McConvill, James; Bagaric, Mirko --- "Ambiguities and Inconsistencies in Relation to the Obligations of Proxies under Corporations Law: A Model for Reform" [2004] UNELawJl 4; (2004) 1(1) University of New England Law Journal 109

AMBIGUITIES AND INCONSISTENCIES IN RELATION TO THE OBLIGATIONS OF PROXIES UNDER CORPORATIONS LAW: A MODEL FOR REFORM[1]

James McConvill* and Mirko Bagaric**

ABSTRACT

This article reconsiders the important question which came to light as a result of the controversial 2002 Coles Myer annual general meeting: do directors that are appointed as proxy have an obligation to vote as directed (and indeed should they)? A recent decision of the New South Wales Supreme Court, which was subsequently approved on appeal, stands for the proposition that proxy holders are agents of the shareholders that appointed them. However, currently the Corporations Act only requires a Chairman appointed as proxy to vote as directed — not an ordinary director. This article briefly explains the present state of the law in Australia on this issue, and then explores some interesting recent judicial remarks which may suggest that ordinary directors appointed as proxy must vote as directed in order to satisfy their director’s duties (both common law and statutory) to the company. We finally outline a proposed statutory reform initiative which seeks to remove the present uncertainty in the law by introducing a blanket requirement that all proxy holders must vote as directed — subject to these proxy holders first providing their informed consent to be appointed as proxy.

I INTRODUCTION

There has to date been very little written in Australia on the question as to whether a ‘proxy’,[2] appointed to act on behalf of a shareholder at a meeting of members, has a duty to vote as directed by the shareholder as appointed.

This question did, however, arise for consideration given the very public events at the 2002 Coles Myer Annual General Meeting (‘AGM’), whereby director Solomon Lew decided not to vote approximately 117 million proxy votes (representing the votes of approximately 170,000 Coles Myer shareholders) in favour of his re-appointment as director. It has been reported that Mr Lew decided not to vote these proxies, which he had solicited by sending out proxy nomination forms to all Coles Myer shareholders as part of a $!0 million campaign to seek

re-appointment to the board of the company, once it became clear that the weight of votes was against his re-appointment as director.[3]

The decision by Solomon Lew not to vote the proxies at the Coles Myer AGM raised a large question mark as to whether

Mr Lew’s action was legal. The reason for this uncertainty is that Solomon Lew personally solicited the proxies he eventually declined to vote, rather than the company issuing the proxy forms nominating Mr Lew as director, and also because Solomon Lew was an ordinary director of Coles Myer and not the Chairman of the meeting.

At present, under s 250A(4) the Corporations Act 2001 (Cth) (‘Corporations Act’), the chairperson of a meeting who is appointed as proxy for a meeting of company shareholders has an obligation to vote as directed, yet an ordinary director or other person appointed as a proxy is not required to vote as directed. Furthermore, the chairperson appointed as proxy is only required to vote as directed when a proxy appointment form has been sent out by the company to its shareholders. When the chairperson solicits the proxy personally rather than through the company, they are free to vote or not to vote as they so choose.[4]

It will be established by the authors that in these two respects s 250A departs from the position at common law, confirmed recently by Gzell J in the decision at first instance in ASIC v Whitlam,[5] that a proxy is an agent of the shareholder as principal and is obliged to vote as instructed — so that the will of the principal is sufficiently represented. The authors will argue that, using the recent Coles Myer proxy battle as an example, this is a serious deficiency in the statutory regulation of proxy voting in Australia, which should be addressed so that the common law and Corporations Act are consistent rather the cause of confusion and uncertainty.

This inconsistency was recognised by the Companies and Securities Advisory Committee (‘CASAC’) in its June 2000 report, Shareholder Participation in the Modern Listed Public Company, when it recommended that there should be a legislative requirement for any person put forward by the company board as a proxy to vote the proxies on a poll as directed. The Australian government has yet to adopt this recommendation. In this article, the authors support the findings and recommendations of the CASAC, but suggests that any reform of this aspect of the Corporations Act should go further to cover all proxies, whether personally solicited, or resulting from the company sending the proxy form to shareholders.

II THE PRESENT STATE OF THE LAW: ARE PROXIES REQUIRED TO VOTE AS DIRECTED?

Rather than there being one clear rule in Australia setting in place the obligations of proxies, these obligations are derived from a variety of different sources. In this part, the authors consider the present state of the law in Australia as to whether proxies are required to vote as directed, derived from the specific common law position, the relevant provisions of the Corporations Act, and also the general duties of directors (potentially applicable when a director of the company is appointed as proxy, though this is not settled following the appeal decision in Whitlam v ASIC, as will be discussed below).

A Common Law Obligation of a Proxy to Vote

as Directed

1 Background

The seminal decision on the obligation of proxies to vote as directed is The Second Consolidated Trust v Ceylon Amalgamated Tea & Rubber Estates Ltd & Others.[6] A discussion of the facts of the case is not required for our purposes, as the decision essentially related to an interpretation of a company trust deed which contained certain rules about when and how proxies should vote on a resolution to change the trust deed (it was sought to change the trust deed in order to alter the conditions under which debenture stock was held). The issue was whether the Chairman was required under the trust deed to demand a poll so that proxy votes against the resolution would have to be counted. It was held that the Chairman did in fact have a duty to demand a poll. Of more interest and long-standing application, however, was the statement of Uthwatt J towards the end of his judgment that

[i]n addition to having this duty to demand a poll or exercise his power to demand a poll, I think — and I think Fidler [the Chairman] as a business man must take the same point of view — he would be under a duty in law to exercise all the proxies which he held as chairman in accordance with the instructions which they contained.[7]

This statement from Second Consolidated Trust appears therefore to be the origin of the common law’s dichotomy between the obligation of a Chairman appointed as proxy to act as directed and the duty of any other person appointed as proxy. For example, in Hopkins Professional Services Pty Ltd and Others v Foyster Holdings P/L and Others,[8] Barrett J cited Second Consolidated Trust and said:

It is true that a person appointed as proxy by an instrument containing a direction as to the manner of voting may come under a positive legal duty to vote that way.[9]

Whilst the reason for the common law distinguishing between a proxy who is chair of the meeting and any other proxies appears to be simply due to the particular facts that emerged in the main cases (namely Second Consolidated Trust and subsequent cases), an interesting question is whether there exists any underlying rationale for distinguishing between a proxy who is chair of a meeting (or a director of the relevant company) and other proxies. Indeed, this question becomes particularly important in the context of proposing legislative amendments to remove any distinction between the obligations of the chair as proxy and any other proxies. Although from the authors’ research there doesn’t appear to be any scholarly consideration of this issue, it is clear that the reason why it has been necessary for the common law to emphasise that a Chairman appointed as proxy is obliged to vote as directed is simply due to the enormous influence that the Chairman has in relation to the conduct of company meetings as to whether or not proposed resolutions are passed. Due to the usual practice of shareholders appointing the chair as proxy to vote on their behalf at company meetings, if the chair was at liberty to use the proxies to vote as he or she so chose, rather than to vote as directed, the chair would in a large number of cases have the ability to determine the outcome of a resolution by either voting a certain way or abstaining. This would be a particularly concerning position where (as in the Whitlam case) the chair has a personal interest in the outcome of the resolution and uses the proxies to vote or abstain from voting to avoid a resolution which is contrary to that preferred by the chair.

Notwithstanding this explanation for the traditional distinction between the obligations of the chair as proxy and the obligations of other proxies under the common law, it is the view of the authors that this does not justify maintaining the distinction under the Corporations Act. Any amendment to the Corporations Act would not involve reducing in any way the obligations of the chair, they would remain the same. What the legislative amendments would do is change the obligations of other proxies to reflect those of the chair, so that all proxies would be required to vote as directed. In other words, the underlying rationale for the chair having a heightened responsibility when appointed as proxy would be respected by making sure that such responsibility attaches to any person appointed as proxy.

2 The Latest Chapter — The Whitlam Case

(a) Decision at First Instance

The extent to which proxies are obliged to vote as directed arose for consideration more recently in a very public case between Australia’s corporate regulator, the Australian Securities and Investments Commission, and Nicholas Whitlam, a prominent company director and son of former Australian Prime Minister Gough Whitlam. Again, it is unnecessary to discuss in detail the facts involved in this case. The defendant, Nicholas Whitlam, was Chairman of the 1998 AGM of large insurer NRMA Ltd. It is important to note here that in Australia, the usual practice is for proxy forms which are circulated by the company to nominate the chair of the meeting to act as proxy if someone else is not nominated by the shareholder.[10] In some cases, however, the company will nominate a director of the company who is not the chair,[11] or a shareholder may nominate a director other than the chair, or the director may personally solicit proxy votes as occurred with Solomon Lew at the 2002 Coles Myer AGM.

The defendant was accused by ASIC of failing to vote a resolution (‘Resolution 6’) contrary to the instructions of members of NRMA Ltd who appointed him proxy. The resolution was to alter the NRMA Ltd Constitution in order to increase the fixed sum remuneration to be distributed among directors from $617,000 to $665,000. A second resolution (‘Resolution 7’), conditional on the passing of Resolution 6, proposed increasing the fixed amount by $190,000 to $855,000. As a director and president of NRMA Ltd, the defendant had a personal interest in the resolution and therefore supported the resolution being passed. The defendant, as proxy, filled out but did not sign the poll paper with respect to 3973 votes against Resolution 6. The effect of these votes not being signed by the defendant was that they were not counted, and accordingly Resolution 6 passed as a special resolution. This was due to rules applicable to the AGM under the NRMA Ltd Constitution which required a poll paper to be signed to constitute a valid vote.[12]

At first instance,[13] Gzell J of the New South Wales Supreme Court found that Whitlam deliberately omitted to sign the poll paper, with the deliberate intention of disenfranchising members who had appointed him proxy and who required him to vote against Resolution 6.[14] Gzell J held that given Whitlam was a director of NRMA at the time of being appointed proxy, by not voting as directed, Whitlam breached a number of his duties as director (particularly the duty to act honestly and not to make improper use of his position as director). Gzell J, whilst acknowledging that the duties of a chairman of a meeting are distinct from the duties owed by a director, argued:

That does not mean, however, that the duties of a chairman are mutually exclusive or that a breach of the Corporations Law section 250A cannot also constitute a breach of [the relevant director’s duties provisions]. None of the authorities and texts to which reference is made ... compel a contrary conclusion.[15] ... A director of a company does not cease to be a director because he or she chairs a meeting of members.[16] ... The defendant was obliged, pursuant to section 232(6), not to make improper use of that position to gain an advantage for himself or any other person. In voting in accordance with the instruction of a member appointing him proxy the defendant would not infringe any duties cast upon him as director.[17]

Gzell J also held that Whitlam breached his duty as Chairman under s 250A(4)(c) of the Corporations Act to vote as directed when appointed as proxy.

While it could be said that Gzell J’s decision simply applied

s 250A(4)(c) of the Corporations Act which required the defendant as Chairman to vote on the poll as instructed, his Honour made it clear that

[t]he obligation of a proxy to vote in accordance with the instruction of the member appointing him or her is not confined to a chairman and does not have its foundation in the Corporations Act, s 250A(4)(c).[18]

Using Second Consolidated Trust as authority, his Honour explained that the agency relationship established between the proxy and his or her appointer meant that the duty to vote as instructed applies to all proxies at common law, howsoever appointed. According to his Honour:

A proxy, as agent, is duty bound to carry out the instructions of his or her principal. It follows that the failure of any director appointed as proxy to vote in accordance with the instructions of the member appointing him or her is in breach of duty qua director.[19]

These comments of Gzell J went further than the position in Second Consolidated Trust, making it clear that at least under the common law, any proxy is required to vote as directed.

(b) Appeal

Nicholas Whitlam subsequently appealed this decision to the New South Wales Court of Appeal. It is important to note, however, Whitlam did not appeal that aspect of the decision at first instance which extended the application of the Second Consolidated Trust principle to apply to all proxies, nor did the New South Wales Court of Appeal in its judgment disturb this aspect of Gzell J’s decision. Accordingly, the above statement of Gzell J as to the scope of the obligation of proxies to vote as directed remains good authority in Australia.

The New South Wales Court of Appeal handed down its decision on 10 July 2003. Despite the fact that the Court of Appeal was not satisfied on the evidence that Whitlam did not deliberately fail to sign the poll paper, the Court of Appeal upheld the appeal, finding that Gzell J’s decision was vitiated by certain errors and, accordingly, could not be permitted to stand.[20]

(i) Director’s Duties Issue

The Court of Appeal disagreed with the decision of Gzell J at first instance that Whitlam’s failure to vote as directed amounted to a breach of his duties as director to act honestly and not to use his office for personal advantage.[21] The Court of Appeal made the important point that the fiduciary duty that a chairman (or indeed any director) owes in their capacity as proxy is not owed to the general body of members (in which director’s duties to the company can be triggered), but rather is owed to the specific shareholder who has appointed the chairman/director as their proxy. The Court of Appeal (comprising Hodgson, Ipp and Tobias JJA), stated:

The primary judge was correct to say that a director does not cease to be a director because he or she chairs a meeting of members; and indeed the circumstance that a director is acting as chairman or in any other role does not necessarily mean that he or she is not at the same time exercising a director’s powers or discharging a director’s duties. But he or she might not be doing so: not everything a director does that affects his or her company is an exercise of a director’s powers or a discharge of (or even governed by) a director’s duties.[22]

The Court of Appeal commented, however, that the main reason why it did not support the view that the failure of a director appointed as proxy to vote as directed necessarily amounted to a breach of director’s duties to the company was that ASIC did not specify in its pleadings why Whitlam ‘owed duties in relation to the proxies, not merely to the proxy givers, but also to the company; or otherwise suggest why his duties in respect of the proxies were duties owed as a director’.[23]

Indeed, in its judgment the Court of Appeal made a very interesting obiter dicta remark that ASIC could perhaps have amended its statement of claim to properly make out a link between Whitlam’s failure to sign the proxy forms as director and his duties as director. The Court of Appeal raised two possible arguments by which this could possibly be established:

Accordingly, in line with the Court of Appeal’s decision, the fact that a chairman appointed as proxy is also a director of the company is not sufficient to support a claim that a chairman is discharging his duties as a director when acting as proxy. An interrelation between the obligations of proxy (owed to the appointing shareholder) and the obligations of the director to the company first needs to be established. Establishing this interrelationship really becomes a factual exercise, with the Court of Appeal suggesting that the above two arguments could be relied on to support a submission that failure to vote as directed constitutes a breach of director’s duties.

In addition to the obiter dicta suggestions by the Court of Appeal in Whitlam, the present authors also believe that some interesting comments made recently by Austin J in the New South Wales Supreme Court in his interlocutory judgment in ASIC v Rich & Ors[25] could also be drawn upon in support of a submission that a failure of a director appointed as proxy to vote as directed constitutes not only a breach of the proxy’s obligations to the appointing shareholder, but also a breach of director’s duties to the company. ASIC v Rich was not a case dealing with the obligation of directors appointed as proxies, but rather considered whether — for the purposes of the duty of due care and diligence under s 180(1) of the Corporations Act which is to be determined, inter alia, according to the ‘responsibilities’ held by a particular director[26] — the obligations of a non-executive director appointed as chairman of the company (One.Tel, which was placed into voluntary administration) were greater than that of other non-executive directors, particularly considering that the chairman was a chartered accountant with an immense amount of commercial experience, and was also chairman of the company’s Finance and Audit Committee. Austin J agreed with the submission of ASIC, deciding that the chairman’s position, along with his commercial experience and his occupation of other positions in the company all contributed to his ‘responsibilities’ within the company, and accordingly, a heightened duty of due care and diligence for the purposes of s 180(1) of the Act.

During proceedings before Austin J, ASIC outlined that it intended to use two kinds of evidence to establish that a chairman has greater responsibilities than any other director in relation to the operation of the board and the performance of the company: (1) expert opinion evidence from prominent company directors in Australia of responsibilities undertaken by the chairman of listed public companies in Australia, and, more importantly, (2) relevant extracts from books, articles, reports and papers from commentators on corporate governance describing the customary responsibilities and role of the chairman of a publicly listed company in Australia. As to the material in (2), Austin J said:

Much of the literature of corporate governance is in the form of exhortations and voluntary codes of conduct, not suitable to constitute legal duties. It is sometimes vague and less than compelling, and must be used with caution. Nevertheless, in my opinion this literature is relevant to the ascertainment of the responsibilities to which Mr Greaves [the Chairman] was subject during the [relevant] period.[27]

It is the corporate governance material discussed in (2), of ever-increasing abundance due to governments and commentators around the world outlining their proposed solutions to the string of recent corporate collapses, which is particularly relevant to our observance of the status of the duty of director proxies to vote as directed in Australia, especially when considering the following comments of Austin J in his judgment:

It may appear, at first blush, to be unduly harsh on a person in Mr Greaves’ position that evidence of this kind might be relied upon to establish that in 2001 he was subject to responsibilities [being special ‘heightened’ responsibilities of the Chairman, which ASIC was trying to establish] and, ultimately, legal duties never before set out in a statute or by judicial decision. It should be remembered, however, that the court’s role, in determining the liability of a defendant for his conduct as company chairman, is to articulate and apply a standard of care that reflects contemporary community expectations.[28]

In the opinion of the authors, it is hard to estimate the importance and potential implications of the approach outlined by Austin J above that the court’s role is to articulate and apply a standard a care for a director in their capacity as chairman that reflects contemporary community expectations, and that reference to published corporate governance material is one of the primary mechanisms to be used by the court to achieve this. In Australia, commentary on Austin J’s decision in ASIC v Rich has been narrowly focused on what the decision means in terms of the obligations of the chairman, but in the authors’ opinion there is no reason why Austin J’s comments should be so narrowly cast and why they cannot also apply to the obligations of directors in other capacities, such as their role as appointed proxies (which the NSW Court of Appeal in Whitlam suggested was central to the proper running of a company’s annual general meeting).

If we were to apply the comments of Austin J in ASIC v Rich, so that corporate governance materials could be drawn upon by the court to articulate and apply a standard of care for a director appointed as proxy that reflects contemporary community expectations, we believe that a court would be drawn to conclude that there is an interrelationship between the obligations of a director appointed as proxy and director’s duties to the company, and that an obligation to vote and to vote as directed would accord with their constructed view of contemporary community expectations.

A common feature in recent corporate governance reform packages and best practice statements both in Australia and internationally,[29] is a statement and/or initiatives emphasising that shareholder participation and effective relations between the board and the general body of shareholders is central to a framework of good corporate governance practices within an organisation. Indeed, active shareholder participation and effective director-shareholder relations could be considered corporate governance ‘norms’. In this respect, proxy voting is important in ensuring effective shareholder participation, in that the ability to appoint a proxy to vote on the shareholder’s behalf enables the shareholder to participate at company meetings when they are not able to participate in person.

Proxy voting is also important in promoting and facilitating effective relationships between directors and shareholders, as by directors making themselves available to represent members who are unable to attend a company meeting, the directors demonstrate that they respect the right of shareholders who cannot attend company meetings in person to also make an active and appropriate contribution to the proper running of the company’s AGM. If directors as appointed proxy are to be given a discretion not to vote on a resolution as directed by the appointing shareholder, the effect would be an undermining of shareholder participation and director-shareholder relations, as the directors would effectively be placing their ability to exercise this discretion above the rights and interests of shareholders. Accordingly, given that recent corporate governance material both in Australia and throughout the world is consistent in emphasising that enhanced shareholder participation and a workable relationship between shareholders and the board of directors is central to good corporate governance, and requiring all appointed proxies to vote as directed would be consistent with these objectives, it is our view that ASIC v Rich could be relied upon by the courts to set in place an obligation for all proxies to vote as directed, on the basis that this reflects contemporary community expectations relating to corporate governance practices.

(ii) Section 250A Issue

In relation to Gzell J’s finding at first instance that Whitlam’s initial decision not to vote as directed constituted a breach of s 250A of the Act, the Court of Appeal took the view that, based on the Victorian decision in Link Agricultural Pty Ltd v Shanahan & Pivot Ltd,[30] even though the returning officer refused to admit the votes at first given that Whitlam failed to sign the poll paper, as (after legal advice was received by Whitlam) the votes were counted, Whitlam did indeed ‘vote’ and could not have breached his obligation to cast the votes under s 250A(4)(c). Importantly, as ASIC had not alleged that Whitlam attempted to breach s 250A, it was not necessary to consider that question.[31]

The Court of Appeal also found that Gzell J’s main finding of fact, that Whitlam’s failure to sign the proxy was deliberate and hence a serious offence under the Corporations Law as it then was in 1998, could not be supported by evidence and arose due to an error of reasoning.

B Section 250A(4) of the Corporations Act

The current provision in the Corporations Act dealing with the requirement of proxies to vote as directed is s 250A(4). Sub-section (4) provides:

(4) An appointment may specify the way the proxy is to vote on a particular resolution. If it does:

(a) the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way; and

(b) if the proxy has 2 or more appointments that specify different ways to vote on the resolution — the proxy must not vote on a show of hands; and

(c) if the proxy is the chair — the proxy must vote on a poll, and must vote that way; and

(d) if the proxy is not the chair — the proxy need not vote on a poll, but if the proxy does so, the proxy must vote that way. (emphasis added)

The operation of s 250A(4) is qualified in two important ways. First, a clarification note to s 250A(4) provides that notwithstanding s 250A(4), a company’s constitution may provide that a proxy is not entitled to vote on a show of hands pursuant to s 249X(2) of the Corporations Act. The reason for this qualification is that it is considered that allowing a proxy to vote on a show of hands would potentially impede the progress of a meeting.[32]

The second qualification is contained in s 250A(5) of the Corporations Act, which provides:

(5) A person who contravenes subsection (4) is guilty of an offence, but only if their appointment as a proxy resulted from the company sending to members:

(a) a list of persons willing to act as proxies; or

(b) a proxy appointment form holding the person out as being willing to act as a proxy.

An excellent summary of the dual operation of s 250A(4) and (5) of the Corporations Act is provided in The Laws of Australia:

The [Corporations Act] provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution. If it does so, where the proxy is not the chair of the meeting, the proxy need not vote, but if the proxy votes he or she must vote according to their instructions. If the proxy is the chair, the proxy must vote and must vote in the manner specified.[33]

The reason why s 250A(4) requires the chair of the meeting to vote on a poll as directed, but not a proxy who is not the chair, seems to be that this was the position at common law (established in Second Consolidated Trust) at the time the section was enacted.[34] At that time, it was clear that a chair of the meeting was ‘under a duty in law to exercise all the proxies which he had as chairman in accordance with the instructions which they contained’,[35] but this principle had not extended to apply to all proxies.

Accordingly, with recent court decisions such as ASIC v Whitlam (upheld on this point by the NSW Court of Appeal in Whitlam v ASIC) confirming that the Second Consolidated Trust principle now extends to all proxies due to the agency relationship created between the proxy and appointer, there is no longer any reason why the obligation to vote as directed should apply to the chair, but not a proxy other than the chair. As the CASAC stated in its 2000 report Shareholder Participation in the Modern Listed Public Company:

The obligation of the chair to vote on a poll overcomes the possibility of that person intentionally abstaining from voting the proxies given to him or her where a majority of those proxies direct a vote which is contrary to the result preferred by the chair. However, this problem may still arise if the proxy form circulated by the board stipulates a person other than the chair as the proxy. The [Corporations Act] does not oblige that proxy to vote the shares on a poll, and it is uncertain whether a person put forward by the board, other than possibly a director, would be under any fiduciary duty to do so.[36]

Due to this seemingly unnecessary dichotomy between the obligation of a chair, and a person other than the chair, to vote on a poll under s 250A(4) of the Corporations Act, the CASAC (after considering the evidence and submissions), recommended that:

The [Corporations Act] should stipulate that any person put forward by the company as a proxy must vote the proxies on a poll at the meeting. This would overcome the possibility of a shareholder being disenfranchised by a person, other than the chair, who is put forward by the board as a proxy deliberately failing to vote that proxy in accordance with the shareholders instructions.[37]

Section 250A(4) is actually quite unique when one considers statutory obligations imposed on proxies under companies legislation in other common law jurisdictions (the UK,[38] Canada,[39] USA,[40] Delaware USA,[41] New Zealand[42] and Papua New Guinea[43]). Apart from Canada, Australia is the only jurisdiction that has created a statutory obligation on the part of proxies to vote as directed, and is certainly the only jurisdiction to distinguish between the obligations of the chair of the meeting and the obligations of other persons appointed as proxies. In the other jurisdictions, it is left for the company to specify in its constitution/articles of association how a proxyholder is to vote. In Canada, under s 152(4) of the Canada Business Corporations Act [R.S. 1985, c. C-44] it is an offence, punishable by a fine not exceeding five thousand dollars or a term of imprisonment not exceeding six months or both, to fail to comply with the directions of the shareholder without reasonable cause, however it seems that this obligation only applies when the person appointed as proxy personally solicited the proxy votes under s 152(1) of the Act.[44] Given that Australia has already gone down the path of expressing in statutory form the obligations of proxies, it would be unwise to now change this and require companies to amend their constitutions to specify the obligations of proxies, however there is also no foreign precedent to justify continuing with the different obligations of the chair and persons other than the chair under the Corporations Act.

In part three of this article, the authors suggest that the Australian government should act to amend s 250A(4) of the Corporations Act to remove the distinction between a proxy who is the chair of the meeting and a proxy other than the chair. Further, in order to ensure that the obligation to vote as directed applies to all proxies, the authors will recommend that s 250A(5), which qualifies s 250A(4) by specifying that the obligation to vote as directed only applies when the proxy’s appointment results from the company circulating a list of persons willing to act as proxies or a proxy nomination form (and not when a proxy is solicited by a person seeking to be nominated as proxy), be repealed in its entirety. According to the authors, these legislative amendments are necessary if s 250A(4) is to continue to reflect the position at common law.

III REFORMING S 250A(4) OF THE

CORPORATIONS ACT

A Overview

The authors will now outline our proposed reform of s 250A(4). The proposed reform involves creating a single duty, applicable to all proxies, that all persons appointed as a proxy to vote at a meeting of members of the company must vote as directed.

The authors have established in the previous section that the multifarious approach to regulating how proxies are to vote at meetings is the cause of unnecessary complexity and confusion — a point that was made clear following the 2002 Coles Myer AGM when commentators were unsure whether Solomon Lew as an ordinary director was actually required to vote the proxy votes or whether he was entitled not to do so. While under the common law it would appear that, following the Whitlam decision, Solomon Lew would be obliged as agent to vote the proxy votes as directed by the appointer, s 250A(4)(d) states that a proxy who is not the chair of the meeting is not required to vote on a poll. Even if Solomon Lew was the chair of the meeting, as the proxy votes were personally solicited by Mr Lew rather than by the company, s 250A(5) would mean that he still would not be required to vote the proxy votes. Accordingly, sections 250A(4)(d) and 250A(5) override the position at common law. However, notwithstanding that there is no contravention of s 250A(4), Solomon Lew in his capacity as director could potentially be found in breach of his general director’s duties under the Corporations Act, such as the duty to act in good faith in the best interests of the company, to act with due care and diligence, and the duty not to misuse his position as director — subject to the comments expressed by the Court of Appeal in the Whitlam case about this line of argument.

Thus, there is no clear answer for what should be a very simple question: what are the consequences of a director appointed as proxy failing to vote as directed?

This is an unacceptable situation, particularly considering that there was originally no real underlying rationale for distinguishing between the obligations of the chair of a meeting, and a person other than the chair, appointed as proxy to vote as directed, other than to reflect the common law position as it then stood. As this dichotomy of obligations no longer applies under Australian common law, given that the statement of Gzell J at first instance in Whitlam (which was not disturbed by the Court of Appeal), there is no longer any justification for maintaining the distinction. Accordingly, s 250A(4) and (5) of the Corporations Act should be amended to regain consistency with the common law.

B Proposed Changes

According to the authors, the objective of amending the Corporations Act should be to remove any qualifications so that the obligation to vote as directed is applicable to all proxies in all circumstances. The authors propose that s 250A(4) and (5) be repealed and replaced by a new s 250A(4) which would state that if upon appointment it is specified by the shareholder that a proxy is to vote a particular way, then the proxy must vote that way. So that the new duty applies to all proxies in all circumstances, the authors propose that both the clarification note to the existing s 250A(4) (which states that a company’s constitution may provide that a proxy is not entitled to vote on a show of hands),[45] as well as s 250A(5) (which states that s 250A(4) is only applicable if the proxy is appointed as a result of the company sending out a list of nominees or proxy appointment forms to members) also be repealed.

In consideration of this broad change to the obligation of proxies to vote in Australia, the authors propose that an express provision be included in the Corporations Act making it a requirement that a person’s consent be obtained before they can be appointed as a proxy (and thus have a duty to vote as directed by the appointer). It would also be stated that a chair or director of the relevant company included on a company’s proxy appointment form will be taken to have consented to being appointed as a proxy for the purposes of the provision. While this amendment could potentially carry the burden of adding to the administration involved in organising and conducting company meetings, it is submitted that this would be outweighed by the benefit of avoiding the potential problem of a person appointed as proxy being held liable for failing to vote when they have no relationship with the appointer and no intention of attending the meeting to vote.

1 Discussion

In relation to the proposed repeal of the clarification note to s 250A(4), while the argument may be made that allowing proxies to vote on a show of hands would slow down the progress of meetings and be the cause of delay and expense, the response of the authors is that if this is the price of ensuring that no shareholders are disenfranchised, then so be it. Shareholders, being the true owners of the company through the mechanism of share ownership,[46] have a sufficient enough interest in the company to require corporate management to accommodate this. Regarding the proposed repeal of s 250A(5), this would prevent a repeat of what occurred at the 2002 Coles Myer AGM as directors or other persons appointed as proxy by personally soliciting proxy forms would no longer be able to refuse to vote the proxy votes, which undermines the legitimate expectations of shareholders.

The authors’ reform proposal goes further than that recommended by the CASAC in its 2000 report as CASAC did not recommend that the obligation to vote as directed also apply when voting occurs on a show of hands (if otherwise specified in the company’s constitution), or when a proxy is appointed through personally solicited proxy votes. The authors believe that this extra element of reform is necessary so that the obligation of proxies to vote as directed applies without exception or qualification, and so that there is no longer the possibility that events like those which transpired at the 2002 Coles Myer AGM can occur again in Australia. This is a reflection not only the position at common law, but also common sense. It must be remembered that a proxy is 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’.[47] In very simple terms, what is the point of appointing someone to be your representative and vote at company meetings, if they are not obliged to vote as you have directed them to? When the issue is put like this, it is clear that amendment of the Corporations Act to specify that all proxies must vote as directed is long overdue.

The proposed reform is also consistent with the legal and economic interests of the respective parties. While directors are appointed to manage and ‘direct’ the affairs of the company, they do so for and on behalf of the shareholders who are the principal stakeholders of the company. The primary manner in which shareholders exercise their (ultimate) authority over the affairs of the company is through their voting rights. These rights should not be taken away lightly. Individuals place considerable importance on their share ownership. This is evident from the large sums of money invested in the share market. Individuals do not invest money in products or activities in relation to which they are indifferent. The participation rights that inhere in share ownership should not be permitted to be trumped by such a fickle and irrelevant consideration as whether a shareholder can physically attend a meeting. There are an infinite number of reasons that may inhibit attendance at a meeting. None of them would appear to justify shareholders from being deprived of their capacity to have some control and input into their investment. A shareholder’s interest in the company is durable and extends for the entire period that they own a share. It is not contingent upon or commensurate with their capacity to attend a meeting — ‘so much should not turn on so little’.[48]

IV CONCLUSION

In light of the events at the 2002 Coles Myer AGM, the authors believe that it is time to reconsider the law on the obligation of proxies to vote as directed in Australia, and it is important that legislators work towards implementing the reform proposal set out by the authors in this article. This reform proposal will ensure that shareholders are not disenfranchised, and that the will of shareholders is sufficiently represented at company meetings. Importantly also, this reform initiative will provide for certainty in an area of corporate law which is burdened by complex and contradictory rules and a mix of competing statutory provisions and judicial statements.

∗ Lecturer in Law, Deakin University; Barrister and Solicitor of the Supreme Court of Victori[a]

∗∗ Professor and Head of the Law School, Deakin University

1 This article is a substantially revised version of an earlier paper published as James McConvill, ‘The Obligation of Proxies to Vote as Directed: The Present State of Play and the Need for a Resolution’ (2003) 21 Company and Securities Law Journal 262, to take into account the appeal decision in Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 46 ACSR 1 and the interlocutory judgment of Austin J in Australian Securities and Investments Commission v Rich [2003] NSWSC 85; (2003) 44 ACSR 341, which has meant that much of the discussion in the earlier article is no longer relevant.

[2] A proxy is a person ‘who has authority to attend and participate in the meeting and to vote according to the instructions of the person who has appointed the proxy’: see Roman Tomasic and Stephen Bottomley, Corporations Law in Australia (1995) 333. See also Re Marra Developments Ltd (1976) 1 ACLR 470, 472 (Wotten J). Section 249X(1) and (3) of the Corporations Act provides that a member of a company who is entitled to attend and vote at a company meeting may appoint a person(s) as his or her proxy(s) to attend and vote instead of the member at the meeting. It should be noted that recently the Australian Government recommended that s 249X(1) be amended so that a body corporate, as well as a natural person, could be appointed as a proxy.

[3] See Simon Evans and Adam Shand, ‘Lew Bungle Hits 170,000 Coles voters’, The Australian Financial Review (Sydney) 22 November 2002, 1; Simon Evans, ‘Lew’s vote mistake creates confusion’, The Australian Financial Review (Sydney) 22 November 2002, 60.

[4] See s 250A(5) of the Corporations Act.

[5] [2002] NSWSC 591; (2002) 42 ACSR 407. See now Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 46 ACSR 1.

[6] [1943] 2 All ER 567 (‘Second Consolidated Trust’).

[7] Ibid 570 (authors’ interpolations).

[8] [2001] NSWSC 915; (2001) 39 ACSR 519.

[9] Ibid 522. The commentary in The Laws of Australia (Business Organisations, 4.2, ‘Company Management’), however, takes a more conservative view of the statement of Uthwatt J (indeed, it really just paraphrases the position under the Corporations Act). See [72]: ‘The appointment of a proxy does not necessarily impose any duty on the proxy to attend or vote, although it is possible that such a duty may arise where proxy forms nominating a director are sent out by the board’. See also Link Agricultural Pty Ltd v Shanahan & Others [1998] VSCA 3; (1998) 28 ACSR 498.

[10] See, for example, the Investment and Financial Services Association (IFSA) Guidance Note No 2.00, ‘Corporate Governance: A Guide for Investment Managers and Corporations’ (July 1999), Appendix B (Model Proxy Form). Go to:

<http://www.ifsa.com.au/IFSAWeb/attach.nsf/Attachments/Standards+and+Guidance+Notes~2GN_Corporate+Governance.pdf/$File/2GN_Corporate+Governance.pdf> at 30 June 2004.

[11] Australian Stock Exchange Listing Rule 14.2.2 states that the person specified on the proxy to be appointed as proxy need not be the chair of the meeting.

[12] ASIC v Whitlam [2002] NSWSC 591; (2002) 42 ACSR 407, 409.

[13] ASIC v Whitlam [2002] NSWSC 591; (2002) 42 ACSR 407.

[14] Ibid 450.

[15] Ibid 449.

[16] Ibid.

[17] Ibid.

[18] Ibid 449.

[19] Ibid 449 (emphasis added).

[20] See generally, James Edwards and Corrine Campbell, ‘Whitlam v Australian Securities & Investments Commission: What the decision of the Court of Appeal means for Directors acting as Proxies’ (2003) 21 Company and Securities Law Journal 457; Sebastian Hempel and Silvana Noveska, ‘Casting proxy votes: Which hat was Mr Whitlam wearing?’ (2003) Keeping Good Companies (Australia), Issue 8, 476. ASIC was intending to seek special leave to appeal this decision to the High Court of Australia, but subsequently announced that it was not proceeding with this application.

[21] See Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 46 ACSR 1.

[22] Ibid 62.

[23] Ibid 63.

[24] Ibid 64. See Edwards and Campbell, above n 20: ‘The only basis advanced by ASIC was that Mr Whitlam became chair and proxy as director and this was not sufficient to support the allegation that Mr Whitlam was discharging his duties as a director when dealing with the poll paper. ... The court seemed to suggest (though the reasoning was obiter dicta) that had ASIC framed Mr Whitlam’s failure to fulfil his obligation as a proxy, as a failure to contribute to the orderly and efficient running of the members meeting, then ASIC may well have succeeded in its claim.’

[25] [2003] NSWSC 85; (2003) 44 ACSR 341. See John Duns, ‘Case Note– Australian Securities and Investments Commission v Rich’ (2003) 11 Insolvency Law Journal 133.

[26] Section 180(1) of the Corporations Act 2001 provides:

‘A director or other officer must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.’

[27] [2003] NSWSC 85; (2003) 44 ACSR 341, 358.

[28] Ibid (authors’ interpolations) (emphasis added).

[29] See Principle 1 of the OECD’s Principles of Corporate Governance which refers to the basic rights of shareholders to ‘participate in, and be sufficiently informed on, decisions concerning fundamental corporate changes.’ The Principles of Corporate Governance is available on-line at: http://www.oecd.org/dataoecd/47/50/4347646.pdf at 31 December 2003. In Australia, the government’s CLERP 9 reform paper (containing recommendations relating to audit reform, financial disclosure and shareholder participation in response to a number of corporate collapses in Australia in 2001 and 2002) states: ‘The role of shareholders is recognised as critical for good corporate governance practice. Shareholders do not assume responsibility for day-to-day management of the corporation. However, they can influence the behaviour of the corporation over the longer term through exercising influence on fundamental matters.’ Available on-line at <http://www.treasury.gov.au/documents/403/HTML/

docshell.asp?URL=Ch11.asp> at 30 June 2004. In the United States, the objects clause of the Sarbanes-Oxley Act 2002 (which introduced a range of corporate governance rules in response to the collapse of Enron and WorldCom) states that the purpose of the Act is to ‘protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws’. Furthermore, in July 2003 the Securities and Exchange Commission released a report entitled ‘Review of the Proxy Process Regarding the Nomination and Election of Directors’, which contains a number of recommendations to make it easier for shareholders to communicate with the board, and for shareholders to participate in management by having proposals included in the company’s proxy forms. See <http://www.sec.gov/news/studies/proxyreport.pdf> at 30 June 2004.

These recommendations were substantially adopted in a new Final Rule by the Securities and Exchange Commission, which was announced in late 2003 and came into force in January 2004. In the United Kingdom, in the Revised Combined Code on Corporate Governance in the United Kingdom issued by the Financial Reporting Council in July 2003 (in response to the January 2003 Higgs Report on Corporate Governance), communication with shareholders was elevated to a primary objective by designating a senior independent director on the board to act as a kind of ‘shareholder liasion’ (together with the chairman), a role which will involve the director meeting with a range of shareholders as a way of developing a ‘balanced understanding’ of the issues and concerns of major shareholders. In the section of the Revised Combined Code titled ‘Relations with Shareholders’, the main principle states: ‘There should be a dialogue with shareholders based on the mutual understanding of objectives’. The Revised Combined Code is available on-line at <http://www.frc.org.uk/documents/pdf/

CombinedCodeFinal.pdf> at 30 June 2004.

[30] [1998] VSCA 3; [1999] 1 VR 466. For a succinct discussion of this case, see Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 46 ACSR 1, 59.

[31] See Edwards and Campbell, above n 20.

[32] See Butterworth’s Halsbury’s Laws of Australia, vol 7 (at 24 February 2004) 120–Corporations, ‘Internal Administration’ [8115]; also Ryan v South Sydney Junior Rugby League Club Ltd [1975] 2 NSWLR 660.

[33] The Laws of Australia (Business Organisations, 4.2, ‘Company Management’) [73].

[34] See Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (Final Report, June 2000) 48. See also Andrew Lumsden, Managing Proxies and the Role of the Chairman (1998) 12.

[35] Second Consolidated Trust [1943] 2 All ER 567, 570 (Uthwatt J).

[36] Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (Final Report, June 2000) 49.

[37] Ibid.

[38] The relevant provision dealing with proxies is s 372 of the Companies Act 1985 (UK).

[39] The relevant provisions are in Part XIII of the Canada Business Corporations Act [R.S. 1985, c. C-44].

[40] Under the Model Business Corporations Act, which has been adopted by a majority of US states.

[41] The relevant provisions are in Chapter 1 (General Corporation Law) of Title 8 of the Delaware Code.

[42] The relevant provision is First Schedule to the Companies Act 1993 (NZ),

s 6.

[43] The relevant provision is Second Schedule to the Companies Act 1997 (PNG), s 6.

[44] Canada Business Corporations Act, RS 1985, c C-44. Section 152(1) of the Act provides:

‘(1) A person who solicits a proxy and is appointed proxyholder shall attend in person or cause an alternate proxyholder to attend the meeting in respect of which the proxy is given and comply with the directions of the shareholder who appointed him.’

Section 152(4) of the Act, which establishes the offence, provides:

‘(4) A proxyholder or alternate proxyholder who without reasonable cause fails to comply with the directions of a shareholder under this section is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months or to both.’

[45] As a consequential amendment, if the clarification note to s 250A(4) of the Corporations Act is repealed, s 249Y(2) of the Act will also need to be repealed. Section 249Y(2) provides: ‘If a company has a constitution, the constitution may provide that a proxy is not entitled to vote on a show of hands.’

[46] The authors acknowledge that there is some debate about whether ownership of shares by shareholders equates to ownership of the company, but believe that our view that shareholders are the true owners of the company can be justified on the basis that shares possess the three key characteristics of private property (the right to possess, use and alienate): see Peter Benson, ‘Philosophy of Property Law’, in Jules Coleman and Scott Schapiro (eds), The Oxford Handbook of Jurisprudence and Philosophy of Law (2002) 752; see further Paddy Ireland, Ian Grigg-Spall and Dave Kelly, ‘The Conceptual Foundations of Modern Company Law’ (1987) 14 Journal of Law and Society 149, 152–4; Helen Bird, ‘A Critique of the Proprietary Nature of Share Rights in Australian Publicly Listed Corporations’ [1998] MelbULawRw 6; (1998) 22 Melbourne University Law Review 131, 138–141; Robert Pennington, ‘Can shares in companies be defined?’ (1989) 10 The Company Lawyer 140; Peta Spender, ‘Guns and Greenmail: Fear and Loathing after Gambotto’ [1998] MelbULawRw 5; (1998) 22 Melbourne University Law Review 96, 110–117.

[47] See Cousins v International Brick Co Ltd (1931) All ER 229, 231 (Lord Hanworth MR).

[48] We also note that our recommendations are consistent with recommendation 21 of the Parliamentary Joint Committee on Corporations and Financial Service, CLERP (Audit Reform and Corporate Disclosure) Bill 2003) June 2004, Canberra, which, at para 8.56, provides ‘The Committee recommends that the law be amended to ensure that the voting intentions of shareholders through their proxyholder are carried out according to their instructions’.