Written by William Osler, Beth Riley, Andrew Disipio, Kristopher Hanc and Joseph Viscomi
The Toronto Stock Exchange (TSX) has adopted housekeeping amendments to:
- Clarify the method to count votes "for" and "withheld" in director elections;
- Clarify the dividend notification requirement for a distribution of securities where there is an immediate consolidation; and
- Remove the reporting requirement for control block sales.
The amendments also correct some minor typographical errors in the TSX Company Manual.
TSX Majority Voting Requirement
Canadian corporate laws generally provide that directors are elected, either on an individual basis or by slate, through "plurality voting." Under plurality voting, shareholders vote "for" or "withhold" their votes in respect of each nominee director or slate of directors. Shareholders are not provided the opportunity to vote "against" nominee directors or slates of directors, and the "withheld" votes are not counted in the tally of votes, meaning that a nominee director or slate can be elected if only one vote is cast "for" such nominee director or slate, even where the majority of shareholders are opposed to the election of such nominee director or slate. Canada is a global outlier in this respect.
In 2014, as a step to improve corporate governance standards in Canada by providing a meaningful way for securityholders to hold individual directors accountable, the TSX implemented the majority voting requirement, which provides that each director of a TSX listed issuer must be elected by a majority of the votes cast with respect to his or her election other than at contested meetings (The TSX had previously required directors to be elected on an individual basis, rather than slates).
The TSX also requires issuers to adopt a majority voting policy that provides:
- If a director is not elected by a majority of the votes cast, he or she will immediately tender his or her resignation to the board;
- The board will determine whether or not to accept the resignation;
- The board will accept the resignation absent exceptional circumstances that warrant the director continuing to serve on the board; and
- The issuer will promptly issue a news release with the board's decision, fully stating the reasons for the decision if the board determines not to accept the resignation.
The majority voting policy does not apply to contested elections where the number of director nominees for election is greater than the number of director positions on the board. The policy also does not apply to majority-controlled issuers.
The TSX's majority voting requirement is consistent with other recent corporate governance initiatives seeking to enhance shareholder democracy in respect of the election of directors. For example, the Canada Business Corporations Act (CBCA) was amended in 2018 to: implement a majority voting standard for uncontested elections of directors of distributing corporations (generally, public companies), subject to certain exemptions; require individual votes for individual directors (i.e., prohibit slate voting); and require directors be elected annually, among other amendments. The CBCA amendments are not yet in force. Similarly, a private member in the Ontario legislature introduced Bill 101, Enhancing Shareholders Rights Act, 2017 to amend the Business Corporations Act (Ontario) in respect of the election of directors.
These proposed corporate statutory amendments are similar to the TSX majority voting requirement. However, they go beyond the TSX's majority voting requirement as they would impose a statutory majority voting standard, pursuant to which shareholders would be able to vote against nominee directors, rather than simply withholding their vote for a nominee, and a nominee director who did not receive the requisite majority votes in an uncontested election would not be elected to the board. In contrast, TSX majority voting requirement only requires a duly elected director to tender his or her resignation to the board for acceptance or rejection in the event he or she fails to receive the requisite majority votes in an uncontested election, and provides the board an ability to refuse to accept such resignation in "exceptional circumstances."
The TSX's majority voting requirement does not apply to issuers listed on the TSX Venture Exchange (TSXV) or other exchanges in Canada, although the CBCA amendments would apply to CBCA companies listed on the TSX, the TSXV and other exchanges.
Assuming the CBCA amendments come into force, CBCA listed issuers will likely satisfy the majority voting requirement through complying with the act, and the TSX will likely not require CBCA issuers to adopt a majority voting policy.
Dividend Notification Requirement
Section 428 of the TSX Company Manual sets forth the process to be followed by TSX listed issuers in connection with declaring a dividend, which includes the requirement that issuers intending to declare a dividend on listed shares provide notice to TSX, and a bulletin is then issued by the TSX to commence "ex" trading of the shares. Determining whether the seller or the buyer is entitled to the dividend is accomplished through the procedure known as ex-dividend trading. On shares selling ex-dividend, the seller retains the right to a pending dividend payment, and the opening bid quotation is usually reduced by the value of the dividend.
In the case of a distribution to be paid in securities immediately consolidated (also known as a reverse stock split) following the distribution, there would be no change to the number of securities held by security holders, and no need for ex dividend trading. In recognition of this, Section 428 of the TSX Company Manual formerly provided that the dividend notification requirement did not apply to a distribution by a Non-Corporate Issuer (exchange traded products, such as REITs, closed-end funds, and structured products). However, the notification requirement applied to Corporate Issuers in similar circumstances.
Given that TSX does not trade "ex" on such distributions (whether for Corporate Issuers or Non-Corporate Issuers), the TSX is of the view that a bulletin to commence "ex" trading serves no purpose and may confuse the market. Accordingly, the TSX Amendments clarify that the dividend notification requirement under Section 428 is not applicable for distributions made by all listed issuers (i.e., both Corporate and Non-Corporate Issuer) where there is an immediate consolidation.
Monthly Control Block Sales Requirement for Participating Organizations
Prior to the adoption of the TSX Amendments, Section 632 of the TSX Company Manual required participating organizations to report monthly sales to the TSX. In addition, Section 2.8 of National Instrument 45-102 - Resale of Securities (NI 45-102) requires sellers report control block sales. The TSX adopted the TSX Amendments to remove such monthly reporting obligation under Section 632 of the TSX Company Manual as such report may be redundant with the NI 45-102 reporting requirements.
For guidance on these recent amendments or other issues around corporate governance, please contact the Bennett Jones Corporate Finance team.