Canada: TSX Changes Rules On Director Elections; OSC Provides Targeted Participation Fee Relief

Last Updated: March 20 2014
Article by Ralph Shay and Natasha Singh

Majority rules for TSX-listed companies

The Ontario Securities Commission (the "OSC") has approved amendments (the "Amendments") to Part IV of the Toronto Stock Exchange (the "TSX") Company Manual. Commencing with annual meetings of shareholders following fiscal years ending June 30, 2014, all directors of TSX-listed issuers, with the exception of majority-controlled issuers, must be elected by a majority of votes cast at any shareholders' meeting other than a contested meeting.


The Amendments are the most recent step in the TSX and OSC's ongoing effort to improve corporate governance standards in Canada. In January 2011, one year after identifying the review of protections for shareholder rights and corporate governance as one of its priorities, the OSC issued Staff Notice 54-701, identifying plurality voting as the dominant voting standard for the election of directors in Ontario. 

A shareholder in a plurality voting system may do one of two things: vote "for" a director nominee or "withhold" his or her vote. Because withheld votes are not generally counted in plurality voting, unless there is a competing nominee to vote for, a shareholder cannot voice his or her dissatisfaction with a particular director nominee – it is possible, in fact, for a nominee to be elected to the board by a single registered vote. 

In October 2012, the OSC approved amendments to the TSX Company Manual, which required issuers to, among other things, make annual disclosure as to whether or not they had adopted majority voting policies for the election of directors at uncontested meetings. Each issuer that chose not to adopt a majority voting policy was required to provide reasons in its annual management information circular. The TSX is now replacing the "comply or explain" regime with a strict rules-based approach in favour of majority voting and shareholder democracy.

Impact on TSX-listed issuers

The Amendments require each director of a TSX-listed issuer, other than a majority controlled issuer (as defined below), to be elected by a majority of the votes cast with respect to his or her election other than at contested meetings (the "Majority Voting Requirement"). If any director does not receive a majority of votes cast, that director must immediately tender his or her resignation to the board. The board may refuse to accept a tendered resignation only in exceptional circumstances.

An issuer must adopt a majority voting policy (a "Policy") if it does not otherwise satisfy the Majority Voting Requirement in a manner acceptable to the TSX, for instance, by applicable statutes, articles, by-laws or other similar instruments.  The Amendments also include the requirement that issuers with a Policy provide a detailed description of the Policy in their management information circulars.

There are two significant exceptions to the Majority Voting Requirement. First, "majority-controlled issuers" (issuers that have a security holder that beneficially owns, or controls or directs, directly or indirectly, voting securities carrying 50% or more of the voting rights for the election of directors, as of the record date for the meeting) are not required to adopt a majority voting policy. Majority-controlled issuers that choose not to adopt a majority voting policy must, however, disclose annually that they are exempt and, as was required under the previous "comply or explain" regime, explain why they have not adopted a majority voting policy. Second, the Amendments do not apply to "contested meetings" (meetings in which the number of nominated directors exceeds the number of available seats on the board).  At these meetings, plurality voting continues to govern director elections.

Rationale for the Amendments

The TSX believes the Amendments will enhance transparency, increase individual director accountability, and improve governance dialogue between issuers, security holders, and other stakeholders. The TSX also believes that the Amendments will bring Canada in closer harmony with the practice of other major international jurisdictions.  The Amendments go a long way toward addressing a growing concern that investors in TSX-listed issuers do not have an effective voice, compared to other jurisdictions, with respect to the election of directors.

Although the Amendments are a breakthrough in Canadian corporate governance, there are more potential developments on the horizon. In particular, the issue has been raised as to whether the Canada Business Corporations Act (the "CBCA") should also be amended to entrench majority voting as a legal requirement for all companies with public shareholders.  Industry Canada is currently conducting public consultations on the CBCA and has identified many topics for reform, including majority voting.  Comments will be received until May 15, 2014.

Participation fee relief for certain small registered firms and reporting issuers

On February 20, 2014, the OSC issued OSC Staff Notice 13-704 Applications for Participation Fee Relief for Certain Small Registered Firms and Reporting Issuers (the "OSC Notice").  The OSC Notice indicates that participation fee relief may be appropriate in certain circumstances for smaller registered firms and reporting issuers, particularly those firms and issuers classified as Class 1 or 3C (as defined in OSC Rule 13-502 Fees ("Fees Rule")). The relief contemplated is projected to be between $235 and $17,275 for registered firms and between $160 and $13,150 for reporting issuers.  

Registered firms and reporting issuers that meet the eligibility criteria are invited to apply for participation fee relief or a refund before March 31, 2014.


Participation fee relief is available to a registered firm or reporting issuer (in Class 1 or 3C) if, based on its 2013 fiscal year*: (a) it would fall into one of the lowest three participation fee tiers (i.e. registered firms with specified Ontario revenues under $1 million and reporting issuers with capitalization under $50 million); and (b) its 2013 specified Ontario revenues or capitalization** decreased by at least 50% from its specified Ontario revenues or capitalization in its last fiscal year ended prior to May 1, 2012.  A registered firm or reporting issuer that meets both of these criteria and follows the appropriate procedure will, if not contrary to the public interest, be considered for a one-time 50% refund (or reduction) of its participation fee, subject to payment of the minimum participation fee of $800.


For further details on this participation fee relief and the application process, please refer to the OSC Notice.  A link to the OSC Notice is provided below.


* For registered firms and reporting issuers, the 2013 fiscal year is the firm's last fiscal year ended before January 1, 2014.

** The 2013 specified Ontario revenues and 2013 capitalization are based on the registered firm's or reporting issuer's 2013 fiscal year and are calculated in accordance with the Fees Rule.

Key links

The notice of OSC approval of amendments to the TSX Company Manual is available here.

OSC Staff Notice 54-701 – Regulatory Developments Regarding Shareholder Democracy Issues is available here.

A discussion paper on Industry Canada Consultation on the Canada Business Corporations Act is available here

OSC Staff Notice 13-704 – Applications for Participation Fee Relief for Certain Small Registered Firms and Reporting Issuers is available here.

With special thanks to Thomas Wilson (Student-at-law).

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