Canada: SEC Adopts Final Rules for Shareholder Proxy Access

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 vote.

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 out below.

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 years.

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 proxy.

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

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 States.

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 future.

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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