TSX - Skirting the Rules No Longer

TSX provides guidance on the use of "exceptional circumstances" in issuer majority voting policies

Written by Brent W. Kraus and Jordan L. Primeau

On March 9, 2017, the Toronto Stock Exchange (TSX) issued Staff Notice 2017-001 (the Staff Notice), which provides guidance on the TSX's majority voting requirement and the use of advance notice policies for director election requirements. Significantly, for many issuers, the Staff Notice outlines the TSX's expectations for the use of an "exceptional circumstance" to reject the resignation of a director that is not elected by a majority of votes cast (a Subject Director).

Majority Voting Requirements

The Staff Notice results from the TSX's experience from the 2015 and 2016 proxy seasons and its recent review of the majority voting policies of 200 TSX-listed issuers for compliance with subsection 461.3 of the TSX Company Manual (the Manual). This review revealed certain deficiencies which led the TSX to clarify the expectations surrounding majority voting policy requirements. The Staff Notice clarifies that issuers' majority voting policies must specifically note that Subject Directors are required to resign immediately, that an issuer's board of directors (Board) must decide whether or not to accept a Subject Director's resignation within 90 days, and that the Board must decide whether or not to accept a Subject Director's resignation.

Exceptional Circumstances

The TSX's review indicated that some issuer majority voting policies listed factors that were inconsistent with the policy objectives of majority voting in the Manual. The TSX shed some light as to what may constitute an exceptional circumstance that would allow a Board to not accept a Subject Director's resignation.

The TSX gave the following examples as possible exceptional circumstances:

• accepting the resignation would cause the issuer to not be compliant with laws, regulations or commercial agreements pertaining to Board composition;
• accepting the resignation would jeopardize the achievement of a special committee of the Board (with a defined term/mandate) to which the Subject Director is a key member; or
• the purpose of using majority voting was inconsistent with the policy objectives of the TSX's majority voting policy.

The Staff Notice also lists factors the TSX does not consider exceptional circumstances, including the Subject Director's:

• length of service;
• qualifications;
• attendance at meetings;
• experience; or
• contributions to the issuer.

The TSX advises that where a Board does invoke an exceptional circumstance to retain a Subject Director, the Board should take steps to insure that the exceptional circumstance is resolved for the following proxy season. Some of the policies that the TSX reviewed contained requirements that may circumvent the Manual's majority voting requirements. The Staff Notice reminds issuers that the TSX considers avoidance or frustration of the majority voting requirements to be incompliant with such requirements. Where issuers use an exceptional circumstance to not accept a Subject Director's resignation, the TSX will be contacting the issuer to discuss. The TSX expects that exceptional circumstances will meet a high threshold.

Impact on the 2017 Proxy Season

Issuers and their Boards should review their majority voting policies going into this 2017 proxy season. The TSX Staff Notice indicates that, going forward, the availability of exceptional circumstances to keep Subject Directors on the Board will be very limited and subject to significant scrutiny from the TSX. More than ever, Boards must carefully consider the circumstances when deciding whether or not to accept the resignation of a Subject Director. To properly do this, Boards must be able to rely on their written majority voting policies. It appears the TSX views exceptional circumstances as truly exceptional. The qualities that make a director a suitable candidate for the Board will generally not, in isolation, constitute exceptional circumstances.