On October 4, 2012, the Toronto Stock Exchange (TSX) adopted amendments to Part IV of the TSX Company Manual (Manual), implementing new provisions for the election of directors of TSX-listed companies. In short, companies listed on the TSX will either have to adopt a “majority-voting” policy for the election of directors, or disclose publicly why they have not done so.

For now, the TSX has not made majority voting mandatory. However, at the same time as the TSX approved these amendments, it also published, for comment by the public, proposed amendments to the Manual that would require all TSX-listed companies to adopt a majority-voting policy for the election of directors. The public has until November 4, 2012 to provide comments to the TSX on the proposed amendments. In light of the proposed amendments, it appears likely that all TSX-listed companies will be required to have a majority-voting policy for the election of directors in the near future.  

A majority-voting policy for the election of directors generally takes the form of a policy adopted by the Board of Directors of the company. Under a majority-voting policy, Board nominees are elected on an individual basis, rather than as a slate. Shareholders vote on their proxy forms, as prescribed by corporate law, either “for” each Board nominee, or “withhold” their vote. However, under a majority-voting policy, “withheld” votes are considered to be “against” votes. Typically, a majority-voting policy provides that a director who receives more “withheld” votes than “for” votes must tender his/her resignation, even though the director has been duly elected under corporate law. The resignation generally will be accepted by Board of Directors, unless there are exceptional circumstances. In other words, a majority-voting policy is designed to ensure that only those directors who receive more “for” votes than “withheld” votes remain on the Board. In contrast, under the plurality-voting system of corporate law, a director or slate of directors is elected even if only one vote is cast “for” the director or slate, regardless of the number of “withheld” votes. As a result, under the plurality-voting system, virtually every nominee director or slate is elected.

The new TSX rules will require each company listed on the TSX to: (i) elect directors individually, and not as a slate; (ii) hold annual elections for all directors, which means that TSX-listed companies cannot have Boards with “staggered” terms of more than one year; (iii) disclose annually in its proxy circular whether it has adopted a majority-voting policy for the election of directors and, if it has not done so, explain its practice for electing directors and why it has not adopted a majority-voting policy; and (iv) after a shareholders’ meeting, promptly issue a news release providing detailed disclosure of the voting results for the election of its directors. Further, if the listed company has not adopted a majority-voting policy, it must advise the TSX (by e-mail) if one of its directors received more “withheld” votes than “for” votes.

The goal of the new rules is to improve corporate governance and disclosure by TSX-listed companies and to uphold security-holder interests and the integrity and reputation of the Canadian capital markets. According to the TSX, majority voting provides a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors. The TSX notes that Canada and the United States are among the few major developed jurisdictions that still have plurality voting for the election of directors.

The amendments to the Manual take effect on December 31, 2012. They will not apply retroactively. This means that a company which, prior to December 31, 2012, calls a shareholders’ meeting for which proxy materials are approved by the Board of Directors, will not be affected by the new provisions until its next shareholders’ meeting at which directors will be elected.

The TSX expects that, by December 31, 2013, all TSX-listed companies and applicants for listing will comply with the new rules. If they do not, they will be considered to be in breach of the Manual.

If changes to a listed company’s articles or by-laws are required to implement annual elections of directors (for example, if the articles provide for three-year terms for directors) and shareholders do not approve the required resolution, the TSX will respect the shareholder vote and the listed company will not be considered to be in breach of the Manual. However, the listed company will have to present the resolution required to implement annual elections to shareholders again within a three-year period of the negative vote, and the listed company’s Board will be required to support the resolution.

After December 31, 2012, all applicants for listing on the TSX and all applicants with listing applications in progress are expected to explain to the TSX if they are in compliance with the new rule, and if not, to provide the TSX with a plan and time frame for complying with the new rule.

The adoption of the amendments to the Manual was not supported by all of those who provided comments to the TSX. It was pointed out in certain comments that while the TSX used to regulate corporate governance practices (former sections 472 to 477 of the Manual adopted in 1995 following the 14 recommendations made in the 1994 Dey Report), these provisions were repealed with the adoption in 2005 by the Canadian Securities Administrators (CSA) of National Instrument 58-101 – Disclosure of Corporate Governance Practices (58-101) and Multilateral Policy 58-201 – Effective Corporate Governance (58-201). In considering whether the TSX is best placed to regulate these matters, it is interesting to note the CSA’s response to a comment it received in respect of 58-101 and 58-201, suggesting that corporate governance guidelines and disclosure rules should remain with the TSX: “In [the CSA’s] view, it is more appropriate that corporate governance guidelines and the related disclosure instrument remain with the CSA for two reasons. First and foremost, this regulation is inconsistent with the business model of the TSX. Second, the CSA have a broader array of sanctions at their disposal to enforce the related disclosure requirements.” At the time, the CSA also noted that international practice in the area of corporate governance is mixed, pointing out that in the U.K. corporate governance was regulated by the Financial Services Authority. So we have now come full circle, and the TSX is again regulating a matter of corporate governance, namely, the election of directors.