Proxy battles are increasingly a feature of the Australian corporate landscape.
An important element in any proxy battle is intelligence: in whose favour are the proxies flowing? That information will show how the members are reacting to the public relations campaigns being waged by the various parties. This allows the campaign messages to be finetuned.
Traditionally, the proxy count has been the preserve of the company itself. Occasionally the company may let the media know how the proxies are stacking up, but it is more common for the first public information about the proxies to be released by the chairman during the meeting itself.
One early attempt to gain some control over proxies was the pre-completed proxy. A shareholder who had requisitioned or called a general meeting would send a modified copy of the company's official proxy form to shareholders:
- with the relevant boxes already ticked; or
- nominating someone other than the company chair as the proxyholder.
Pre-completed proxies were given the judicial all-clear during the 2001 battle for control of the board of online retailer Bigshop.
While pre-completed proxy forms gave a shareholder some control over the proxy process, there was still no way of determining how many recipients were actually using them. So the next logical step was to try to route proxies through a third party, who could maintain a count of them. This was first done shortly after the Bigshop case, in 2002, but the Supreme Court of Victoria said that members should only send proxies directly to the company (Bisan Ltd v Cellante  VSC 430). Just last year, a judge of the Federal Court agreed with that proposition (Portman Iron Ore Limited  FCA 1362).
This was the situation which faced Clayton Utz when it was recently called in to advise in relation to the attempt to replace the responsible entity of City Pacific First Mortgage Fund.
City Pacific First Mortgage Fund was an unlisted managed investment scheme. The BalmainTrilogy joint venture was formed after Balmain and Trilogy were approached by City Pacific unitholders and asked to take over management of the scheme from City Pacific Ltd.
To that end, a group of over 200 unitholders authorised BalmainTrilogy to call a meeting at which they could vote to replace City Pacific Ltd.
It quickly became clear that City Pacific was not going to go without a fight. With two court decisions saying that proxies have to be sent directly to the company (in this case, City Pacific), it didn't look as though BalmainTrilogy would have any way of knowing the proxy count until the day of the meeting.
Appearances can be deceptive, however. Rather than looking at just the final rulings of the Victorian and Federal Courts, we took a closer look at what the judges had actually said and, in particular, at why they had been opposed to letting anyone but the company handle proxies.
What emerged was an entirely understandable judicial concern about the possibility for inappropriate handling of proxies:
"The interception of proxy appointment forms by an intermediate party who is under no fiduciary duty or other apparent obligations in relation to their safeguarding, entails an inherent exposure to the possibility of filtering or other inappropriate handling. In my opinion, it could constitute a grave defect in the electoral process in respect of any contemplated meeting." (Bisan)
The next challenge was to construct a proxy handling facility which would address those concerns.
Proxy handling facility
Computershare was appointed by Balmain Trilogy to establish and run the proxy handling facility.
The next step was more complicated. Unitholders who sent their proxy forms to Computershare would be confident that there would be no "filtering or other inappropriate handling", but how could they be sure that their proxies would actually be delivered to City Pacific in time for the meeting?
There was no contractual relationship between Computershare and the unitholders, so unitholders had no way of ensuring that Computershare would deliver the proxies. This problem was overcome by a structure under which, among other things:
- Computershare contracted with BalmainTrilogy to properly handle the proxies and deliver them to City Pacific 48 hours before the meeting; and
- BalmainTrilogy executed a deed poll in favour of unitholders under which it undertook to ensure that Computershare complied with its contractual obligations.
This structure gave unitholders both the confidence that the proxies would be delivered before the meeting and a legal means of enforcing delivery. It also addressed the courts' concerns about proxies being handed over to someone who had no duty to ensure their safe handling.
Importantly, Computershare also agreed to provide BalmainTrilogy with regular reports on the proxy count, including daily reports during the last two weeks before the meeting.
The process of delivering the proxies to City Pacific was also strictly controlled. The main form of delivery was to be by hand by Computershare. This had a number of benefits: as well as minimising the risk of proxies being misplaced by couriers or over fax lines, it allowed the proxy count to be maintained up until the last moment. Of course, since the proxy handling facility was located in Melbourne and the meeting was on the Gold Coast, this necessitated some careful planning: for example, Computershare staff flew to the Gold Coast the evening before the proxies were to be handed over, and they carried all the proxies as carry-on, rather than checked-in, luggage. Proxies received after the staff had flown to the Gold Coast were faxed to City Pacific on the morning of the lodgement deadline.
The proxy handling facility was designed to meet all of the policy concerns raised by the Victorian and Federal Courts. What was really needed, however, was a court ruling to that effect.
That ruling appeared to be on its way when, a week before the meeting date, City Pacific began court proceedings to prevent the unitholders voting to remove it as responsible entity. Among other things, City Pacific argued that proxies must be sent only to the responsible entity, and not to any other intervening party. Failure to comply with this requirement, it argued, would result in the proxies being invalid or the meeting being invalid (or both). In support of its arguments, it naturally cited the earlier Victorian and Federal Court decisions.
Justice Dowsett acknowledged that the two earlier cases raised a serious question about the handling of proxies, but did not appear to be convinced that they were necessarily correct:
"[The Victorian and Federal Court decisions support] the proposition that proxies must be sent to the nominated recipient, the company in the case of a corporation, and the responsible entity in the case of a scheme. However, section 252Z does not actually say that. It requires only that the proxy documents be received by the responsible entity at least 48 hours before the meeting. That seems not to exclude the possibility that they might be collected by a third party."
In the end, the Judge decided that the unitholders should be left to vote on whether to remove City Pacific, and that any complaints about the proxy and voting process could be dealt with after the meeting.
As is now well known, the vote went ahead and City Pacific was removed.
Not unexpectedly, City Pacific went back to Court to challenge the outcome of the meeting. That challenge was rejected and, in any event, City Pacific chose not to reagitate the matter of the proxy handling facility.
Without a final court ruling, it would be premature to say that BalmainTrilogy's proxy handling facility provides a definitive solution for a shareholder who wants to keep a running proxy count.
Nevertheless, Justice Dowsett's comments do provide a strong indication that a carefully-constructed facility such as that established by BalmainTrilogy and Computershare may assuage the earlier courts' concerns and their consequent interpretation of the law.
Interestingly, the Takeovers Panel appears to be of the same view. During last year's Indophil bid for Lion Selection, the Panel received a complaint about a proxy handling facility established by Indophil. The Panel did not appear to have any in-principle objections to the proxy handling facility, provided that members could be assured that their proxies would be delivered to the company in time. Indophil duly provided undertakings to the Panel to deal with those concerns.