The proxy war

The proxy might just be the most underappreciated tool at the disposal of an investor

Something odd happened on the 13th of February at 9 AM. Security Paper was supposed to hold its 8th EOGM in order to elect its directors. They even arranged a shuttle service from the stock exchange to their offices in order to facilitate the shareholders who wanted to participate in these elections. However, as soon as the meeting started, it was adjourned by its Chairman.

This might seem innocuous on the face of it but the reality is that the company was fighting a losing battle. Seeing their loss imminent, the company decided that the best course of action was to take this step. But what was the rationale for this move? Let Profit explain.

Background of Security Paper

Security Paper is a listed company which was established in the 1960s by State Bank of Pakistan (SBP). The company has the function to manufacture the special paper required by the SBP to print its own currency. Due to the sensitive nature of the product, the company to date, is the sole manufacturer of security paper in the country, most of which is naturally used in printing currency-notes. But this is not all. 

From ballot papers used in elections to stamp papers, passport booklet paper, and cheque book paper and the paper used to print college degrees, Security Papers makes it all. But since the main use of its security paper is in currency, its major buyer is a fully owned company of the SBP called Pakistan Security Printing Corporation, with more than 80% of Security Papers sales being made to Pakistan Security Printing.

The company has been marred by one controversy or another. From related party transactions to the independence of its directors, the company has faced complaint after  complaint. With the recent implementation of the State Owned Entities Act, it seems like these complaints will continue.

The company is owned primarily by associated companies making up 60% of its shareholding while general public owns 23.5% respectively. This is the point of contention which was the reason for the meeting being adjourned. 

So what was this bone of contention? For that, we need to understand the rights of a shareholder. 

Rights of shareholders

There are many rights and privileges that are provided to a shareholder when they buy a share of a listed company. From getting a share of the profits and dividend to having a say in terms of the resolutions passed in the meetings, shareholders get to take part in the decision making process as part owners. 

But what if the shareholder cannot vote or participate in a meeting or does not want to do so?

In that case, one of the privileges that is enjoyed by the shareholder is that they can transfer their vote to another person or company who can then use this voting power as they may choose. 

Proxy Votes

Proxy votes or getting to choose proxy voters might be the best kept secret of the capital markets of Pakistan. One of the responsibilities and privileges enjoyed by a shareholder is the fact that they get to participate in the decision making of a company as they hold a portion of the company. 

In line with this, they get to participate in the meetings held by the board of directors and get to raise their voice. In Pakistan, however, the shareholders fail to realize the importance of their votes. 

Voters usually feel that they have little to no power in terms of swaying the decision making process and do not take part in the elections. Any similarity of this situation with the current political situation of the country is purely coincidental and no shareholders were harmed in the writing of this story. Hurt egos and damaged reputations do not constitute harm.

Anyhow, due to this sense of lack of control, there is a trust gap. Shareholders who are much more savvy in terms of the market step into the vacuum and take advantage of this situation. They actually end up turning the situation advantageous for themselves and reap the benefits as well.

So what exactly is a proxy vote?

What is a proxy vote?

Proxy or more specifically proxy votes are votes that are allotted to a shareholder. In case the shareholder can not or does not want to participate in the elections, they are given a right to transfer their vote to another individual or corporation. They would need to fill out a form and meet all the formalities placed by the Securities and Exchange Commission (SECP) in order to facilitate this transfer. Compared to not voting or wasting a vote, this would seem like the next best thing as the vote can still be cast.

This can be considered a facility that is being provided to the shareholder in case they cannot attend the meeting physically or do not want to do it for some reason. In the days gone by, it would have been difficult for a shareholder to travel to the city where the meeting was going to be held in order to cast their vote. Now with the advent of e-voting and mail in ballots, the physical limitation has also been eliminated so the reason for not voting falls primarily on the voter themselves.

Even though voting is a way to make your voice heard, in the corporate landscape of Pakistan, the voting process is a mere formality. Lets say a company has 100 shares. This would mean that they would have 100 votes. Most of the time, there would be a majority shareholder who will own a large chunk of these shares. In a straight up and down vote, the majority will get its way and the vote from a small shareholder will not matter.

So what power do the proxies actually hold?

Why the fuss?

The fact is that the use of a proxy comes mostly around the time when elections of a director have to be carried out. This publication has discussed this issue in detail before as well. Consider a company which had 7 directors whose tenure is ending. Now as the next elections have to be carried out, the company nominates its 7 directors who want to be elected again. Investors and shareholders of the company can now nominate a director that they want to get elected.

The majority shareholder has 75% shareholding of the company while there are smaller shareholders in the market who have the remaining 25%. To keep things simple, we can assume that there are only 100 shares of the company to begin with. As 7 directors have to be chosen, each shareholder will get 7 votes for each of the director positions. They can use all these 7 votes to elect one director as well. Out of the 700 votes, the majority will have 525 votes while the smaller shareholders will get 175 votes.

This is where the importance of proxy voters comes in. The directors are selected based on the candidates who get the most votes. The majority would want to use its quota of votes to get all of its candidates elected. We can suppose that they divided their votes and gave each candidate 75 votes. On the other hand, the minority shareholders can join together and give their candidate all of their 175 votes. This would mean that the minority will get one director on the board while the majority will get 6 of theirs.

The minority shareholders are able to bind together into a block and have made election of a director possible even though they held only a quarter of the shares. The block can be created by asking for proxy votes from all the shareholders who hold the shares and then a united front can be presented in the elections of the director.

This is why, when an election of a director is going to be contested, there are calls and proxies are sought by one group or the other. Individuals who either want to be elected or want one of their directors to be elected start to collect proxies from actual shareholders which can then be used to make this possible. Even though this can be considered an abuse of the privilege that was given to the shareholders, there is some twisted sense of fairness and equilibrium which is brought into the capital markets. Minority shareholders can either come together or give their proxies to someone who wants to get an outsider elected on the board which might not be possible if they were scattered.

The tale of the bundle of sticks and textbook definitions of synergy come to mind where the whole is greater than the sum of parts.

The rights of a proxy voter

In technical terms, a proxy voter gets to enjoy all the benefits of an ordinary shareholder. In essence, it is just a transfer of voting power and rights from one individual to another. They get to vote on resolutions proposed by the board of directors in the form of ordinary or special resolutions. In addition to that, they are able to participate in the meeting on behalf of the original shareholder.

Companies Act of 2017 has set out all the rights and privileges that the proxy voter can enjoy. Section 134 (7) states that no member holding shares or other securities carrying voting rights shall be debarred from casting his vote, nor shall anything contained in the articles have the effect of debarring him. This will also apply to proxy votes as it is applicable to other shareholders. In case the company does end up violating this right, they can be reprimanded and punished by the SECP and a penalty can be placed on them.

Similarly, the Companies Act also gives the right to the shareholders where they can invalidate a whole meeting or the proceedings of a meeting. Section 136 states that the proceedings of a general meeting can be invalidated by the court if a member, having at least ten percent of the voting power, files a petition based on any irregularity in the meeting. These irregularities can include measures which prevent members from effectively using their rights as a shareholder. The court can also ask for a fresh meeting to be held subsequently if the petition has been made within 30 days from the impugned meeting taking place.

Section 137 is related to proxies alone and states how a proxy can be appointed outlining all the formalities that have to be fulfilled in order to appoint a proxy. It also states in subsection (5) that a proxy needs to be filed with the company not later than 48 hours before the said meeting has to take place and that members can even ask to check the proxies that have been lodged with the company anytime they want. Lastly, subsection (10) talks about how the notices issued by the company have to conform to law and in case any defects are seen in the notices which prevent participation of a proxy will see punishments placed on them by the SECP.

Why the long lecture and law tutorial?

Well the basic purpose of going on the legal tutorial was to highlight the laws and regulations that pertain to voters and specifically to voters who have attained proxies from other shareholders. When so much care and attention has been given to explain the laws, let’s get to the fun part.

Security Paper was supposed to hold its elections for directors which was to be carried out in its 8th Extraordinary General Meeting (EOGM) to be held on November 29th 2023. A day before the meeting was to be held, the Islamabad High Court had a petition filed in it which meant that the 8th EOGM was suspended and the elections could not be held. On 14th December 2023, the petition was dismissed which meant that elections could be carried out. On 23rd January 2024, the company sent out a new date for the 8th EOGM to be held and stated that the elections would take place on 13th of February.

One point stated in the notice of the EOGM was that the company stated in the notes that in light of Section 134 and 137, the proxies that had been obtained earlier were being rendered invalid and were being canceled and that new proxies had to be obtained in order to be considered legitimate proxies to participate in the elections.

As should have been done, a complaint was filed to the SECP as the Section 134 and 137 mentioned by the company do not allow any proxies to be canceled and actually enshrine the rights of the participation of the proxies and voters alike. The complainant was rightfully angry at the fact that, even though he had valid proxies, the company was trying to cancel the old proxies when this was a continuation of an old meeting and had no right to do so.

The complainant had got his previously attained proxies with the share registrar and had gotten the official confirmation which meant that he should be seen as the rightful owner of the proxies even now. The regulations being quoted only allow proxies to be canceled if one shareholder appoints more than one proxy under Section 137(1)(c). This has not happened here so it is an invalid logic being used by the company.

This case was taken up by the SECP and a representative from the regulatory had stated that “It is informed that the matter has been taken up with the company and its response is awaited. We will be in a position to provide a detailed response to your queries once the response of the company is received.”

Before the meeting was supposed to take place, 18 hours before the meeting, the SECP gave out an order that the proxies had been canceled inappropriately as the company had no right to do so. The proxies were declared valid and could be used by the individual.

Seeing its obvious and imminent defeat in sight, the meeting held the next day was adjourned by the Chairman. What will happen to these proxies’ votes now will have to be seen but it can be expected that the SECP will have a keen eye on the developments in the future.


Editor’s Note: A clarification from Security Papers Limited was received on the 21st of Feb 2024, which is being reproduced verbatim below:

Security Papers Limited Rejects the Claim of The Proxy War

In response to The Profit’s article titled “The Proxy War” on February 18, 2024, Security Papers Limited (SPL) in its press statement wants to clarify that the points raised in the article is based on assumptions and negating the actual grounds for adjourning the EOGM.

As outlined in the disclosure of material information sent to Pakistan Stock Exchange Limited by SPL on February 13, 2024 and also communicated to the shareholders present in the EOGM in-person and via zoom link, the EOGM was adjourned with the consent of the members due to the fact that SPL was determined as a Public Sector Company (PSC) by Securities and Exchange Commission of Pakistan (SECP) vide its Order dated 26 January 2024.

Whilst the determination of SPL being a PSC is being challenged in an appeal before the relevant legal forum, SECP communicated with SPL via an email during the evening hours of February 12, 2024, precisely the day preceding the EOGM, expressly stated a new directive that SPL was directed to ensure compliance with the provisions of the State-Owned Enterprises Act, 2023, failing which necessary action may be taken in accordance with law.

Given these unprecedented developments, it is prudent to seek legal advice on the matter and therefore, the EOGM was adjourned in accordance with the Articles of Association of SPL.

SPL acted in accordance with the applicable law, rules and regulations whilst addressing the matter of proxies, as outlined in Section 134 and 137 of the Companies Act, 2017.

The aforementioned detail is the sole reason for adjourning the EOGM. Any suggestion of impropriety on SPL’s part is unfounded and ignores the Company’s commitment to upholding transparency and regulatory compliance, and any assertion of it as a “Proxy War” or a “losing battle” is entirely baseless, inaccurate, and fails to capture the true reasons behind the adjournment of EOGM.

Zain Naeem
Zain Naeem
Zain is a business journalist at Profit, and can be reached at [email protected]


  1. A coalition can be formed by soliciting proxy votes from all shareholders who possess shares, and thereafter presenting a unified front during the directorial elections.


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