Canada: Further Thoughts On TSX Changes To Director Elections And Majority Voting

The Toronto Stock Exchange recently announced proposed amendments to the TSX Company Manual that would require all TSX-listed issuers to elect directors by majority vote (the "Proposed Amendments"). If the Proposed Amendments are adopted, security holders will effectively be required to vote "for" or "against" each individual board nominee, in contrast to the default plurality voting under Canadian corporate law whereby security holders voting by proxy either vote "for" or "withhold" when electing directors.

Under the Proposed Amendments, the TSX would require that all listed issuers adopt majority voting for uncontested director elections.1 This could be implemented by the board's adoption of a majority voting policy, as opposed to formally amending an issuer's constating documents. Where a majority voting policy is adopted, security holders voting by proxy would still vote "for" or "withhold" for each individual board nominee, as required by corporate law. However, "withhold" votes would be considered "against" votes and counted as part of the total votes cast. The type of majority voting policy described in the Proposed Amendments would require that (i) a director who received a majority of "withhold" votes tender his/her resignation immediately following the meeting, to be effective upon acceptance by the board; and (ii) the board consider whether to accept the resignation and disclose its decision within 90 days of the receipt of such resignation. Under the existing voting regime, even if a director receives a majority of "withhold" votes in an uncontested election, the director is still elected under corporate law for the ensuing term.

Why the Need to Mandate Majority Voting?

Shareholders of Canadian public companies who vote by proxy have no automatic right under corporate law to vote "against" individual directors nominated for election to the board. Instead, shareholders who vote by proxy have only two options: to vote "for" nominees or to effectively abstain from voting by withholding their vote. In practice, since most shareholders of Canadian public companies vote by proxy, directors are elected so long as any affirmative votes are received, regardless of the number of votes withheld. This has two implications: i) a minority of shareholders voting "for" director nominees has the power to elect those directors; and ii) even an overwhelming majority of votes withheld will not block the election.

Some Concerns with Majority Voting

Corporate laws allowing shareholders to vote proxies "for" or "withhold" were adopted largely to avoid complications arising from a failure to elect the requisite number of directors. Critics of majority voting proposals often cite, among other concerns, the minimum number of total director nominees or qualified members of certain board committees not being elected (putting the issuer offside corporate and securities laws), the added resources and time required to have subsequent shareholder meetings to elect new directors to replace those forced to resign, disruptions and a general destabilizing effect caused by a failure to re-elect key directors, difficulties in fulfilling the board's mandate absent a full board, the negative impact on potential candidates, and potential increased influence by special-interest shareholders, who may be able to defeat a nominee in a situation where, due to low shareholder participation, withheld votes constitute a majority of the votes cast at a meeting but significantly less than a majority of the total outstanding shares.

Recognizing some of these concerns, the TSX is proposing that its listed issuers adopt a non-binding policy which would functionally allow directors to resign at a later time, giving the board adequate time to reconstitute and reorganize if necessary, without being offside corporate or securities laws or requirements. While it is open for an issuer to adopt a stricter policy that requires that the board accept the director's resignation immediately without affording the board any discretion to determine whether the resignation should or should not be accepted, these are generally less common due to the lack of flexibility to address the types of complications discussed above. Regardless of the type of policy adopted, a director who receives a majority of "withhold" votes would still be elected as a matter of corporate law. The purpose of the majority voting policy is to ensure that only those directors who receive a majority of votes in their favour remain on the board, with the differences among majority voting policies determining if, how and when a defeated director is replaced. In the Canadian Coalition for Good Governance's suggested form of majority voting policy, for example, boards choosing to accept the resignation of a director who received a majority of "withhold" votes generally have three options: i) leave the seat unfilled until the next annual meeting; ii) appoint a new director the board considers to "merit the confidence of the shareholders"; or iii) call a special meeting to elect a new director.

Practically, our experience has been that a majority of "withhold" votes is not a common occurrence among companies that have adopted voluntary majority voting policies. In fact, directors may opt to withdraw from the election process in advance of the meeting in order to avoid potential embarrassment or negative publicity if the preliminary proxy voting results indicate an unfavourable outcome. In cases where a majority of "withhold" votes has been received, the response by company boards varies. Often, director resignations pursuant to majority voting policies are not accepted or, if accepted, clear reasons as to why the board came to that decision are often not provided. Evidence from the U.S. suggests that defeated directors may often not resign, but will not have their names put forward for election the following year. In this respect, the TSX has asked for comments on whether it would be useful for the TSX to provide specific guidance stating that it expects that the board of directors will typically accept the resignation of a director that receives a majority of "withhold" votes, absent exceptional circumstances.

Conclusion

As shareholders of public entities and regulators continue to take a growing interest in matters of corporate governance, one issue of rising prominence is the process by which those in charge of governance, directors and officers, are elected or appointed. Shareholder participation in the election of directors has gained significant attention in recent years. Although this is a significant issue for Canadian shareholders, as evidenced by recent shareholder proposals and initiatives of institutional investors and shareholder interest groups, such as the Canadian Coalition for Good Governance,the Proposed Amendments represent the first time a Canadian regulator has undertaken any formal initiatives to address these issues. (It should be noted that the Ontario Securities Commission indicated in Staff Notice 54-701Regulatory Developments Regarding Shareholder Democracy Issues, in January of 2011, that it was considering a number of related issues, including amending securities laws to require individual voting and majority voting for directors).

While the importance or relative impact of the concerns raised by critics of majority voting can be debated, they are not without merit and should be considered alongside the competing interest of providing shareholders with greater access to director elections. Despite the potential concerns, a number of TSX-listed issuers have already voluntarily adopted majority voting policies. The experience of these issuers is indicative of the fact that most, if not all, of these concerns appear manageable with a well-drafted majority voting policy that takes into account the specific circumstances of a particular issuer.

The Proposed Amendments are open for public comment until November 5, 2012. If adopted, they are not expected to be implemented before the 2014 proxy voting season. As we discussed in our post earlier this month, these amendments complement recent changes to the TSX Company Manual requiring annual director elections, individual voting (as opposed to slate voting) and requirements to disclose votes received for director elections and whether or not a majority voting policy has been adopted, which are scheduled to go into effect on December 31, 2012.

Footnotes

1. While the Proposed Amendments do not define the term "uncontested", it is generally understood to refer to a director election where the number of nominees for election is equal to the number of directors to be elected. Majority voting policies adopted by issuers can express this in different ways, including by having the policy apply only to elections where all of the nominees for election to the board are supported by the current board of directors and disclosed in the company's management proxy circular.

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