Shareholders of Canadian public companies have in the past devised schemes to remove existing directors by nominating a dissident slate from the floor of a shareholders' meeting to the surprise and prejudice of other shareholders. Advance notice by-laws were designed to prevent such ambushes, and to ensure that all shareholders are treated fairly and provided with timely information in connection with the nomination of directors.
Over the past year, advance notice by-laws or policies have been widely accepted in Canada, following the adoption of such a by-law in October 2011 by one of our firm's clients. In order to provide shareholders with additional protections, we have updated our form of advance notice by-law, a sample copy of which can be found here.
Advance notice by-laws have been utilized by American public companies for more than 20 years and are prevalent in the United States. In the past year, advance notice by-laws have been adopted by many of our clients. Over the course of the 2013 proxy season, we expect several more clients to adopt such by-laws, with the result that clients governed by the Business Corporations Act (Ontario) ("OBCA"), the Business Corporations Act (Quebec) ("QBCA") and the Canada Business Corporations Act ("CBCA") will have adopted such by-laws.
Under applicable corporate legislation in Canada, there are generally only two methods available to shareholders to nominate directors at a meeting without providing ample notice to all shareholders:
- proxy fight. Following the mailing of proxy materials by an issuer relating to the election of directors, any person may solicit proxies, so as to elect their own nominees to the board of the issuer, by delivering a dissident's proxy circular (or by way of public broadcast, speech or publication in circumstances prescribed by the legislation). This type of activity is generally referred to in business parlance as a 'proxy fight'. There is no time restriction as to when one may solicit proxies through these means, subject of course to practical time constraints. As a result, a proxy fight could be commenced with little prior notice to the issuer or its shareholders.
- nominations at a meeting. Shareholders or proxyholders may, at a meeting called for the purpose of electing directors, nominate from the floor of the meeting one or more persons to serve as a director. Since no prior notice of such nomination need be given to the issuer or its shareholders, this type of nomination is often referred to as an 'ambush.'
Advance notice provisions have been designed to prevent shareholders from nominating directors through a proxy fight or an ambush, without in each case providing an issuer with adequate time to consider and respond in an informed way to such proposed nominations. Advance notice provisions benefit shareholders by:
- ensuring that all shareholders – including those participating in a meeting by proxy rather than in person – receive adequate notice of the nominations;
- allowing shareholders to register an informed vote;
- facilitating an orderly and efficient meeting process; and
- preventing an ambush.
Implementation of by-law or policy
The directors of a company governed by the OBCA or CBCA may by resolution pass an advance notice by-law, following which the by-law must be submitted by the directors to the shareholders at the next meeting of shareholders. The advance notice by-law would be effective from the date of such directors' resolution.1 If the advance notice by-law is confirmed by shareholders at the next meeting, it would continue in effect in the form in which it was so confirmed. If the advance notice by-law is rejected by shareholders at the next meeting, or the directors do not submit the advance notice by-law to the shareholders at the next meeting, the advance notice by-law would cease to be effective from the date of the meeting.
For British Columbia companies, advance notice provisions have recently been adopted by way of a policy of the board.2 Such a policy, which is effective upon adoption by the board, is put to shareholders for approval, on the basis that the policy would cease to be effective at the conclusion of the shareholders' meeting (and therefore after the election of directors) if not approved by shareholders at that meeting. Notwithstanding a recent court decision upholding such a policy, we remain concerned with the adoption of advance notice provisions outside of a corporation's articles or by-laws.3
Advance notice provisions
The length of the notice period for advance notice provisions varies but, in the case of an annual meeting of shareholders, is usually no less than 30 nor more than 65 days prior to the date of the annual meeting. Institutional Shareholder Services Inc. ("ISS") and Glass, Lewis & Co., LLC support advance notice by-laws and policies, which provide for such minimum notice provisions.4 Also, ISS supports issuers making a reasonable request from dissidents for information additional to that required under applicable law, in order to review any proposed nominee.5
Advance notice provisions have also been supported by judicial decisions. In Mundoro Capital, the British Columbia Supreme Court upheld the adoption of an advance notice policy. Likewise, in Maudore Minerals Ltd. v The Harbour Foundation,6 the Ontario Superior Court of Justice noted that there "was nothing unfair or inappropriate" in the implementation of an advance notice by-law in connection with a proxy fight "to ensure that all shareholders would have sufficient notice of a contested election of directors.7
Sample updated by-law
ISS, in its Canadian Corporate Governance Policy (2013 Updates), recommends that shareholders vote to "support additional efforts by companies to ensure full disclosure of a dissident shareholder's economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review any proposed director nominees".8 Consistent with this guideline, we have updated our form of advance notice by-law to require that issuers and their shareholders be provided with more fulsome disclosure in order that shareholders may register a more informed vote. In this regard, the principal changes to our previous form of advance notice by-law are as follows:
- all nominees (including management-solicited nominees) are required to deliver to the issuer an agreement to abide by all applicable policies of the issuer.
- disclosure of all shares indirectly owned by each nominee and the shareholder making the nomination, including convertible securities and shares owned through derivatives, would be required.
- the nominating shareholder is required to include a statement as to whether each nominee would be "independent" of the issuer (within the meaning of applicable securities laws).
See a sample advance notice by-law here.
An advance notice by-law is an important tool for a public company in order to ensure that all shareholders are treated fairly and are provided with timely information in connection with the nomination of directors. Over the past year, several Canadian public companies have adopted the form of advance notice provisions first presented to our clients in October 2011. We are hopeful that the new form of advance notice by-law for Canadian public companies which we have introduced for the 2013 proxy season will further enhance the rights of shareholders.
1 We would note that under the QBCA it would appear that an advance notice by-law would not be effective until duly approved by the shareholders.
2 The reason for this is due to the manner in which the constating documents may be amended under the Business Corporations Act (British Columbia) ("BCBCA"). Companies governed by the BCBCA have "notice of articles" which contain prescribed information such as the company's name, names and addresses for each of the directors, registered and records office address, authorized share structure and whether there are special rights or restrictions attached to a class or series of shares. The articles of a company incorporated under the BCBCA set out the general rules governing the company's internal affairs and the restrictions, if any, on the businesses that may be carried on by the company and the power that the company may exercise. The company adopts its notice of articles and articles at the time of incorporation and in order to amend the notice of articles or articles, as the case may be, the company's shareholders must approve (in most cases by special resolution) the amendment prior to such amendment becoming effective. Under the CBCA, the OBCA and in most other provincial or territorial corporate statutes in Canada, the "articles of incorporation" contain prescribed information such as the corporation's name, authorized share structure, whether there are special rights or restrictions attached to a series of shares and the restrictions, if any, on the businesses that may be carried on by the corporation. The by-laws under such corporate statutes are adopted post incorporation and set out the rules of the corporation's conduct, subject only to confirmation (or rejection) by the corporation's shareholders. By-laws are roughly similar to the articles of a company incorporated under the BCBCA but the key difference between by-laws and articles is that by-laws become effective immediately upon director approval and are subject to confirmation (or rejection) at the next meeting of shareholders by ordinary resolution whereas any amendment to the articles of a company incorporated under the BCBCA is subject to shareholder approval (in most cases by special resolution) and the amendment is effective only upon the requisite shareholder approval being obtained. As a result, the implementation of an advance notice by-law would not take effect immediately and would therefore not apply to the meeting at which the by-law is being approved. Although the QBCA has a similar structure to the CBCA and the OBCA, as outlined in footnote 1, advance notice by-laws under that statute may also not be effective until shareholder approval has been obtained.
3 Nevertheless, the decision in Northern Minerals Investment Corp v Mundoro Capital Inc, 2012 BCSC 1090 [Mundoro Capital] fully supports the policy rationale for advance notice by-laws (or articles with advance notice provisions in the case of a company incorporated under the BCBCA in that such by-laws (or articles) prevent dissidents from hiding "in the weeds" until a shareholders' meeting and thereby "preventing all shareholders from having notice and the opportunity to vote in a proxy contest" (¶ 54).
4 See Institutional Shareholder Services Inc., "Canadian Corporate Governance Policy 2013 Updates" (16 November 2012) at 13, available here, and Glass, Lewis & Co., LLC., "Guidelines 2013 Proxy Season An Overview of the Glass Lewis Approach to Proxy Advice" at 11 (2012), available here.
5 ISS, ibid at 13.
6 2012 ONSC 4255.
7 Supra note 3 at ¶ 114.
8 ISS, supra note 4 at 13.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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