Shareholders typically have three options available to them when
looking to nominate directors different than those put forth by the
company's management, (i) a shareholder proposal that is added
to the management proxy circular for the applicable shareholder
meeting, (ii) the more popular and publicized proxy contest, which
generally requires that the shareholder(s) soliciting proxies
prepare and mail to shareholders a dissident proxy circular that
both identifies the nominees in question and contains certain
prescribed disclosure, and (iii) nominating directors from the
floor at the company's annual general meeting (either as a
registered shareholder(s) or by way of proxies), usually providing
the company with no or very little advance warning.
In August of 2011 our colleague, Matthew Cumming, wrote a blog
Dissident Ambush of a Shareholder's Meeting" which
discussed option (iii) and the tactics to consider in taking such
an approach. As shareholders of Canadian companies have become
increasingly active, this type of behavior has become more common.
In response, boards have found a way to defend against being
subject to such an unwanted surprise and one that appears to be
garnering support – advance notice by-laws.
The typical response when it becomes apparent that the
company's shareholders will face a surprise vote on the
election of directors has been to postpone the scheduled
shareholder meeting. Canadian courts have proven sympathetic to
such a response provided theboard of directors, in postponing the
meeting, does so in good faith. In allowing the postponement of
such meetings, the courts have pointed to the importance of
enablingall shareholders to meaningfully participate in the voting
process for the election of directors as doing so is good corporate
Despite having jurisprudence on their side, rather than wait to
be surprised, boards of companies in Canada have started taking
proactive steps to defend against this sort of shareholder
behaviour by adopting an "advance notice" by-law.
Broadly, the result of adopting such a by-law is that the
company's shareholders are precluded from nominating directors
at a meeting of shareholders unless the company receives advance
notice of the nomination within a prescribed time period, usually
not less than 30 days and not more than 65 days prior to the
scheduled meeting, as well as certain particulars regarding the
Advance notice by-laws have long been a tool of corporate
governance in the United States (having been adopted by the likes
of JPMorgan Chase and Citigroup), but are gaining popularity north
of the 49th. Just recently, Institutional
Shareholder's Services Inc. ("ISS")
released its Canadian Corporate Governance Policy 2013
Updates, which, for the first time, included consideration of
advance notice requirements. ISS stated that it would evaluate each
proposed advance notice by-law on a case-by-case basis but would
likely support advance notice requirements which "provide a
reasonable framework for shareholders to nominate directors by
allowing shareholders to submit director nominations as close to
the meeting date as reasonably possible and within the broadest
window possible, recognizing the need to allow sufficient notice,
regulatory, and shareholder review". Specifically, ISS
recommends a deadline for notice of a shareholders' director
nomination between 30 and 65 days prior to the meeting date. ISS is
not alone in its views as Glass Lewis & Co.
("Glass Lewis") released its Proxy Paper Guidelines for the 2013 Proxy
Season and has also indicated it would generally support these
advance notice policies (effectively the same as a by-law).
In addition to the support of proxy voting firms, advance notice
policies have recently found support in the courts. In Northern MineralsInvestment Corp. v. Mundoro Capital Inc., 2012
BCSC 1090 (CanLII), the court was asked by a shareholder to
declare an advance notice policy unenforceable. The court found in
favour of Mundoro's board and went on to state that the policy
in question ensured an orderly nomination process and that the
company's shareholders should be fully informed in advance of
an annual general meeting.
To date only a handful of small and mid-cap companies in Canada
have adopted advance notice by-laws but it's time for Canadian
corporations of all sizes to consider whether following suit makes
sense. With AGM season right around the corner, directors may have
an opportunity to adopt such a by-law and ask their shareholders to
ratify it at the upcoming annual general meeting. We would
recommend consulting with counsel before taking any action.
No-one likes to be surprised – and more than ever there is
a path to preventing such an unwanted event from occurring.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
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