House of Representatives

Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011

Explanatory Memorandum

Circulated by the Authority of the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP

Chapter 6 - Cherry picking

Context of amendments

6.1 Proxies are used by shareholders that are not able to attend a company meeting but who still wish to vote. Appointing a proxy involves a shareholder appointing an individual to represent them at a general meeting (either an AGM or an extraordinary general meeting). The appointed representative may or may not be a shareholder of the company for which the general meeting is being held. The proxy rules in the Corporations Act are contained in Division 6 of Part 2G.2.

6.2 Shareholders can provide directed proxies, which specify how they wish the proxy holder to vote on a resolution, or undirected proxies, which enable the proxy holder to choose how to vote.

6.3 Currently, all directed proxies held by the chair must be voted. However, non-chair proxy holders can choose which proxies to vote. This gives non-chair proxy holders the ability to choose to exercise only those votes that support their position, and to not exercise votes that do not accord with their position on a resolution. This is called 'cherry picking'.

6.4 The PC concluded that cherry picking impairs the transparency and effectiveness of shareholder voting on remuneration issues. It enables the wishes of shareholders to be ignored and can result in outcomes that do not clearly reflect shareholder views on a resolution. It can also facilitate conflicts of interest of non-chair proxy holders.

6.5 While the PC inquiry recommended changes to the law in the context of voting on remuneration reports, the principle behind removing the ability for proxy holders to 'cherry-pick' can be applied to shareholder voting more generally.

Summary of new law

6.6 The new law will require that non-chair proxies vote as directed when they vote on a poll. It will also prohibit proxy holders from 'cherry-picking' the proxies they exercise, by requiring that any directed proxies that are not voted will automatically default to the Chair, who is required to vote the proxies as directed. This will ensure that directed proxies are counted as the shareholder intends.

Comparison of key features of new law and current law

New law Current law
Non-chair proxy holders will be required to cast all of their directed proxies on all resolutions as directed if they vote. If a nominated proxy does not vote, the proxy will automatically default to the chair, who has a duty to vote all directed proxies. Proxy holders, other than the chair, are not required to cast all of their directed proxies on all resolutions, but may choose which proxies to cast.

Detailed explanation of new law

6.7 The provisions currently at paragraphs 250A(4), (5) and (5A) in the Corporations Act, dealing with the exercise of directed proxy votes by the chair and by those other than the chair, will be repealed. [Schedule 1, item 33]

6.8 A new provision, section 250BB, will provide for all situations where a proxy appointment specifies the way to vote. This section provides that if the proxy is the chair of the meeting the proxy must vote on a poll, and must vote as directed. [Schedule 1, item 34, paragraph 250BB(1)(c)]

6.9 If the proxy holder is not the chair, the proxy need not vote, but if they do, they must vote as directed. The offence provision has been refined in cases where a non-chair proxy holder does vote but does not vote as directed. This provides that a non-chair proxy will not be liable unless he or she agreed to the appointment or held him or herself out as being willing to act as a proxy, or allowed another person to do so. The proxy who voted but did not vote as directed will be subject to a fine. There is no offence for a proxy who fails to vote. [Schedule 1, item 34, paragraph 250BB(1)(d) and subsections 250BB(3) and (4)]

6.10 If a nominated proxy does not register as attending the meeting or does not vote, the proxies not exercised in a poll vote will default to the chair, who has a duty to vote the proxies as directed. These provisions ensure that all proxies are voted, thereby ensuring that shareholder instructions are voted as intended. [Schedule 1, item 34, section 250BC]

6.11 This situation provides for the chair to become the proxy, and vote as directed, after a nominated proxy has failed to vote. Each company has the ability to work out the best way for the default system to work within their timeframes for voting whilst ensuring that chairs have enough time to cast defaulted proxies. Obviously, this procedure may vary from company to company. It is anticipated that for some companies this may require a two stage voting process, where votes are cast and all proxies are checked before the unvoted proxies default to the chair.

Application and transitional provisions

6.12 The new provision will apply to proxies appointed on or after 1 July 2011.

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