The Canadian Coalition for Good Governance (CCGG) recently published a policy encouraging issuers to take measures to enhance “proxy access”, meaning the ability of shareholders to have meaningful input into the director nomination process. The CCGG published this policy in the midst of a surge of voluntary adoption of proxy access by significant issuers in the United States. As of the date of this publication, we are not aware of any Canadian issuer that has adopted proxy access.
In Canada, a registered shareholder can always have a say in the director nomination process by nominating individuals from the floor of a shareholder meeting (being mindful to comply with any applicable advance notice requirements in the company’s by-laws). However, given that most votes are generally subject to management proxies submitted in advance of the meeting, a shareholder realistically seeking to have its nominees elected will have to undertake a proxy campaign in advance of the meeting (in the case of a solicitation of more than 15 shareholders, a dissident proxy circular will have to be prepared, filed publicly on SEDAR and delivered to shareholders whose proxy is solicited).
In Canada, federal and provincial corporate law statutes provide shareholders with other ways to have a say in the identity of the nominees up for election. Under the Canada Business Corporations Act (CBCA), one or more holders of shares representing in the aggregate at least 5% of the voting shares can require the company to include one or more nominees in the management proxy circular in respect of the meeting in question or can requisition a meeting to have one or more current directors removed and other directors elected in their place. Provincial statutes provide for substantially similar rights, with the eligibility criteria varying from that under the CBCA in some cases.
Although the CCGG recognizes that the statutory shareholder proposal and meeting requisition rights in Canada already provide shareholders with some means of proxy access, it believes that improvements are required for meaningful shareholder influence over the nomination process to be achieved. It advocates for changes to the existing statutory framework and, until such changes are made, encourages issuers to voluntarily adopt a proxy access policy. The proxy access terms advanced by the CCGG differ from the existing statutory proposal framework as follows:
- For issuers with a market capitalization of $1 billion or more, the aggregate shareholding percentage required to have access to a nomination right would be lowered from 5% to 3% (the threshold for issuers with a market capitalization of less than $1 billion would be 5%, as under the existing statutory regime under the CBCA and most provincial corporate statutes). A 3% threshold is in line with proxy access policies recently adopted voluntarily by numerous significant U.S. issuers (although, notably, many of those issuers have a market capitalization far in excess of $1 billion).
- Shareholders would not be required to hold their shares for a specific period of time before they are permitted to nominate a director. Under the CBCA, shareholders are required to have held the requisite number of shares for a six-month period in advance of the submission of the proposal (which does not apply of course when a shareholder mounts its own dissident campaign and proposes the nominees from the floor of the meeting). Most U.S. issuers that have adopted proxy access require the shareholders employing proxy access to have held the required percentage of shares for a minimum of three years.
- In determining whether a shareholder has met the minimum threshold for proxy access, its economic interest (being the equity in the company which is “at risk”) rather than its pure voting interest (which could be hedged), will be factored. The current shareholder proposal and meeting requisition rights do not distinguish between economic interest and voting interest in determining whether the 5% threshold has been met.
- The CCGG policy does not speak to how far in advance of the meeting a shareholder would be required to communicate its nominees to the company. Under the CBCA, a shareholder proposal has to be submitted to the company at least 90 days before the anniversary date of the notice of meeting sent to shareholders in connection with the previous year’s meeting.
Number of Nominees
- The number of directors to be nominated by shareholders cannot exceed the lesser of three directors or 20 percent of the board. Where more than one shareholder or group of shareholders holding the requisite percentage wish to nominate directors, each would select one nominee until the maximum number is reached, going in order from the largest to the smallest group of shareholders. Shareholders would not be able to nominate another three directors or 20 percent of the board in the following year so long as the previously nominated directors, if elected, remain on the board. The CCGG also suggests that, in order to provide comfort that a shareholder is not seeking to obtain control of the issuer through use of proxy access, a representation to that effect should be required from shareholders nominating directors by proxy access. The existing shareholder proposal mechanism does not limit the number of nominees that can be proposed.
- The CCGG proxy access terms would establish certain equal treatment standards for the shareholder nominees in the circular and in the form of proxy (including that disclosure in respect of the nominees be located in the same section of the proxy circular with the same prominence and on essentially the same terms as disclosure about the company’s nominees, along with use of a fair “universal proxy” form). The existing statutory framework does not include specific requirements in this regard (other than, under the CBCA, to include in the management circular or to attach to it a statement in support of the proposal of a maximum of 500 words if so requested by the person making the proposal (with no restriction on the length of any management rebuttal)).
- The CCGG proposes that shareholders nominating directors be permitted to use the issuer’s proxy circular to solicit support for their nominees. Under the existing solicitation rules, even if a shareholder has its own nominees listed amongst the nominees in the management proxy circular through its exercise of the shareholder proposal right, the shareholder would nonetheless be required to prepare, file and deliver to solicited shareholders a dissident proxy circular in connection with any solicitation of proxies (unless the solicitation qualifies for an exemption from the proxy circular requirement (for example, where 15 or fewer shareholders are solicited)). Note that this represents a proposed amendment to the existing solicitation rules that cannot be achieved through voluntary adoption of by-law amendments by issuers.
- The CCGG proxy access terms provide that reasonable solicitation costs of a shareholder availing itself of proxy access be paid by the company (unless shareholders resolve otherwise at the meeting in question). Note that in order to provide shareholders with an opportunity to vote in respect of the reimbursement of such solicitation costs, an issuer may have to include the consideration of this matter as an item of business in the relevant notice of meeting. The precise amount of costs claimed for reimbursement would presumably not be available for shareholders to factor into their decision in advance of the meeting.
McCarthy Tétrault Notes
- We rarely see shareholders use the proposal right under Canadian federal and provincial statutes to nominate directors for election. It will be interesting to see whether the more shareholder-friendly terms of the proxy access framework proposed by CCGG (if and when adopted by issuers), including a lowering of the bar with respect to eligibility, assurance with respect to fair disclosure, and the lessening of the burden of solicitation, would actually motivate increased shareholder participation in the nomination process.
- An issuer’s adoption of proxy access into its by-laws would not have the effect of replacing the shareholder proposal rights which already exist under Canadian federal and provincial statutes. There could be scenarios in which a shareholder could want to make nominations through the existing shareholder proposal framework instead of through the issuer’s proxy access policy (where the shareholder does not want the number of its nominees to be capped, for example). This could result in the issuer having to apply different rules in respect of different nominations.
- It is good corporate governance practice for a board to establish a process (often through a nominating committee) to ensure that, as a whole, it has an appropriate mix of competencies and skills. Securities laws establish guidelines for the proportion of independent directors on the board and on certain of its committees. Proxy advisory firms set their own standards with respect to board independence and other board composition factors, such as board interlocks and “overboarding”. Granting shareholders more meaningful input into the director nomination process , when such shareholders are free to nominate any individual or individuals for any reason, including the belief that the nominated individual(s) will vote in alignment with that shareholder’s wishes, may leave boards with less flexibility to achieve these various composition guidelines.