Written by Will Heath.
One of this year’s prominent corporate governance developments was the Federal Government’s proposed regulatory "crackdown" on proxy advisers. We reported on those proposed reforms here and the reforms remain to be legislated. In the meantime, the recent AGM season has witnessed proxy advisers instigating their own crackdown against companies who proposed to seek the flexibility to conduct fully virtual meetings. The manner of the proxy advisers’ campaign was a stark reminder that proxy advisers – whether reformed or not – can activate megaphone media strategies that can disrupt genuine and considered corporate activities.
So what happened this AGM season?
In the recent AGM season, a number of ASX-listed entities sought to amend their constitutions to provide the entity with the flexibility to hold fully virtual meetings to the extent permitted by the law. Such amendments were proposed in anticipation of the Federal Government’s proposed changes to the Corporations Act , which would (if enacted), allow fully virtual meetings only if expressly permitted by the entity’s constitution.
Some of those ASX-listed entities were successful in obtaining shareholder approval above the 75% special resolution threshold.
But other ASX-listed entities were caught in the crossfire of proxy advisers and associated interest groups.
The megaphone tactics employed by proxy advisers included:
- mass mail-outs to ASX-listed entities claiming that there was investor concern in relation to virtual-only AGMs and suggesting companies should withdraw proposed constitutional amendments;
- multiple appearances in major media outlets by proxy advisers and associated interest groups claiming virtual meetings would avoid scrutiny of Boards and "erode" shareholder rights; and
- publication of proxy voting guidelines which recommended against constitutional change without detailed reasoning. Frustratingly, at least one proxy adviser published voting guidelines after a number of ASX-listed entities had published notices of meetings and, moreover, that adviser purported to apply its guidelines with retrospective effect.
There was little genuine engagement by proxy advisers with the substance of the constitutional amendments proposed by entities or the safeguards which would apply. Three key legal issues were overlooked by proxy advisers in their megaphone campaign:
- First, as we have written elsewhere, the principal legal requirement of any virtual meeting under the current law is that it must be held in a manner that gives members, as a whole, a reasonable opportunity to participate. The same principal requirement would apply in the Government’s proposed changes to the Corporations Act. As such, it is the case and will remain the case (whether the law is changed or not) that shareholder rights are not eroded by a company holding a virtual meeting.
- Second, the assertion that company directors can avoid scrutiny by holding virtual-only meetings is an unsubstantiated claim which ignores the onerous statutory and fiduciary duties which apply to such directors. It is axiomatic that a director must, among other things, act in good faith in the company’s best interests and for proper purposes. In that context, it should be open for a Board to consider and, if thought fit, hold a virtual meeting after taking into account such statutory and fiduciary duties and all the circumstances facing the company. What are Boards to do if future COVID (or other) restrictions forbid or limit the holding of physical or hybrid meetings?
- Third, ASIC has wide powers to take action against companies and Boards which do not comply with their obligations in relation to AGMs. ASIC confirmed this publicly and therefore the assertion in media reports that shareholders would “lose their rights” is without basis – the law enshrines, not erodes, shareholder rights and the regulator will enforce them.
Disappointingly, these (and other points) appeared to be lost in the megaphone campaign employed by proxy advisers.
What was the result?
Ultimately, the proxy advisers’ megaphone tactics had mixed success. Our own survey of the data indicates that while some ASX-listed entities withdrew their proposed constitutional amendments to facilitate virtual meetings or failed to achieve the 75% special resolution threshold needed for change, other ASX-listed entities succeeded in changing their constitutions.
The megaphone campaign undertaken by proxy advisers against virtual-only meetings invites larger questions about the role of proxy advisers and whether reform is needed. Additionally, it remains to be seen whether proxy advisers’ behaviour shifts towards further public activism rather than (as ASIC's 2018 report recommended) cooperative engagement with listed entities on a case-by-case basis to ensure shareholders have accurate information to enable them to make informed voting decisions.