Earlier this year, the Canadian Coalition for Good Governance (CCGG) released its publication “ Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access”, proposing enhanced proxy access to facilitate shareholders’ nomination of directors for Canadian public companies (CCGG Proposal). The CCGG Proposal draws upon the voluntary adoption of such proxy access by some U.S. public companies. However, in Canada, unlike the U.S., there already exist statutory mechanisms for shareholder nomination of directors through the proxy process.
PROXY ACCESS IN THE U.S.
Under U.S. federal securities legislation there is currently no general statutory right of proxy access allowing shareholders to nominate directors through the proxy process. The U.S. Securities and Exchange Commission (SEC) most recently attempted to grant shareowners proxy access in 2010, when it passed a proxy access rule (Rule 14a-11) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, the U.S. Court of Appeals for the District of Columbia Circuit vacated the SEC’s proposed rule, holding that “the SEC had failed to adequately assess the economic effects of the proposed rule”. The SEC did not appeal the court’s decision.
Since that ruling, over 30 U.S.-headquartered companies (including certain major financial institutions and retailers) have either voluntarily or by majority shareholder vote adopted, or agreed to adopt, proxy access, notwithstanding there is no legal requirement to do so. The “Boardroom Accountability Project” (BAP) organized the filing of 75 proxy access shareholder proposals to enact by-laws granting shareholders who meet a threshold of owning three per cent of a company for three or more years the right to nominate director candidates, representing up to 25 per cent of the board, on such company’s ballot. In addition to the foregoing ownership requirement, the BAP proposal provides that each company’s proxy access by-law should specify that a shareholder must give the company, within the time period identified in the company’s by-laws, written notice of the information required by the company’s by-laws and by SEC rules regarding the nominee (including the nominee’s consent to being named in the proxy materials and to serving as director if elected) and the shareholder (including proof of ownership of the requisite shares). Additionally, the shareholder may submit a statement, not exceeding 500 words, in support of the nominee.
Specific proxy access mechanisms, whereby shareholders can nominate some directors directly through the company’s proxy, already exist in several other countries including Sweden, Australia, Germany, Italy and Brazil.
PROXY ACCESS IN CANADA
Existing Canadian corporate law provides shareholders with a form of proxy access by virtue of a statutory right to nominate directors. For example, a shareholder holding five percent of a federally-incorporated company’s outstanding shares may: (i) requisition a meeting to elect directors (Canada Business Corporations Act (CBCA), section 143(1)) or (ii) submit a shareholder proposal to nominate directors to be included in the company’s annual proxy circular (CBCA, section 137(4)). Any shareholder who wishes to make such proposal is restricted to a 500-word statement in support (as compared to management’s response, which is unrestricted in length). There is no statutory requirement for management to include information about the shareholder’s nominee(s) in the proxy circular with the same prominence and in the same location as the company’s nominees. Furthermore, there is no statutory requirement to use a universal proxy form. Similar provisions are included in the Alberta, Ontario and Quebec corporate statutes.
As is the case with other corporate actions, boards of companies nominating individuals for election as directors in their annual proxy circulars must act with a view to the best interests of the corporation and with due care. Shareholders utilizing forms of proxy access to make nominations of directors are not subject to such duties.
CCGG PROPOSAL: A CLOSER LOOK
The CCGG Proposal expands on the existing Canadian statutory framework. The CCGG suggests that “shareholders should be able to replicate as closely as possible their ability to nominate directors at the AGM [annual general meeting] through the proxy voting process in alignment with contemporary shareholding and voting practices”. In that regard, the CCGG Proposal would allow shareholders who hold a specified percentage of a company’s voting shares (five per cent for a company with a market capitalization of less than C$1 billion and three per cent for a company with a market capitalization of C$1 billion or more) to present director nominee(s) to other shareholders in the company’s proxy materials. Such shareholders would be restricted to nominating the lesser of three directors or 20 per cent of the board. The CCGG Proposal contemplates shareholders being permitted to coordinate and aggregate their holdings to meet the relevant thresholds and notes that, to the extent required, corporate law should be amended to allow shareholders that engage their right to nominate directors to communicate with other shareholders and solicit proxies without requiring the filing and distribution of a dissident proxy circular (which is currently a requirement for any shareholder of a Canadian company who solicits more than 15 proxies in connection with a director nomination).
SHARE OWNERSHIP PERIOD CONDITION
Despite concerns raised by certain commentators regarding the possibility of misuse or abuse of enhanced shareholder proxy access, the CCGG Proposal states that a minimum period of share ownership is unnecessary either to ensure that proxy access is restricted to shareholders with a long-term perspective on the company or to avoid vexatious nominations. The CCGG’s position on this issue contrasts with the BAP proposal (i.e. ownership of a minimum of three per cent of a company for three or more years), as well as the positions held by many large U.S. institutional investors and by corporate governance and proxy advisory firms in Canada. As noted by Canadian corporate governance scholar Yvan Allaire, such organizations advocate for a minimum holding period on the basis that it may help to discourage activist shareholders from exploiting a short-term gain to the detriment of other shareholders with a long-term perspective.
PROXY ACCESS IN CANADA: WHAT’S NEXT?
While the federal budget released in April 2015 contained a short paragraph discussing proposed amendments to the CBCA (including promoting gender diversity among public companies, modernizing director election processes and aligning federal laws governing cooperatives and not-for-profit corporations), it did not address the issue of enhancing proxy access for shareholders. The federal Parliament has not introduced a bill relating to CBCA amendments generally or the topic of enhanced proxy access specifically since the release of the federal budget. Similarly, a report published in June 2015 by the Ontario Ministry of Government and Consumer Services contained a number of broad recommended updates to the Ontario Business Corporations Act. For more information on this report, please see our August 2015 Blakes Bulletin: Broad Changes to Ontario Corporate Law Recommended. While none of the recommendations specifically related to enhancing proxy access for shareholders, that matter is of a type that could be addressed by that review.
Given the fact that, unlike the U.S., there are existing statutory mechanisms for shareholder proxy access in Canada, it is not clear the extent to which the CCGG Proposal will gain traction for: either legislative change or voluntary adoption by issuers. No Canadian issuers have announced voluntary adoption of the CCGG Proposal to date. It also remains to be seen whether proxy advisory firms will adopt voting policies aimed at encouraging issuers to adopt the CCGG Proposal.