A number of recent legislative and regulatory initiatives in the United States will likely result in corresponding changes in Canada in the area of shareholder governance of companies.
Those changes include the following:
- Mandatory ‘Say-on-Pay’ Vote — A requirement was introduced under the US Emergency Economic Stabilization Act of 2008 for a shareholder advisory ‘say-on-pay’ vote on executive compensation for public companies receiving money from the Troubled Asset Relief Program (TARP). On July 1, 2009, the Securities and Exchange Commission (SEC) proposed changes to its rules that would require public companies that are TARP recipients to provide ‘say-on-pay’ votes. Shareholder advisory votes on executive compensation have become more common both in the United States and Canada, however this is the first instance of a mandated shareholder advisory vote in the United States or Canada. In addition, bills have been introduced in both the US Senate (the Shareholder Bill of Rights Act of 2009) and the US House of Representatives (the Shareholder Empowerment Act of 2009) to make ‘say-on-pay’ votes mandatory for all US public companies, and the US Treasury Secretary has announced that the US Treasury supports these legislative initiatives.
- Shareholder Nomination of Directors — A proposed rule was published by the SEC on June 10, 2009 that would entitle eligible shareholders to have access to a company’s proxy materials in order to facilitate the election of directors nominated by those shareholders — by requiring inclusion in the Company’s proxy materials of a shareholder’s nominees for up to 25 per cent of the board if the shareholder has held for at least one year a significant interest in the company’s voting securities (one per cent for large accelerated filers, three per cent for accelerated filers and five per cent for non-accelerated filers). The shareholders would be required to sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected and would be required to certify that they are not holding their shares for the purpose of changing control of the company, or to gain more than minority representation on the board of directors. In Canada, shareholders continue to avail themselves of the provisions of corporate and securities legislation to use a dissident proxy circular prepared and distributed at their expense to promote the election of their nominees for election. Recent examples of Canadian companies where proxy contests for the election of directors have been waged include Biovail Corporation, PetValu Canada Inc., Zarlink Semiconductor Inc., and Genco Resources Ltd.
- Broker Discretionary Voting of Street Name Securities — The SEC recently approved an amendment to Rule 452 of the New York Stock Exchange (NYSE) eliminating the right of brokers to vote uninstructed shares in director elections at shareholder meetings held on or after January 1, 2010. Under current NYSE Rule 452, brokers are allowed to vote on routine proposals, including ratification of auditors and uncontested director elections, if the beneficial owner customer has not provided voting instructions to the customer’s broker prior to the scheduled meeting of shareholders. The current practice of most brokers is to vote uninstructed shares in accordance with the recommendations of a company’s management. In Canada, National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) prohibits brokers from voting securities of Canadian reporting issuers in street name without specific voting instructions from the beneficial owner of the securities.
These changes follow an earlier change in both Canada and the United States in which many public companies, without being required to do so by law or stock exchange rule, have implemented a majority-voting-for-directors’ policy. The policy, which is frequently set forth in amended bylaw provisions of a company, requires the company to determine whether a director receives at a shareholders’ meeting fewer votes for his or her election than the number of votes withheld from voting for that director. If so, the board must then consider whether to accept the resignation of that director, which is required to be delivered in such circumstances pursuant to the policy.
As always, Canadian securities industry participants will need to keep an eye on US developments as they often migrate to Canada.