Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities, September 2011
The Toronto Stock Exchange (TSX) has published for comment proposed changes to its Company Manual which would require TSX-listed issuers to:
- elect directors individually;
- hold annual elections for all directors; and
- make specified disclosure concerning majority voting for the election of directors.
The comment period in respect of the proposed amendments expires on October 11, 2011. The proposed changes address the TSX's concern that Canadian investors may not have as effective a voice in electing directors as investors in other jurisdictions and their belief that the proposed amendments will bolster Canada's reputation for supporting strong governance standards, bringing Canada closer to the practices of other major international jurisdictions.
Individual Director Elections
The TSX proposes that listed companies provide for individual director elections, meaning that holders of voting securities would be able to vote "for" or "withhold" voting, separately for each director nominee. According to the TSX, approximately 83% of issuers in the S&P/TSX Composite Index currently elect directors individually. The alternative to individual elections is electing directors by slate, whereby shareholders are able to vote "for" or "withhold" voting only in respect of all the proposed directors as a slate.
In addition to affecting the election of directors generally, the proposed amendments, if implemented, would require individual director elections in contested elections (i.e., elections for which the number of proposed nominees exceeds the number of available board appointments). This would mark a change from current practice where, in contested elections, management and dissident security holders often put forward competing board slates.
Annual Director Elections
The TSX proposes that at each annual meeting of security holders, holders be entitled to vote on the election of all directors. The TSX's proposal would in effect eliminate staggered boards where only a subset of directors is elected each year and director terms are for more than one year. Use of staggered boards is not common in Canada, where, according to the TSX, 98% of issuers in the S&P/TSX Composite Index hold annual director elections, but has been cited by Canadian governance commentators as a mechanism for board entrenchment as it could take security holders a number of years to refresh a board with staggered terms.
Majority Voting for Director Elections Overview
Under Canadian corporate law, security holders are entitled to vote "for" or "withhold" their votes in respect of the election of directors to the board of an issuer. As a result, in non-contested elections, each nominee director is elected to the board provided at least a single vote is cast for the nominee. In contrast, under majority voting for director elections, security holders are effectively permitted to vote "for" or "against" board nominees.
Majority voting arrangements, common in some jurisdictions outside North America and increasingly adopted by Canadian issuers, typically provide that if a majority of votes are "withheld" from the election of a nominee director, the individual must tender his/her resignation for consideration by the board of directors. The board is generally expected to accept the director's resignation and publicly announce its decision. According to the Canadian Coalition for Good Governance, 57% of issuers in the S&P/TSX Composite Index have adopted a majority voting policy.
While the TSX contends that majority voting policies support good governance by providing a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors, the TSX has not proposed to mandate majority voting or the adoption of a majority voting policy, instead proposing a disclosure model for majority voting and noting that it plans to continue to monitor the corporate governance landscape to determine if a rule requiring listed issuers to adopt a majority voting policy may be appropriate. The TSX notes that while majority voting is becoming better understood and supported by its largest listed issuers, there are currently corporate and securities law concerns with mandatory majority voting, majority voting policies are not yet widely understood, and issuers have not adopted majority voting policies to the same degree as annual elections and individual director elections.
Management Information Circular Disclosure
If implemented, the TSX's proposals would require materials sent to security holders by listed issuers that are subject to National Instrument 51-102 – Continuous Disclosure Obligations, in connection with a meeting of security holders at which directors are being elected, to disclose whether the issuer has adopted a majority voting policy for directors for non-contested meetings and if not, explain their practices for electing directors and why they have not adopted a majority voting policy. The TSX believes that disclosure of an issuer's adoption or non-adoption of a majority voting policy will enhance the governance dialogue between issuers, security holders and other stakeholders and improve transparency.
Election Results Reporting to the TSX
For TSX-listed issuers that have not adopted a majority voting policy, the proposed amendments would require that following each meeting of security holders at which there is a vote on the election of directors, the issuer would be required to provide notice to the TSX if a director receives a majority of "withhold" votes. The TSX notes that it intends to follow up with the issuer in such cases to understand its intentions and corporate governance practices in light of the voting results, and to follow up with the applicable director to understand how the vote results may affect his/her views about serving as a director of the issuer.
Public Disclosure of Proxy Results
Although no changes to the TSX Company Manual have been proposed regarding disclosure of voting results, the TSX has asked for comments as to whether it should consider requiring disclosure of voting results or, in the alternative, require that the election of directors be conducted by ballot to ensure public disclosure of the voting results. The TSX notes that disclosure of the votes received for each director is valuable information for security holders and other stakeholders and points out that if the vote in respect of the election of directors is conducted by a show of hands, disclosure of the votes received for each director would not be required under existing requirements.
Authority and Necessity
The TSX has also asked if the proposed amendments are an appropriate initiative for the TSX to pursue or whether other organizations are better suited to pursue such initiatives. In anticipation of potential comments, the TSX acknowledges that the TSX "understands that some may not consider these issues part of TSX's jurisdiction" and, in response, notes that it monitors corporate governance disclosure and that the proposed amendments could be added to the TSX's existing compliance efforts and managed within the existing framework and that the TSX Venture Exchange has existing requirements dealing with director elections.
The TSX acknowledges that the Ontario Securities Commission (OSC) published OSC Staff Notice 54‑701 – Regulatory Developments Regarding Shareholder Democracy Issues on January 10, 2011, soliciting comments in respect of areas that included slate voting and majority voting for non-contested director elections. However, the TSX believes that the OSC process is at an early stage and that any OSC initiatives will be complementary to the TSX's proposed amendments.
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