Majority voting for the election of directors is gaining acceptance in the U.S. and in Canada. The movement for a change from the traditional plurality voting standard has been led in large part by institutional in ority vote proposals submitted to American and Canadian issuers by shareholders vestors. The number of maj has significantly increased over the last two years.
Developments in the U.S. are relevant to Canadian issuers. The California Public Employees Retirement System announced in 2005 that it would seek to implement majority vote policies at individual companies and pursue changes to state laws. Intel Corporation announced in January 2006 that it had amended its by-laws to adopt a majority vote standard for the election of directors in uncontested elections, beginning in May 2006. A number of other significant U.S. issuers, including Pfizer, Microsoft, United Technologies and Wells Fargo have adopted director resignation policies.
Momentum is also building in Canada. Institutional Shareholder Services Canada adopted a new policy for 2006 in support of majority vote initiatives. The Canadian Coalition for Good Governance noted in its second annual report that "Canadian companies must be encouraged to amend their by-laws to allow shareholders to vote for or against individual directors".
Canada’s chartered banks have recently adopted new policies for uncontested elections which require that any nominee for director who receives a greater number of votes WITHHELD than votes FOR his or her election shall tender his or her resignation following the annual meeting (such resignation to take effect once accepted by the board).
In light of these developments, it is timely for Canadian issuers to take stock of the situation.
Canadian corporate statutes generally provide that shareholders of a corporation elect directors annually by ordinary resolution (being a resolution passed by a majority of the votes cast by the shareholders who voted on the resolution). Corporations whose shares have been distributed to the public are generally required to solicit proxies from the shareholders in connection with their shareholders’ meetings. Canadian corporate and securities regulations generally require that the form of proxy provided to shareholders indicate whether the shares are to be VOTED or WITHHELD from voting in respect of the election of directors (and not voted FOR or AGAINST any particular candidate). As a result, the directors of a Canadian corporation who receive the most votes (i.e. a plurality of the votes) will be elected. In the normal circumstances where the number of candidates for election does not exceed the number of directors to be elected (as fixed by the board or the shareholders), then each director who receives at least one vote is assured a plurality of the votes. The situation is different if shareholders have nominated competing nominees (candidates other than those nominated by management) which requires shareholders to solicit proxies. In that case, those nominees with the most votes would be elected.
The plurality voting system was adopted in order to avoid the consequences of failed elections (i.e. an election of less than a full board). The plurality voting model is the voting standard under Canadian corporate statutes. The principal concern with the plurality voting standard is that it enables management’s nominees to be elected even if a majority of shareholders withhold votes in respect of an election.
The aim of a number of recent shareholder proposals as they relate to majority voting is simple enough: corporations have been asked to allow shareholders to vote FOR or AGAINST directors nominated for election. Only those candidates who receive more votes FOR than AGAINST would be elected.
In light of the mandatory requirements of Canadian corporate regulations with respect to the form of proxies, which don’t contemplate the type of voting for directors requested in the recent shareholder proposals, Canadian corporations wishing to be responsive to the shareholder concerns with plurality voting may consider a few alternatives:
- Mandatory resignation of directors who fail to receive a majority of votes. This approach, which may be adopted by the board as a policy, a guideline or as a by-law, requires directors whose candidacy receives more votes WITHHELD than votes FOR, to tender their resignations to the board. The board would then make a decision on whether to accept or reject the resignation. The policy may also mandate public disclosure (within a specified period of time) of the board’s decision with respect to the acceptance or refusal to accept the resignation.
- Entrench majority voting in the corporation’s charter. Corporations may amend their articles to provide that, in order for a nominee to be elected as a director, at least a majority of the votes attaching to the shares voted at the meeting must be voted in the nominee’s favour. A variation of this alternative is to require election by a "super majority" of the votes cast (for example 66 2/3%). The effect of the entrenchment by way of charter amendment is that a WITHHELD vote will have the same effect as a vote AGAINST.
- Cumulative voting. Canadian corporate statutes generally permit corporations to include cumulative voting rights for shareholders in respect of the election of directors. Under this system, shareholders are provided with a number of votes equal to the number of shares held multiplied by the number of candidates to be elected. Shareholders have the right to cast the aggregate number of votes in favour of any one or more directors. Cumulative voting in and of itself does not address the principal concern with plurality voting. However, such a system of voting does allow shareholders greater clout in the election of competing directors.
The 2006 proxy season will give issuers insight into whether a majority voting standard gains a stronger following in Canada and what shareholder expectations are for the adoption of a new voting standard.
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