On September 28, 2016, Bill C-25 passed first reading in the Parliament of Canada. The Bill is currently at the second reading debate stage. If passed into law, the Bill will result in important changes for public corporations that are governed by the Canada Business Corporations Act (CBCA) including:
- Director Election Matters. Enshrining majority voting into the CBCA such that a director will only be elected if the number of votes cast in his or her favour represents a majority of the total number of votes cast at the meeting, enshrining the practice of “individual voting” rather than “slate voting” for directors and shortening the maximum duration of director terms from three years to one year.
- Notice-and-Access. Broadening the scope of the exemptions available under the CBCA related to the requirement to deliver proxy-related materials to shareholders so that CBCA corporations will be able to make use of the notice-and-access procedures available under Canadian securities laws.
- Other Matters. Mandating gender diversity disclosure, simplifying the timeline for shareholders to submit shareholder proposals and clarifying that all certificates representing shares and share warrants must be in registered (and not bearer) form.
Director Election Matters
The election of directors of a CBCA corporation is currently based on a “plurality” system under which a shareholder can either vote “for” a director nominee or “withhold” the shareholder’s vote. Shareholders are not currently entitled to “vote against” a director. If the number of nominees presented for election as directors is the same as the number of directors fixed by the management of a CBCA corporation, management’s slate will be elected even if only one vote “for” is cast for each director and all other votes are “withheld”. The corporate law theory behind this practice is that, while allowing shareholders to express their objection, a corporation should not be deprived of a board of directors.
By contrast, majority voting provides that a director will only be elected if he or she has received a majority of the votes cast at the meeting at which he or she is seeking to be elected. The Toronto Stock Exchange (TSX) introduced new rules in 2014 requiring all corporations listed on the TSX whose articles or by-laws do not already contain majority voting provisions to adopt a written majority voting policy. These policies must provide that for uncontested meetings (i.e. where the number of directors nominated for election is the same as the number of board seats available), a director must immediately tender his or her resignation if he or she is not elected by at least a majority of the votes cast and that the board of directors must determine to accept or refuse (but only in exceptional circumstances) a tendered resignation within 90 days of the relevant meeting. Since the adoption of the TSX’s majority voting rules, there have been a number of situations where a board of directors has refused to accept such a resignation, and the relevant director has continued to serve on the corporation’s board.
The Bill proposes to do away with the plurality system by building majority voting into the CBCA so that a director will only be elected if the number of votes cast in his or her favour represents a majority of the total number of votes cast at the meeting. This will result in a significant change to the status quo for CBCA corporations. It is not clear whether the majority voting requirements will be more onerous than the TSX’s majority voting rules which permit a board of directors to effectively overrule the shareholders where a director does not receive a majority of the votes cast in his or her favour. The Bill does contemplate exceptions that would permit a director who does not receive a majority of the votes to be elected but the criteria to rely on these exceptions is not set out in the text of the Bill and would be dealt with by regulation.
The Bill proposes to enshrine the practice of most Canadian public corporations to allow shareholders to vote in respect of each individual director nominee. This practice of “individual voting” on a director by director basis can be contrasted with “slate voting” where director elections are held on an all or none basis. The practice of “individual voting” has been mandated by the TSX since 2012, and so these proposed changes are not expected to change the status quo for CBCA corporations with securities listed on the TSX.
The Bill proposes to shorten the duration of director terms from a maximum of three years to one year. One year director term limits have been mandated by the TSX since 2012, so these proposed changes are not expected to change the status quo for CBCA corporations with securities listed on the TSX.
Notice-and-access is intended to facilitate electronic methods of communicating with shareholders. This can substantially reduce the cost of printing and mailing proxy-related materials. Under the notice-and-access process introduced under Canadian provincial securities laws in 2013, a public corporation can (at least as far as provincial securities laws are concerned) deliver proxy-related materials by posting the relevant information circular or, if appropriate, other materials, on SEDAR and an alternative website.
The CBCA requires corporations to deliver proxy-related materials to shareholders. Currently, CBCA corporations can obtain an exemption from the requirement to delivery proxy-related materials to shareholders to take advantage of the notice-and-access process, but only as it relates to registered shareholders. The exemption does not extend to intermediaries who must send these materials to beneficial shareholders. As a result of the CBCA requirement to deliver these materials to beneficial shareholders, it is not clear that CBCA corporations can practically make use of notice-and-access. The Bill proposes to expand the scope of available exemptions so that a CBCA corporation could obtain an exemption from the requirement to deliver proxy-related materials to all shareholders – both registered and beneficial. We expect that if the Bill becomes law, we will see an increase in the number of public corporations governed by the CBCA making use of the notice-and-access process.
To learn more about notice-and-access, see our article New Notice-and-Access Process – Streamlined Delivery of Proxy Materials, but Use With Care!
Information released in connection with the Bill suggests that additional changes, not yet fully articulated in the text of the Bill, will also be contemplated, including:
- Requiring, at every annual general meeting, that public corporations governed by the CBCA identify the gender composition of their boards and senior management and to disclose their diversity policies or explain why none are in place. It remains to be seen how these CBCA diversity requirements will intersect with the gender disclosure rules now mandated by Canadian provincial securities laws, but we would expect them to be consistent.
- Simplifying the timeline for shareholders to submit shareholder proposals.
- Clarifying that all certificates representing shares and share warrants must be in registered form, thus prohibiting the issuance and use of bearer shares and bearer share warrants that can be exploited for illegal purposes.
These changes are not expected to be enacted for some time, as the Bill still needs third reading in the House of Commons and three readings in the Senate. Further, certain provisions contemplate regulations which have not yet been proposed and approved by the federal cabinet.