Increasing the Ambit of Rights Available to Voting by Proxy

[Vishal Hablani and Anirudh Goyal are 3rd & 4th Year B.A.L.L.B. (Hons.) students respectively at the West Bengal National University of Juridical Sciences, Kolkata]

Under the proxy system of voting, a shareholder delegates his rights to attend and vote at a meeting to another person as his representative. This representative is known as the proxy. The system of proxy voting has statutory recognition under section 105 of the Companies Act, 2013 (the ‘2013 Act’). Though the law with regard to proxy voting is fairly settled, we believe the ambit of rights available to a proxy must be increased so as to enhance the shareholder representation in the meeting. This post critically analyses the right to vote by show of hands and right to speak in a meeting.     

Right to Vote by Show of Hands: A Critical Analysis

There are two methods by which voting can be undertaken at a company meeting, either by show of hands, or by way of poll. However, a proxy can only vote in case voting is undertaken by way of poll, and not by show of hands.[1] The provision is not absolute in nature, as it is possible for a company to provide in its articles that proxies can vote by show of hands.[2] Voting by show of hands is usually resorted to when it is assumed that the decision to be undertaken is not controversial, and would not be rejected by the members.[3] However, the problem here lies with the discretionary power given in the hands of the chairman. This is because the chairman might avoid going for voting by way of poll if the demand for the same has not been made or, if the demand is made, but the conditions stated under section 109 are not satisfied. The situation becomes even more problematic when a large number of shareholders are represented by proxies.

A strong opposition voiced for not conferring this right to proxies is that it is possible for a person to carry proxies for multiple shareholders, and it could be possible that some of these shareholders might favour the resolution, and some might not.[4] Thus, it becomes difficult to ascertain for the proxy whether to vote in favour of a certain resolution or to oppose it.

Is the law in India archaic?

The obligation imposed under common law on the chairman is to allow for vote by way of poll if he is of the opinion that opposite result would be yielded from the one that has arisen through voting by show of hands.[5] However, this obligation failed to get any statutory recognition. In the absence of statutory recognition of this obligation, the anomaly with regard to proxy voting by show of hands continued. The first step to address the situation was taken in the United Kingdom (“UK”), wherein the Companies Act, 2006 conferred upon proxies the right to vote by show of hands.[6] Even though the right was given statutory recognition, the anomaly with regard to the split of votes on account of multiple proxies given to a particular person continued unabated.[7] To address the situation, section 285 of the Companies Act, 2006 was modified with the introduction of regulation 3 of the Companies (Shareholders’ Rights) Regulations 2009. Following the changes, according to section 285(2) it is now possible for a proxy to give one vote in favour of a resolution and one vote against it, provided “the proxy has been instructed by one or more of those members to vote for the resolution and by one or more other of those members to vote against it”.[8]

One must consider that there can still be situations where the interests of shareholders might not be put forth properly if voting is undertaken by show of hands and a proxy is allowed as per the English law. For instance, consider a situation where a proxy is carrying votes for three members, of which two have instructed him to vote against the resolution and one has instructed him to vote in favour. In this scenario, if the proxy votes by show of hand, two negative votes would be neutralised by one positive vote. However, had all the three members been personally present, one extra negative vote would have been accounted. Even though the approach fails to completely represent the interests of shareholders, nonetheless it is feasible when the proxy is only representing the interests of a single shareholder, or multiple shareholders with similar interests. Had such a provision been not there in place, as was the situation prior to the introduction of 2009 regulations, it would have been completely impossible for the shareholder to vote by appointing proxy in case voting is undertaken by show of hands.

In India, the Companies Act, 1956 was replaced by the 2013 Act. However, still the proxy holders were not given the right to vote by show of hands, contrary to what has been done in the UK. The issue must be addressed soon because proxy system was introduced to increase the participation of shareholders in the meeting, and not conferring the right to vote by show of hands on proxies is clearly not serving the purpose.  

In the Indian scenario, if voting is undertaken by show of hands, wherein the proxies will not be allowed to vote, the shareholder representation would be rendered illusionary. We believe the law must be amended in India, in light of the changes that were undertaken in the UK.

How to get away with the neutralisation effect if the proxy holds votes in favour of and against the resolution?

Prima facie it appears like a proxy is representing the interests of shareholders, if he is vested with the power to cast vote twice, in case he holds multiple votes in favour and against the resolution. However, practically it does not impact the decision, because the effect of a positive vote would be neutralised by the negative one, thereby leaving the representation illusionary again. To address this issue, we believe the change must be given effect to in India, in such a manner that a single proxy is allowed to hold the voting rights only either in favour of a resolution, or against it. Though the approach might not bring a substantial change, it would probably result in little scattering of votes, and thus would help in taking a more informed decision. The step would be even more effective if the cap of maximum representation of 50 members by a proxy at a time would be reduced; for instance, say a proxy would be allowed to represent only 20 members at a time in a meeting, holding votes only either in favour or against the resolution.       

Whether Right to Speak Must be Made Available to Proxies?

Under Indian law, a proxy has not been conferred with the right to speak at the meeting.[9] However, there is nothing in the provision that prevents a company to confer this right on proxies by way of its articles.[10] This further gives the flexibility to the company to confer this right selectively. For instance, company may allow the proxies to speak on particular subject matters only. It must be noted that the word ‘speak’ has to be construed liberally.[11] If there is a prohibition on speaking, that does not mean a proxy cannot speak at all during the meeting.[12] For instance, the right to demand poll has been conferred on the proxy, and for exercising the right the proxy may have to speak.[13]

Position in the UK

It is surprising that as late as 2013, the right to speak was not conferred upon the proxies by the legislature. Drawing a comparison with the UK law, the right to speak was conferred as early as in the year 1948, with the introduction of Companies Act, 1948 (the ‘1948 Act’).[14] The right was conferred based on the recommendation made by the Cohen Committee, wherein it was observed that if a proxy is deprived of the right to speak, the right to vote “loses a great deal of its value; moreover, in the absence of such a provision the chairman would experience great difficulty in the conduct of the meeting.”[15]

The right was conferred under section 136(1) of the 1948 Act. However, it must be taken into consideration that the right was only available in case the meeting was conducted by the private company, and not by a public company.[16] The limitation that the proxies could not speak at the meetings of the public companies was removed with the introduction of section 324(1) of the Companies Act 2006.[17]

The way ahead

The primary reason for not conferring the right to speak on proxies is based on the assumption that shareholders with ulterior motives or malice might use the right to harass the management. The harassment can be by way of asking unnecessary questions and making “impassioned speeches” against the management. The reason does not sound very convincing because if the intention of the shareholder is to harass the management, it can be easily done by transferring share(s) in the name of the person who was supposed to be appointed as the proxy for the purpose of said harassment.

The conferment of right to speak must also be carried out in light of increasing shareholder activism. Presently, proxy advisory firms are mushrooming in India. Apart from advising shareholders about the transactions that are to be undertaken by the management, these firms also provide proxy appointment services. If given the right to speak, the members of these firms can better articulate about the company affairs at the meeting instead of a non-specialist person appointed as a proxy.

Another probable reason behind limiting a proxy’s right to speak could be because of the reason that a proxy could be any person. It need not necessary for the proxy to be a member of the company.[18] The 2013 Act does not provide anything about the qualifications of a proxy. It is assumed that the right to speak must be limited because the person appointed as a proxy might not be well versed with the company mechanics and thus, if allowed to speak might create nuisance.[19] In this case, the authors believe that certain qualifications must be provided for the person who could be appointed as a proxy. For instance, concerned about the professionalism of proxies, it was provided by section 149(1)(b) of the Companies Act, 1965 of Malaysia, that a non-member person can only become a proxy if he/she “is an advocate, an approved company auditor or a person approved by the Registrar in a particular case”.[20] There is no restriction on a proxy’s right to speak under the Malaysian company law. It must be taken into consideration that the Companies Act, 1965 is not in force, and was recently replaced by the Companies Act, 2016. The new legislation has done away with the provision governing qualifications for a proxy.

It might be argued that coming up with an amendment that lays down qualifications of a proxy for the purpose of conferment of right to speak might prove be counterproductive. This might be primarily because of the reason, as it would then complicate the process of proxy appointment, which would directly affect the participation. However, even if qualifications are introduced, it would not be difficult for the proxy advisory firms to extend the proxy appointment services to the shareholders.

We personally do not endorse the view that qualifications must be introduced for the proxies. However, the suggestion has been made primarily to address the concern regarding the professionalism of proxies, which is usually being relied upon as a defence to limit the right. We believe that the right must be made available even if it makes it a bit difficult for the shareholders to appoint proxies, in case qualifications are introduced.   

Conclusion

We believe that the law governing proxy voters in India is archaic. Substantial changes must be introduced so as to widen the scope of rights available to proxies. The right to speak must be necessarily conferred upon proxies. The said right is inherent within the right to vote, and thus, shall not be compromised with. A meeting shall not be conducted to merely inform the shareholders the decision of the board. In fact, it shall be conducted so as to deliberate upon the action which is sought to be undertaken by the management, in light of company’s best interests and maximum profitability for the shareholders. Unfortunately, proper deliberation is not possible if right to speak would be limited. The shareholders’ participation by way of appointing proxies, without allowing them the right to speak is merely passive in nature. Also, right to vote by show of hands must be made statutory available to proxy voters, so as to increase shareholder participation in the meeting.     

Vishal Hablani & Anirudh Goyal

[1] The Companies Act, 2013, section 105(1).

[2] A. Ramaiya, Guide to the Companies Act, Vol.1 1736 (18th ed., 2015).

[3] Deirdre Ahern & Karen Maher, The Continuing Evolution of Proxy Representation, No. 2, Journal of Business Law, pp. 125 – 143 (2011); Harben v Phillips [1883] L.R. 23 Ch. D. 14 CA.

[4] Ahren & Maher, note 3 above, at 138.

[5] Second Consolidated Trust v. Ceylon Amalgamated Tea & Rubber [1943] 2 All E.R. 567 Ch D.

[6] Companies Act 2006, section 284(2), as it stood before the introduction of Companies (Shareholders’ Rights) Regulations 2009.

[7] Ahren & Maher, note 3 above, at 138.

[8] Companies Act 2006, section 285(2)

[9] The Companies Act, 2013, section 105(1).

[10] KR Chandratre, Company Meetings: Law Practice and procedure 197 (3rd ed., 2015).

[11] Id.

[12] Id.

[13] Id.

[14] Companies Act 1948, section 136(1).

[15] Cohen Committee, Report of the Committee on Company Law Amendment, paragraph 133 (October 22, 1945).

[16] Id.

[17] Companies Act 2006, §324(1).

[18] The Companies Act, 2013, section 105(1).

[19] Ahren & Maher, note 3 above, at 129.

[20] Companies Act 1965, section 149(1)(b).

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