The U.S. Securities and Exchange Commission ("SEC")
has now adopted final rules giving shareholders "proxy
access." These rules give shareholders who meet certain
conditions the right to include in the issuer's proxy circular
their nominees to the board of directors. After many years of
controversy, proxy access was adopted on August 25, 2010, by a 3-2
The new proxy access rules are not applicable to foreign private
issuers, which would include most Canadian public companies listed
on U.S. exchanges. Canadian corporations are of course subject to
the provisions of their own corporate statutes, most of which
already have a form of proxy access. The differences between the
new U.S. proxy access rules and the existing Canadian rules are set
The key elements of the new proxy access rules are:
Proxy access will be available to a shareholder or shareholder
groups who have owned at least three percent of the issuer's
voting shares continuously for at least the previous three
Shareholders cannot borrow shares to achieve the thresholds and
any short positions must be netted. However, shares that have been
lent to others may be counted, provided that the nominating
shareholder has the right to recall the shares and will do so if
the issuer includes the shareholders' nominees in its
Qualifying shareholders may include nominees for director on the
issuer's ballot and describe them (limited to 500 words per
nominee) in the circular. Nominating shareholders will be subject
to certain disclosure, procedural and other requirements.
Shareholders will have the right to include in the proxy
circular no more than the prescribed number of nominees for
director (being the greater of one director or 25 percent of the
board). If the number of shareholder nominees exceeds the number
permitted under the rule, then preference will be given to those
nominated by the largest shareholder or shareholder groups.
Shareholders will not be able to use the new rules if they hold
their shares with the intent of changing control of the issuer or
gaining more seats on the board than is permitted under the rules.
Shareholder nominees also must satisfy state and federal law
eligibility requirements and applicable stock exchange independence
standards. An issuer may challenge a nominee's qualification by
using the SEC no-action process.
An issuer may broaden shareholders' proxy access rights
beyond those given by the SEC rules, but may not narrow them.
Application of the proxy access rules to smaller reporting
companies (those with a common equity public float of less than
U.S.$75 million) will be deferred for three years.
The rules will be effective 60 days from publication in the
Federal Register and will apply to an annual meeting in the 2011
proxy season if the first anniversary of the mailing of this
year's proxy materials occurs within 120 days from and
including the effective date. For example, if the rules are
effective on November 1, 2010, then shareholders have a proxy
access right if the issuer mailed their proxy materials on or after
March 1, 2010. A copy of the final rules can be found at http://www.sec.gov/rules/final/2010/33-9136.pdf.
Canadian corporate statutes have long provided shareholders with
access to the proxy for the purpose of nominating directors. Most
statutes require a share-ownership threshold of five percent and
several require a minimum holding period. Some statutes also
require that shareholders give notice to the issuer of their intent
to use proxy access at least 90 days before the anniversary date of
the mailing of the prior year's notice of meeting. Canadian law
does not deal with many of the other issues described above that
form a part of the new proxy access rules in the United
Neither Canadian law nor the new U.S. proxy access rules deal with
the issue of expense reimbursement. In contrast, Delaware corporate
law now allows, but does not require, a Delaware corporation's
by-laws to include a provision providing for issuer reimbursement
of shareholders who solicited proxies for the election of
directors. The SEC opted not to include expense reimbursement in
the proxy access rules out of a belief that it is an inefficient
way to facilitate board changes and increase board accountability
because shareholders would still need funds to maintain an election
contest. The SEC also expressed concern that expense reimbursement
would create a disparity among shareholders as those with greater
resources could take advantage of the right and conduct a proxy
contest, knowing they would be reimbursed, whereas shareholders
lacking such resources would be unable to do so.
We expect that in both Canada and the United States, the issue of
proxy solicitation expense reimbursement will emerge in the near
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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