Everyone from the TSX, which recently issued new guidance on its majority voting policy, to the federal government, which is proposing to amend the federal Canada Business Corporations Act (CBCA) to enshrine majority voting into corporate law, is now weighing in on what the regime should look like going forward. There’s even a private member’s bill in the Ontario legislature calling for majority voting to be codified in the Ontario Business Corporations Act. “With the flurry of regulatory initiatives, it certainly seems like a big deal and they’re treating it like a high-priority item,” Alex Moore, a lawyer at Davies Ward Phillips & Vineberg LLP, says of politicians and market regulators.
On one hand, the reforms are a welcomed development. Judy Cotte, vice-president and head, corporate governance and responsible investing at RBC Global Asset Management, says, “Canadian investors support efforts to enshrine majority voting in law, so these proposals do not cause concern.”
It’s a view supported by Stephen Erlichman, executive director of the Canadian Coalition for Good Governance. “Having a director elected by a majority vote in non-contested director elections is a fundamental principle.”
However, as with any new law, some lawyers express concern about the impact the changes will have and urge caution.
“Nobody is against shareholder democracy and nobody is against shareholder voting,” says Carol Hansell of Hansell LLP. “[But] in our view this shouldn’t be done through the CBCA.” Hansell’s law firm recently released a paper critical of the federal proposal (PDF) known as Bill C-25, which has passed second reading, and called the proposed election process “very, very disruptive and unnecessary.”
To understand some of the concerns being raised, one needs to understand the state of director voting in Canada.
Currently, the country has no majority voting requirements in law. Rather, in 2014, the TSX implemented a mandatory policy requiring issuers to put in place a majority voting policy. However, the proxy system that the TSX endorses is not a true for-or-against vote. Shareholders either vote for a candidate or elect to withhold their vote as a form of a protest.
Directors who do not achieve a majority of the “for” vote are still elected to the board. However, they must tender their resignation. The board then has 90 days to accept the resignation or reject it, citing exceptional circumstances. Notably, the TSX policy does not extend to TSX-Venture-listed companies.
Shareholders have criticized the TSX policy because it leads to “zombie directors”—those who get elected without a majority of shareholder support, and the board declines to accept the resignation. But while that happened on occasion in the 2015 proxy season, Hansell notes, last year “there were no problems. So why wouldn’t we just let the TSX system continue to operate to see if that works?” (see chart)
Nonetheless, the TSX recently issued guidance after reviewing 200 majority-voting policies put in place by issuers and finding a litany of gaps, ranging from a lack of timeframe for accepting a resignation to failing to provide a news release about the board’s decision.
It also tightened up a loophole, noting that a director’s length of service, his or her qualifications, attendance at meetings, experience or contributions to the issuer did not qualify as an exceptional circumstance to justify keeping the director on.
Contrast the TSX approach with the majority voting system proposed by Bill C-25, which would include companies listed on the Venture exchange that are governed by the CBCA. The differences are subtle, but notable. The federal government proposes a “for” and “against” system. A director who fails to garner a majority of the shareholder vote (50% +1) is off the board, and cannot be appointed by the other directors.
It’s the “sudden death” nature of the election that has raised concerns among legal watchers, who fear that such a system is too rigid and doesn’t provide boards with the necessary flexibility inherent in the TSX policy.
For example, Hansell says it could result in a failed election, where no directors are elected. Unhappy shareholders might vote out an entire audit committee. “I would think that’s a very bad thing for shareholders,” she notes.
An election could also trigger a change-of-control provision. Or a director who might quietly be working on a special committee investigation could be forced to step aside if he or she loses an election, whereas under the TSX policy, that could qualify as an exceptional circumstance to keep a director on.
Eleanor Fritz, a former director of compliance and disclosure at the TSX, warns the federal changes “may lead to jurisdiction shopping and issuers looking to go public may choose not to incorporate as CBCA issuers.”
Fritz also thinks it could be more costly and cause issuers to “spend money on proxy solicitations to get the vote out.”
Hansell adds there could be instances involving smaller companies where “majority voting will allow people to take control of a board without even going to a proxy contest.”
It also takes time to get a new director on board and the sudden-death nature of the election could impact recruiting efforts.
However, Walied Soliman, a lawyer at Norton Rose Fulbright Canada LLP, dismisses many of those issues. “I think those are theoretical concerns. If directors are going to be voted off the board they will be replaced by qualified people through an appropriate board process.”
Cotte adds: “Companies can ameliorate many concerns regarding potential disruption by maintaining a robust and current list of ‘evergreen’ director candidates,” which she notes is a governance best practice. Those people can be called upon “in the unlikely event that a director does not receive majority shareholder support,” she says.
Davies’ Moore raises another concern. The federal government’s move to enshrine majority voting is “the start of a fairly significant deviation” from existing corporate law standards, where there is a “fair amount of consistency across the country when it comes to laws governing the incorporation of companies.”
However, that’s fine with Cotte and Erlichman, who are calling on provincial governments to follow the federal lead and amend their business incorporation laws to include majority voting as a shareholder right.
But whether other provinces will follow suit remains to be seen. In Ontario, Mississauga-Erindale MPP Takar Harinder, a former cabinet minister in the Liberal government, has brought forward a private member’s bill proposing a number of shareholder safeguards including majority voting. Hansell, who chairs the Ontario council that is advising the government on changes to business law, says her group will soon turn its attention to the issue.
Cotte maintains that the federal government’s move to entrench majority voting into the CBCA is good for the country’s capital markets, noting “this amendment will be seen by global institutional investors as an important step to strengthen Canadian corporate governance legal standards.”
The timetable for third and final reading of the CBCA reform bill isn’t known, but the official comment period closed in February. Change is still possible, but critics face an uphill battle to make it happen.
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