Canada: The Spotlight will Shine More Brightly on Shareholder Voting Processes in M&A

To read "M&A: Tory's Top Trends for 2011" in full, please click here.

In 2009, we predicted that shareholder activism would increase in 2010. We saw this borne out. Shareholders are increasingly exercising their voices, in some cases after pushing for the right to do so, in corporate decisions ranging from matters such as "say on pay" to endorsing or rejecting M&A transactions and the continuance of shareholder rights plans, to replacing directors who are not to their liking. We see this activism continuing in 2011, accompanied with a new focus on the mechanics of the proxy system in Canada and the United States. Interestingly, what we also began to see in 2010 was the corporate world pushing back against what it considered to be the growing and inappropriate influence of proxy advisory firms on the way shareholders exercise their votes. We believe this movement will gain more momentum in 2011

Shareholders Remain Keenly Interested in Getting Their Voices Heard

To see how shareholder activism thrived in Canada and the United States in 2010, you only have to look at Carl Icahn and his list of recent proxy fights. Even institutional investors such as pension funds are becoming increasingly active owners in both governance and financial matters. Shareholders are willing to exert their influence to get what they want.

A number of factors are behind this activism: Shareholders are being given more opportunities to vote as a result of stock exchange or securities laws that give them more legal tools and require their approval for an increasing scope of matters (for example, the TSX now requires its listed companies to obtain shareholder approval when acquiring another public company if the transaction involves issuing shares in excess of 25% of the acquiring company's outstanding shares). The evolution of corporate governance best practices is also leading more companies to seek their shareholders' views on matters that had previously been outside shareholders' sphere of influence – in Canada, for example, "say on pay" and corporate social responsibility agenda items (see Trend 3, on the role of directors versus shareholders). Shareholders are also seeking more influence through negotiations with companies and, failing that, through requisitioning shareholder meetings to force consideration of matters of concern to them. West Face Capital's launch of a proxy battle to replace certain directors of Maple Leaf Foods is a recent example of this in Canada. Activists are feeling more confident, with the assistance of experienced advisers who are gaining new-found prominence in launching proxy battles to force boards to listen to shareholders' views. This trend shows no sign of abating.

Proxy Voting System Flawed?

Shareholder voting in public companies relies on proxy voting. Significant attention has been paid to the U.S. and Canadian proxy systems of late. This has resulted, in part, from the SEC and then the Canadian Securities Administrators inviting general comment on their respective proxy regimes in response to industry and investor interest in updating the rules to promote greater efficiency and transparency in the systems and to enhance the accuracy and integrity of the shareholder vote.

Market participants in the United States and Canada have spoken loudly and clearly, questioning whether the proxy voting system itself is broken. Their concern goes beyond policy issues (although there remains continued interest in the policy issues, including the ongoing debate about reimbursement of proxy solicitation expenses).

Canadian securities regulators and the SEC are being strongly urged to consider changing, indeed strengthening, regulation of proxy voting to deal with identified cases of over-voting, empty voting and the overall lack of transparency in the way voting is processed to ensure that votes are counted properly. Corporations and their shareholders want a clearer view of the way voting instructions are being dealt with, particularly by the proxy voting services that most intermediaries use, such as Broadridge Financial Solutions. These issues have been highlighted in a number of recent proxy battles, including, in Canada, in VenGrowth Asset Management's sale of funds to Covington Capital, in which a dissident shareholder voiced dissatisfaction about problems with the ability to physically submit votes to the proxy voting service, the availability of shareholder lists, the ability to view proxies, and how and when votes are tabulated. In contested M&A transactions, with millions or billions of dollars resting on the outcome of these votes, capturing and accurately recording every vote are critical to all parties involved.

We expect that shareholder voting issues will continue to be under the microscope in the United States and Canada in 2011.

Proxy Advisory Firms Facing Scrutiny

Proxy advisory firms such as Institutional Shareholder Services, Glass Lewis and Proxy Governance Inc. are hired by institutional investors to provide recommendations on how they, as shareholders, should vote on certain corporate decisions. The reports are based on the proxy advisory firm's research and views of corporate governance best practices. These reports shape – and some say determine – voting outcomes because many institutional shareholders either automatically vote in line with the proxy advisory firm's views or give the reports significant weight in deciding how to vote. The role of proxy advisory firms is being increasingly scrutinized and openly criticized by many in corporate Canada and the United States; Kinross Gold Corporation and IBM are just two public companies that have been vocal about their serious concerns in this regard.

The questions that are being asked on both sides of the Canadian–U.S. border about proxy advisory firms include these:

  • Is too much power concentrated in the hands of too few?
  • Are the proxy advisory firms qualified to advise on all the types of decisions that shareholders are now voting on, particularly in change-of-control transactions in which experience beyond corporate governance is critical?
  • Is regulation required to ensure (i) disclosure of apparent voting control and (ii) more oversight and transparency of possible conflicts of interests when the same firm, through different departments, provides both consulting services to issuers regarding management proposals and corporate governance ratings and voter recommendation services to institutions?
  • Should the firms be exempt from the proxy solicitation regime and reporting of control rules?

This is one largely unregulated area of the securities world that may not stay that way for much longer since regulators are being strongly urged to step in.

Changes Will Come

In 2011, equity holders will continue to have increased opportunities to formally exercise their democratic rights to have a say in corporate decisions. We expect that further changes to the proxy voting system will make their way into the regulatory reform agenda in Canada and the United States as regulators heed the call to protect investor confidence by ensuring fairness, accuracy and transparency in all aspects of shareholder voting.

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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