General

Toronto Stock Exchange issuers should be aware that, beginning December 31, 2012, TSX-listed companies may be required to make changes to their policies for electing directors and making public disclosure of election results. The TSX has determined that Canadian director election standards were lagging behind other major international jurisdictions, and therefore, it has introduced certain requirements "to improve corporate governance standards and disclosure for all TSX listed issuers, in support of upholding security holder interests and the integrity and reputation of the Canadian capital markets." The proposed amendments were originally published in September, 2011, and have received support from the majority of those that provided comment.

The TSX also published another proposal for further amendments to the TSX Company Manual which would mandate majority voting for all director elections at uncontested meetings of TSX-listed issuers. The TSX is reviewing comments received on this proposal before November 5, 2012, and expects any further changes to take effect by December 31, 2013.

The Amendments

On October 4, 2012, the TSX announced that it will adopt amendments to the TSX Company Manual which may alter the method for electing directors of TSX-listed issuers. As of December 31, 2012, the following changes will take effect:

  1. Companies will be required to elect directors individually, as opposed to by group or "slate." In the past, shareholders did not always have the opportunity to pick and choose which directors to support for election because each director was part of a group of directors that was being considered for election as a whole. Shareholders may once have been forced to accept an entire slate of directors, but now have the option to support only those members of a group they wish to elect.
  2. Companies will be required to elect directors annually, as opposed to electing directors with multi-year and over-lapping, or staggered, terms. While Canadian corporate law generally permits longer terms with staggered expirations, the TSX views this amendment as a necessary part of effective corporate governance because it gives shareholders an opportunity to hold directors accountable for their performance on an annual basis.
  3. Companies will be required to promptly disclose the voting results for the election of its directors by press release.
  4. Companies will be required to publicly disclose in their annual information circulars whether the company has adopted a majority voting policy (as described below) or, alternatively, explaining its election practices and any reasons for adopting a voting policy other than by majority. The TSX believes that annual majority voting policies promote effective corporate governance because they communicate to issuers which directors do not have the support of a majority of shareholders on a yearly basis.
  5. If a company does not adopt a majority voting policy, it must notify the TSX if a director receives a majority of "withhold" votes.

Majority Voting vs. Plurality Voting

Corporate legislation currently allows for "plurality" voting – shareholders either vote "for" a nominee, or they "withhold" their vote for the nominee. If a company employs plurality voting, an uncontested nominee doesn't need a majority of shareholders' votes because, as long as one shareholder votes for the nominee, that nominee would be elected, regardless of the number of votes "withheld" from the nominee. This is in contrast to majority voting, which provides that a nominee may not have more votes for their election "withheld" than cast in favour "for" their election. Generally speaking, directors who receive more "withholds" than votes cast "for" their election are expected to tender their resignation.

It is important to note that the amendments described herein do not require majority voting, but rather the TSX is adopting a "disclose and explain" approach. Companies must only inform investors of their voting policies and explain why they have not chosen to adopt annual majority election policies. Under the proposed further amendments to the TSX Company Manual, all TSX-listed companies would have to adopt majority voting policies, but these rules, if adopted, will likely not take effect before December 31, 2013.

Seek Advice

Familiarity with the above-described amendments will be crucial in ensuring ongoing director election and disclosure compliance. Legal counsel can play an important role in reviewing existing company practices, advising on whether different practices are appropriate, and developing compliant election and disclosure policies.