The importance of proxy

Yasapala Karunasinghe

Although many a Workshop, Seminar, Group Discussion were held on the aftermath of the implementation of the new Companies Act No.7 of 2007, (from May 3, 2007) an important topic that has escaped the attention of the specialists in Company Law is the proper format of the Proxy Form used at the meetings, Annual and Extraordinary of Public Companies.

The word Proxy connotes:

a) one who is appointed to represent another, and

b) the instrument making such an appointment.

A shareholder is entitled to appoint another person as his proxy to attend and vote and speak (if specified) at the aforesaid meetings of a Company. This term is also used in civil litigation where a party appoints a lawyer to represent him in Court and the specimen form is specified in the Civil Procedure Code. The holder of a Power of Attorney (General or Special) is a recognised agent in litigation.

The specimen form of the instrument of Proxy for Company purposes has a history:

a) Companies Ordinance No.51 of 1938 in its First Schedule, Table A, Regulation 61 states: An instrument appointing a proxy may be in the following form or any other form which the directors shall approve. (The format is not reproduced for reasons of space).

b) Companies Act. No.17 of 1982 effective from 02.07.1982 which repealed the Ordinance had in its First Schedule Table A, Rule 71:

‘An instrument appointing a proxy shall be in the following form or a form as near thereto as circumstances permit’ (Format not reproduced). - this is for the Proxy to attend and vote.

Rule 72: ‘Where it is desired to afford members and opportunity of voting for or against a resolution and/or to speak at the meeting the instrument appointing the proxy shall be in the following form or a form as near thereto as circumstances permit’ (Format not reproduced). - this is for the Proxy to attend, vote and speak which is called a two-way Proxy.

c) Companies Act No.17 of 1982 was repealed by Act No.7 of 2007 effective from May 3, 2007 and its First Schedule - Model Articles, does not prescribe the format as in the earlier enactments. Reference to Proxies is in Article 11 in a general way.

The format used by Companies to see whether the formulation set out by the Legislature is observed in the correct spirit.

In most Companies well known and recognised as leaders of the commercial world there is compliance while others for dubious reasons do not comply. They appear to be reluctant to change even after the flaw is highlighted. In the proper design of the law, the pride of place in the instrument shall be given to the proxy holder and not the members of the board of directors as indulged in by the latter category.

In the best practice, the proxy’s name appears first followed by the words ‘failing whom ‘ after which the names of the board of directors appear in the order of precedence also followed by the words ‘failing whom’ up to the last but one name.

In the alternative, the pride of place is given to the names of the directors of the Company in order of precedence led by the Chairman and followed by the words ‘failing whom’ up to the last name of the director and only then is the precious space for the name of the Proxy, who has perforce been relegated to the last position.

This design literally means that the Proxy will be able to exercise his vote only if all the directors had ‘failed to vote’.

It has been said that the proxy must be in the form settled by the Articles of Association and that the names of directors may be listed provided they are acting in good faith in the best interests of the Company, treating all members alike.

The underlying principle is to maintain transparency in related-party transactions.

But does the investor in shares be it on an initial offer on a Prospectus or in the secondary market at the bourse have easy access to the Articles of Association? The answer is: ‘No’.

To prevent abusive inter-party transactions the shareholders have to be vigilant, combative and expressive of their views using their votes negatively. This can be done only if the proxy form is in the proper format, as in the first instance mentioned above.

The Book titled ‘Principles of Modern Company Law, 1979 by CB lower at pp. 538/9, quoted by IC Jayasuriya in his ‘Guide to Companies Act of 1982 - Vol/2’ at p.219 states:

‘although proxy voting gave appearance of democratic freedom, this appearance was often deceptive and in reality the practice helped to enhance the dictatorship of the board ... two-way proxies were a practical move towards giving greater reality to the control by the shareholders over the directors.’

In order that the interests of the minority shareholders may be protected, the prescription and compulsory use of the proper format of proxy form should receive the urgent attention of relevant authorities.