Proxy voting

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Proxy voting

  1. 1. NATIONAL LAW SCHOOL OF INDIA UNIVERSITY BANGALORE PROJECT ON “PROXY VOTING” SUBJECT: CORPORATE GOVERNANCE TRIMESTER-IV 2013-14 UNDER THE SUPERVISION OF Dr. Versha Vahini National Law School of India University, Bangalore SUBMITTED BY:-Ronak Karanpuria LL.M. (Business Law) Student ID No.: 534 1
  2. 2. Acknowledgement I express my deep sense of obligation and gratitude to Dr. Versha Vahini, National Law School of India University, Bangalore, for his invaluable guidance and persistent encouragement in the preparation of this project work. I am deeply indebted to all the Indian and foreign writers and judges whose writings and decisions have been duly cited in this work and have given me inspiration and light during preparation of this work. 2
  3. 3. RESEARCH METHODOLOGY  Aim and Objective The Aim of the research paper is to determine the scope of “Electronic Evidence” w.r.t. modern digital environment.  Research Question The researcher will address proxy voting in context with its right and power to vote by proxy, proxy holder unauthorised acts, revocation and termination of proxies.  Research Methodology In this paper the researcher has primarily used descriptive and analytical methodology of research. The researcher mainly relied upon the secondary sources which include books, Reports, Journal, magazines, online articles and legal databases.  Scope The scope of this paper is to find out the legal aspects of proxy voting  Limitation. The field study would have been desirable but due to paucity of time this paper is limited only to the theoretical aspect of electronic evidence which have been gathered from various sources including books, articles, and journals.  Sources In this paper various secondary source have used by the research student in the form of books, article from various journals and also internet sources have been used.  Mode of Citation A Uniform mode of citation is followed throughout this paper. 3
  4. 4. Table of Content S. No. Particulars Page No. 1 Introduction 6 2 The existing regime 7 3 Misuse & Fraud’s 8 4 Proxy fight 5 Revocation of proxies 6 Conclusion 11 7 Bibliography 12 4
  5. 5. INTRODUCTION Every company has a mission or objective bearing social responsibility using common fiduciary tools to enhance their mission and protect the investment where their portfolios to be managed in a way vision by shareholders. Capital market dealing with crores of transaction involving billions invested in equity of the companies with more responsibility to pay towards how publicly traded companies managed their portfolios. Some institutional investors such as pension funds and mutual funds are required to manage their funds in a way that support both their mission and their financial goals. Securities regulations allow investors to engage management of companies they hold on important governance and social issues. Also in India, shareholders do not study much while investing in companies & unconsciously vote their proxies, reluctant to monitor every issues raised in meetings, unaware of their rights, foster abuses of accounting and management issues. Such abuses resulted in fall of big tycoons or scandal of billions of rupees of profit from financial market. Voting allows them to make their voice to be heard against a proposed plan which if they believe in the best interest of the company. The outcomes of votes at meetings may affect the value of your shares. In Cousins v International Brick Co Ltd1, defined proxy as a person representative of shareholder. Similarly, in the same case, Lawrence U (at 102) stated '[t]he proxy is merely the agent of the shareholder, and as between himself and his principal is not entitled to act contrary to the instructions of the latter'. Whitlam v Australian Securities and Investments Commission2, where the Court commented (at 160) that a proxy 'certainly had a duty as a fiduciary to the proxy givers to act in accordance with their directions'. Proxy voting promotes and protects shareholders value and the company objectives like proposal getting approval from directors now getting sanction from shareholders. But at the same time adverse effects of fraud committed in proxy voting cannot be undermine. So it is puzzling that many foundations get many proposals for voting by proxy generally in a public limited company where shareholders are diversified and improbable for them to attend the meeting. By not thoughtfully voting on proxy issues, many foundations are ceding the considerable power of their shareholder status to engage management on social and environmental issues that are often at the heart of a foundation’s work. Due to this number of times efficacy of corporate accountability has been in question about shareholder participation which in turns affect the growth of the company and its general welfare. Why participation is needed at all? It is consistent with the principles of shareholders democracy, which provide equal opportunity to all shareholders to participate in democratic system of corporate governance. 1 [1931] 2 Ch 90,100. Lord Hanworth MR defined a proxy as '[a] person representative of the shareholder who may be described as his agent to carry out a course which the shareholder himself has decided upon' 2 [2003] NSWCA 183 5
  6. 6. THE EXISTING REGIME The principles of corporate governance like the role played by shareholders indirectly in the managing the company affairs, where management is vested in the board of directors and in the annual general meeting which is required to held within 15 months 3 and in each year, so shareholders are not invited for day to day transaction. In terms of participation shareholder control certain rights mainly a) Election & removal of directors b) Adoption, repeal or amendments of byelaws, resolutions c) Approval of extra-ordinary matters. The shareholders controls the affairs and give further direction to directors whether to continue with project or look in different ways by voting at annual general meeting. Voting can be done by show of hands or one can demand for poll and unless the articles of the company provide for a larger number, five members personally present in case of public company and two in case of private company, if the meeting is adjourned then a quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall be a quorum. The issues attached with it is the length of notice, service of notice, persons to be called, voting rights in shares held in trust etc. but researcher confined the discussion to the proxy voting issues. Generally, under principles of corporate law, management issue the proxy application to give notice of an upcoming shareholders' meeting, to form a quorum and to notify shareholders of corporate matters. The management of company affairs is a tedious task involving adjournment of meeting or meeting on a day where involvement of all the shareholder mainly in public limited company is difficult to attain the meeting in person, so overcome this and encourage them to participate in corporate affairs they vote on the decision by issue of proxies. Instead, they generally execute proxies which authorize other interested parties to represent and vote for them. WHO CAN VOTE The power of shareholder to execute proxies are governed by sec- 1764, which entitle any member of the company to attend and vote at the meeting to appoint any person whether he is member of the company or not to vote on his behalf but rights of proxy shall be limited with no right to speak, which means proxy can only vote. The word “member”5 instead of shareholder is used in the sec-176 which means proxy appointment is not limited to shareholder. So to become member either he subscribes to memorandum of a company or his name is register of members or an equity holder whose name 3 The Companies Act, 1956: Sec- 166 ANNUAL GENERAL MEETING The Companies Act, 1956: Sec- 176 PROXIES 5 Companies Act, 1956: Sec-41 Definition of “Member” (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. [(3) Every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company 4 6
  7. 7. is registered as beneficial owner in the records of depository. The word “registered owner” means who hold shares either directly with the company, as the registered owner or record holder, or indirectly (for example, through a bank or broker-dealer), as a beneficial owner. Beneficial owners holding their shares at a broker-dealer or bank are sometimes said to be holding shares in “street name”. There are no significant differences between registered and beneficial owners regarding the value of your shares. Both have the same rights to dividends, stock splits, and any appreciation or depreciation in the value of the stock. But in case of voting Registered owners (or record holders) receive a proxy and cast votes directly with the company that issues the shares. Beneficial owners, on the other hand, receive a “voting instruction form” directing their broker or other financial institution how to vote their shares. In Strang v. Edson6, court held that receiver has the power to vote stock placed in his care by the court. In Atkinson v. Foster7, Also, where a receiver has been appointed and the property assigned includes stock of a corporation, the court may compel the giving of a proxy to the receiver enabling him to vote the stock at meetings of the stockholders of the corporation. In White v. Ferris8, A bankrupt has the right to vote stock in his name on the books of a corporation, even though his property vests in the trustee. The instrument appointing proxy must be in writing and signed by the appointer and in case if its body corporate then such instrument must be sealed and signed by duly officer authorised by it. Also the proxy rules are not applicable in case if the company not having a share capital. Another issue raised, where securities may be held in the name of banks, broker-dealers and trust companies. Increasing numbers of these financial institutions deposit their securities with depositories that register and hold the securities in their own nominee name. Such depositories effect deliveries of securities among participating financial institutions. The broker-dealer then casts the proxy vote with the company after receiving instructions from its customer, the beneficial owner. Large institutional investors like FII, bank trust department, who possess substantial amount of corporate share shows the great discretionary power and their involvement in the proxy system has a profound impact on corporate behaviour. Similarly the President of India & the Governor of state under sec- 187, 187-A of the act and in case of public company a member can issue more than one proxy to vote on behalf of them. Proxies to be deposited within company or to authorize person before 48 hours of meeting to be held valid or as provided under articles of association. However, proxy cannot appoint another proxy with exception for body corporate being an artificial person and President & Governor. 6 Strang v. Edson, (C. C. A. 8th, 1912) 198 F. 813. 27 Ill. App. 63 (1887), affd. 134 11. 472, 25 N. E. 528 (189o). 8 42 Conn. 560 (1875) 7 7
  8. 8. MISUSE & FRAUD The appointer and proxy holder relation are based on trust, acting in the fiduciary relation, in the same way as director and shareholder relation but sometimes an arrangement is made where shareholders agrees to vote its shares are directed by another in exchange for consideration personal to shareholder.9 The vote buying arrangement even in the interest of corporation & stakeholders to be determine subject to the intrinsic fairness test. In 1982 Schreiber case10 and the 2002 Hewlett-Packard case11 through some light on the arrangement whether such arrangement is void per se or voidable. In Schreiber case: The Court held, however, that “[b]ecause vote-buying is so easily susceptible of abuse it must be viewed as a voidable transaction subject to a test for intrinsic fairness.” Finding no fraud in the fact that no warrant holder other than Jet Capital received a loan from TIA, and fi nding that TIA’s decision was based on the stockholders’ best interests, the Court ultimately held that the loan transaction “was not void per se because the object and purpose of the agreement was not to defraud or disenfranchise the other stockholders but rather was for the purpose of furthering the interest of all [TIA] stockholders.12 In HP case13: There is no reason for management to disclose preliminary reports that are generated early in a planning process, based on imperfect information, and limited both by the unfamiliarity of the people creating the report with the business and by the desire of those people to commit to conservative numbers that are definitely attainable. The court's willingness to hold an expedited three-day hearing provides a warning that shareholder votes can be set aside for 'vote-buying' through improper influence by management or for material misstatements to shareholders.14 To overcome this situation, corporate bodies issue proxy rules which require full disclosure of material information, prohibit proxy fraud, installing proxy management machinery & prohibition of false & misleading statements. 9 See Hewlett v. Hewlett-Packard Co., 2002 WL 549137, at *4 (Del. Ch. Apr. 8, 2002); This article is concerned with “vote-buying” arrangements between the corporation and its stockholders. The Court in Hewlett-Packard recognized this distinction, stating: “Shareholders are free to do whatever they want with their votes, including selling them to the highest bidder,” so long as corporate assets are not exchanged for votes. 10 Schreiber v. Carney, 447 A.2d 17 (Del. Ch. 1982) 11 Hewlett v. Hewlett-Packard Co., 2002 WL 549137 (Del. Ch. Apr. 8, 2002). 12 Schreiber, 447 A.2d at 26 13 At issue in the case—at the motion-to-dismiss stage—were efforts by the Hewlett-Packard Company (HP) to garner approval for a merger between HP and Compaq Computer Corporation. Before the merger vote, the proxy committee of Deutsche Asset Manage-ment (Deutsche Bank) “determined to vote its shares against the proposed merger” and submit-ted proxies to that effect. Around the same time, “HP closed a new multi-billion dollar credit facility to which Deutsche Bank had been added as a co-arranger.” Deutsche Bank became concerned that its no vote would cause HP to “end the ongoing, and desired future, business dealings between HP and Deutsche Bank.” On the morning of the special meeting, Deutsche Bank and HP management held a telephone conference, after which Deutsche Bank switched its votes—nearly 17 million votes—to vote in favor of the merger 14 http://www.internationallawoffice.com/newsletters/Detail.aspx?g=624a02bd-573b-4b81-a51a5a95e7af9ab5 8
  9. 9. PROXY FIGHT A proxy fight or proxy battle is an event, where stockholders oppose some aspect of the corporate governance like director position or any other management decisions. In which shareholders were persuade to use their proxy votes to make new management for any of a variety of reasons.15 In Hilton Hotels v. ITT Corp case, it involves power and duties of directors in hostile takeovers, coupling with an unsolicited tender offer with a proxy contest to replace the incumbent board. Delayed tactics were used to postpose annual general meeting. There arise a conflict of interest where shareholders are not permitted to exercise free rights, so the major issues which are seen is whether it will affect the interest of corporation or shareholder, generally proxy fight is contested in mergers, takeovers etc. In Paramount v. Time,16 a hostile acquiring corporation would propose a tender offer contingent of the redemption of the poison pill by the Board of the target corporation. But in addition, the hostile acquiring corporation would nominate a new slate of directors and seek the proxies of other shareholders to elect this new Board of the target corporation at its next annual meeting or a special meeting of the shareholders. The board of directors can redeem or eliminate poison pill but can’t prevent proxy contest. However, they can prevent shareholders from entering into certain agreements that can assist in a proxy fight, such as an agreement to pay another shareholder's expenses. REVOCATION OF PROXIES There is a contract between appointer and the proxy holder, where proxy holder is acting in fiduciary duty. Proxy holder must exercise the power in accordance with the instructions of the giver of the proxy. Where the giver of the proxy holder did not instruct him how to vote, he is free to vote how he please. In Cousins v. International Brick Company ltd.17 Lord Handworth held that shareholder may exercise the right to vote personally notwithstanding that he or she has given proxy and not revoked it. Similarly in Ansett v. Butler Air Transport ltd18, Proxies was given for meeting on 31 dec 1957, which was then adjourned on 21 jan 1958. Many shareholder who has given proxy for dec attended meeting personally, issue raised was whether the proxies of the shareholder present at the meeting had been revoked or valid for poll. Court held that it is clear that notwithstanding their personal attendance, their wishes is their proxy should vote for the poll. In Oliver v. Dalgleish19 issue is regarding disobey by proxy holder as instruction given to him, court held: first that vote is invalid because outside the authority of proxy, second vote is valid 15 Klein, Ramseyer, and Bainbridge. Business Associations: Cases and Materials on Agency, Partnerships, and Corporations. (7th Ed.) Foundation Press 16 571 A.2d 1140, 565 A.2d 280 (Del. 1989) 17 [1931] ch 90 18 [1958] 75 WN (NSW) 306 19 [1963] 3 All ER 330 9
  10. 10. and proxy disobedience is a matter purely between the proxy holder and appointer and hence it does not affect the voting result. Revocation of proxy is to be communicated to the company and it shall be received by the company at its registered office before the commencement of the meeting. Proxy shall itself be revoked in case of death or insanity of the shareholder appointing the proxy. Where more than one proxy issued to cast vote for the same matter, then the last proxy so issued will be valid. CONCLUSION Voting being an essential process can’t be undermine to maintain democratic system as a means of corporate governance, simultaneously securing the voting rights of shareholders. However voting by shareholder in public company is a tedious task, which involves large gathering and due to which sometimes shareholder passes their right to vote by the means of proxy voting. Voting by proxy involves fiduciary duty, where proxy is under duty to oblige and to do things as guided by appointer. Such mechanism is to be controlled by the way of rules either in articles of association or by statutes because decision of shareholders can affect the fate of company, major decisions like director appointment, restructuring of company, mergers, amalgamation etc. such a controversial decisions needs to be taken with care and precaution, where an individual shareholder can be persuaded to vote in a different manner, fraud, misuse and proxy contest are the major issues. 10
  11. 11. BIBLIOGRAPHY 1. Statues: Company act, 1956 2. Books i. Klein, Ramseyer, and Bainbridge. Business Associations: CASES AND MATERIALS ON AGENCY, PARTNERSHIPS, AND CORPORATIONS. (7th Ed.) Foundation Press ii. DDRJ Prentice Holland , CONTEMPORARY ISSUES IN CORPORATE GOVERNANCE, iii. Weston Situ Johnson, TAKEOVERS, RESTRUCTURING & CORPORATE GOVERNANCE, iv. Richard Smerdon, A PRACTICAL GUIDE TO CORPORATE GOVERNANCE, v. Bob Tricker, CORPORATE GOVERNANCE: PRINCIPLES, POLICIES AND PRACTICES, 3. Articles i. ii. iii. iv. v. Rockefeller Philanthropy Advisors “Unlocking the power of proxy” Available at www.asyousow.org/publications/powerproxy.pdf Investment company institute “Trends in Proxy Voting by Registered Investment Companies” Available at www.ici.org/pdf/per16-01.pdf “Access to Corporate Machinery” available at http://www.jstor.org/stable/1339801 Accessed: 31/08/2013 03:23 Roundtable on Proxy Voting Mechanics: “Topic One: Share Ownership and Voting” Available at www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm 4. Case laws: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Cousins v. International Brick Co Ltd [1931] 2 Ch 90,100. Whitlam v. Australian Securities and Investments Commission [2003] NSWCA 183 Strang v. Edson (C. C. A. 8th, 1912) 198 F. 813. Atkinson v. Foster 27 Ill. App. 63 (1887), affd. 134 11. 472, 25 N. E. 528 (189o). White v. Ferris 42 Conn. 560 (1875) Schreiber v. Carney, 447 A.2d 17 (Del. Ch. 1982) Hewlett v. Hewlett-Packard Co., 2002 WL 549137 (Del. Ch. Apr. 8, 2002) Hilton Hotels v. ITT Corp case Paramount v. Time 571 A.2d 1140, 565 A.2d 280 (Del. 1989) Ansett v. Butler Air Transport ltd [1958] 75 WN (NSW) 306 Oliver v. Dalgleish [1963] 3 All ER 330 11

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