para 687-688.

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