The Canadian Coalition for Good Governance (CCGG) recently released its much anticipated policy paper on “proxy access”, a term which refers to shareholders’ conceptual right to nominate directors and have those nominees placed on management’s ballot. The CCGG takes the position that this right, which is supplemental to a shareholders right to elect directors, “is an essential component of shareholder democracy”. In a previous post, Kaitlind de Jong reported on the efforts the CCGG has undertaken to promote enhanced proxy access for shareholders in Canadian public companies prior to the release of its policy.
Current best practices in Canada suggest that nominees should be chosen by an independent nominating committee of the board. Canadian corporate statutes also provide a platform to proxy access by giving a five percent shareholder of a company the ability to requisition a special shareholder meeting to elect directors or submit a shareholder proposal.
The CCGG policy paper lays out certain recommendations for companies adopt policies that will allow shareholders to communicate directly with boards on a regular basis regarding board composition and suggests certain corporate and securities law amendments which purport to enhance proxy access. One such amendment would allow shareholders of companies with market capitalizations of under $1 billion who hold an aggregate of at least three (3) percent of an issuers outstanding shares with the ability to nominate directors for election, and such nominees would be placed on management’s form of proxy. This change would bear a significant impact on Canadian corporate governance since currently 92.2 percent of all companies listed on the TSX and TSX-V have a market capitalization below $1 billion. However, the CCGG has suggested that in circumstances where shareholders are seeking control of the board, the number of shareholder nominees should be capped to the lesser of three directors or twenty percent of the board in an effort to avoid ‘creeping board control’. For a more detailed discussion of the suggested changes please consult the CCGG’s policy paper.
Judging by the experience with proxy access rules in the United States, even though it is unclear when or if the suggested amendments will be adopted, the initiative will arguably put pressure on the regulators and governance of public companies. In 2010, the U.S. Securities and Exchange Commission recommended similar rules to those proposed by the CCGG which were subsequently struck down by the U.S. Court of Appeal. Despite the ruling, the policy gained traction and numerous prominent institutional investors such as CALPERS have been advocating for the adoption of enhanced proxy access by-laws. To date, over 30 companies in the U.S., including General Electric, Citigroup, Bank of America, and Verizon Communications Inc. have adopted or agreed to adopt enhanced proxy access by-laws either voluntarily or in response to shareholder proposals.
The author would like to thank Hugo Margoc, summer student, for his assistance preparing this legal update.