Two of Canada’s largest banks – Toronto-Dominion Bank (TD Bank) and Royal Bank of Canada (RBC) – are the first public companies in Canada to adopt proxy access policies. The move comes after dialogue with their respective shareholder bases both before and after their 2017 annual general shareholders’ meetings (AGMs) at which shareholders had supported (to varying degrees of success) shareholder proposals asking the banks to adopt proxy access bylaws to facilitate shareholders’ nominations of directors. Proxy access has now arrived in Canada, at least for big banks. However, many continue to question the necessity or appropriateness of proxy access in Canada, suggesting that for most public companies proxy access may be a solution in need of a problem.
Existing Shareholder Nomination Rights in Canada
Under the banks’ governing statute, the Bank Act, as well as most corporate statutes in Canada, shareholders of Canadian companies already have the right to submit a shareholder proposal on any matter that the investor proposes to raise at a shareholders’ meeting, including director nominations. Any business validly submitted by way of a proposal must be included in the issuer’s management proxy circular for its AGM, subject to compliance with prescribed requirements under the applicable statute and certain exceptions. Importantly, these existing shareholder proposal rights already allow holders of at least 5% of the voting shares for a six-month period to submit nominations for an unlimited number of directors. Additionally, holders of 5% or more of the voting shares of Canadian corporations also have the right to requisition the directors to call a shareholders’ meeting – a right often used to nominate directors at Canadian public companies.
TD Bank and RBC Proxy Access Policies: Background and Key Features
Despite these rights, proxy access has been a top governance issue in Canada and the United States over the past few years, leading to the first-ever proxy access shareholder proposals being submitted to TD Bank and RBC at their AGMs earlier this year. Following dialogue with their respective shareholders, as well as consultation with the Canadian Coalition for Good Governance (CCGG), Canada’s leading governance advisory group, TD Bank and RBC adopted almost identical U.S.-style proxy access policies, effective immediately. The proxy access policies are detailed and complex, with the following principal features:
- One or more nominating shareholders (up to a maximum of 20 shareholders) may nominate directors for inclusion in the bank’s proxy circular and form of proxy and ballot for any annual shareholders’ meeting.
- Nominating shareholders must collectively own 5% or more of the outstanding common shares.
- Common shares must have been held by the nominating shareholders continuously for at least three years.
- Nominating shareholders must have full voting and economic rights in the relevant common shares.
- The number of director nominees may not exceed the greater of two directors and 20% of the board.
- In addition to including prescribed information about the nominating shareholders and nominees in the notice to be submitted by the nominating shareholders, nominating shareholders may include a statement of up to 500 words in support of the election of the shareholders’ nominees, in addition to biographical information concerning the nominees.
Nominating shareholders must also enter into a nominating shareholder agreement with the bank (in the form attached to the policy). Under that agreement, the nominating shareholders must, among other things, agree to comply with the requirements of the Bank Act, securities legislation and stock exchange rules, assume all liability stemming from any action concerning any violation arising out of communications by the nominating shareholders or their nominees, and indemnify the bank against any losses or costs incurred in connection with any action against the bank relating to the submission of the nomination or any communication by the nominating shareholders or their nominees.
Concurrently with adopting these policies, TD Bank and RBC submitted a joint letter to Canada’s Department of Finance advocating for changes to the Bank Act to facilitate their adoption of proxy access on a basis consistent with the “3/3/20/20” model that several issuers have adopted in the United States (i.e., one or more holders (up to a maximum of 20 holders in a group) of at least 3% of the shares, held continuously for three years, may nominate up to 20% of the board). The amendments are necessary since, currently, the Bank Act (and other corporate statutes) require a 5% minimum share ownership threshold to nominate directors, which TD Bank and RBC indicate they intend to reduce to 3% if their recommended changes to the Bank Act are implemented. The joint letter also advocates other changes to the Bank Act (along with harmonization of the definition of “solicitation” under Canadian securities laws) consistent with the provisions of their policies. In the interim, TD Bank stated that it has adopted proxy access as a policy, rather than a bylaw, to allow it to implement proxy access with effect for its next AGM without losing the flexibility to keep current with new developments, such as changes that would result from an amendment to the Bank Act.
As noted above, the TD Bank and RBC proxy access policies are consistent with the fairly typical proxy access bylaw standard adopted by U.S. public companies over the past few years. This includes requiring a minimum three-year shareholding period and a cap on the number of shareholders that can form a nominating group, despite the fact that CCGG had not advocated for these features in its May 2015 policy statement that urged Canadian issuers to voluntarily adopt proxy access. However, the joint letter to the Minister of Finance indicates that CCGG is reviewing its previous position and will support a requirement that nominating shareholders hold shares for at least three years. It should also be noted that not all U.S.-style proxy access bylaws are the same, with some having no limit on the number of shareholders that can form a nominating group, and others allowing nominations for up to 25% (and sometimes more) of the board.
The banks’ proxy access policies include several other provisions that nominating shareholders and their nominees will need to comply with to be eligible to nominate directors, rendering the proxy access rights more onerous and restrictive in many respects than under the existing shareholder proposal regime. For example, nomination notices must include various representations and warranties from the nominating shareholders; contain information concerning the nominees’ independence and other information that would be required in a dissident proxy circular; disclose certain details of positions held by nominees at the banks’ competitors; and disclose any compensatory arrangements in place with the nominees. Importantly, to be eligible, nominating shareholders must also undertake not to engage in a “solicitation” (which is broadly defined) under the Bank Act or Canadian securities laws other than a solicitation solely in support of the nominating shareholders’ own nominees and the bank’s nominees without sending a proxy circular under exemptions from the obligations to send a proxy circular (i.e., the public broadcast and 15-shareholder or less solicitation exemptions).
The banks are also entitled to omit from their proxy circulars any nominees or information concerning nominees in various circumstances, including where:
- a shareholder proposal containing director nominees is submitted;
- a shareholder commences a solicitation under the Bank Act or Canadian securities laws with respect to the election of directors;
- the nominating shareholders do not attend the shareholders’ meeting; or
- the bank is otherwise permitted to reject a shareholder proposal (e.g., the nomination notice and other required documents are not submitted at least 90 days before the anniversary of the notice of meeting for the prior year’s AGM, the purpose is to enforce a “personal claim” or “personal grievance,” or the rights are being abused to secure publicity).
Have the Proxy Access Floodgates Opened? Implications for Canadian Issuers
While the adoption of proxy access in Canada is certainly an important development and is likely to be followed by other major Canadian banks, we do not expect an explosion of proxy access proposals in Canada in the 2018 proxy season; nor do we expect many other non-bank Canadian issuers to rush out and voluntarily adopt proxy access. As discussed in our just released report Davies Governance Insights 2017, proxy access, or at least the U.S.-style proxy access that has developed, may not be appropriate or necessary for the Canadian market. The existing shareholder proposal and requisition rights in Canada, combined with distinctions between Canada’s corporate laws and the Toronto Stock Exchange rules, on the one hand, and the United States’ rules, on the other, effectively already ensure that directors can be removed and replaced by shareholders at each AGM. Moreover, important differences between the Canadian and U.S. markets may obviate the need for proxy access in Canada. The growth in shareholder engagement, in its various forms, also provides many significant and influential shareholders with input into director nominations at the companies in which they invest. Canadian issuers and investors should carefully consider whether (and why) they support enhanced proxy access and, if they do, what the most appropriate form is, based on the particular circumstances of each issuer. The adoption of new governance processes, solely for the sake of process, should be guarded against.