Written by J. Paul D. Barbeau and James T. McClary
The topic of proxy access, or the ability of shareholders to nominate directors to the board, has again come to the fore of the Canadian corporate governance debate. The Canadian Coalition for Good Governance (CCGG), an organization whose members include pension funds, mutual funds and other money managers, recently proposed amendments to the Canada Business Corporations Act (CBCA) to strengthen the ability of shareholders to nominate directors of federally incorporated Canadian companies. This proposal comes on the heels of increased U.S. proxy access activity arising from the New York City Comptroller's Boardroom Accountability Project, a campaign to give shareholders more say in how U.S. corporate boards are elected.
Nominating Directors in Canada
Directors of Canadian companies are typically nominated by the board or management of the company and presented to shareholders annually in the management proxy circular. Until recently, the vast majority of director elections were slate votes, meaning the board would fix the size of the board, and the management proxy circular would present a slate of directors of equivalent size. Shareholders could either choose to vote in favour of the slate or withhold their votes, but in either event the elections were formalities because, in the absence of a competing slate of directors, a single vote in favour would result in the slate's election (keeping in mind that withhold votes are not votes against – companies need directors and the slate with the most votes wins). As a result, shareholders have had limited input on the constitution of the board other than those shareholders with sufficient resources and expertise to wage proxy battles by way of a dissident proxy circular or to engage directly with boards to convince them to propose alternative nominees.
The movement away from slate votes to majority director elections has been a step towards improved proxy access in Canada, but limits of Canadian corporate legislation continue to present challenges to meaningful shareholder involvement in director nominations.
Current Canadian Regime and Limits on Proxy Access
Canadian corporate legislation permits shareholders to make nominations for directors from the floor of an annual shareholders meeting. However, the vast majority of shareholders vote by submitting a proxy in advance of the meeting, which results in any nominations from the floor having little to no prospects for success because the proxy votes have already been tabulated for the directors set out in the management proxy circular. Furthermore, the broad acceptance and implementation of advanced notice bylaws represents the final nail in the coffin of shareholder nominations from the floor.
Alternatively, Section 137 of the CBCA (and equivalent sections in provincial corporate statutes) permits one or more shareholders holding together in excess of five percent of the company's outstanding shares to submit to the company, for inclusion in a management proxy circular, a proposal to include nominations for the election of directors. However, procedural difficulties include a statutory limit of 500 words that does not facilitate advocacy and a deadline to submit the proposal of effectively four to six months prior to the meeting date. In addition, the company can marginalize the shareholder proposal by attaching it as an appendix and clearly indicating that management does not support the shareholder nominees. As a result, expensive shareholder solicitation is usually necessary to successfully present alternative nominees to the board. For these and other reasons, statutory shareholder proposal mechanisms are rarely relied upon to nominate directors.
Boardroom Accountability Project - US Proxy Access Developments
In 2010, the United States Securities and Exchange Commission adopted a proxy access rule under authority granted by the Dodd Frank Act. However, the rule was overturned in the U.S. Court of Appeals for procedural reasons and it has been left to companies to voluntarily adopt proxy access bylaws. Not surprisingly, voluntary adoption was initially unenthusiastic.
In November of 2014, the New York City Comptroller (which oversees five municipal public pension funds with $160 billion in assets) launched the Boardroom Accountability Project, the purpose of which is to pressure U.S. companies to voluntarily implement proxy access regimes through bylaw amendments. Initially targeting 75 companies and drawing support from some of the world's largest institutional investors, the project has had early success, including the enactment of meaningful proxy access at Bank of America, Citigroup, General Electric, Prudential Financial and Staples. It is expected many other U.S. issuers will elect to follow suit under increasing pressure from shareholders.
The bylaw amendments proposed by the project give shareholders who meet a threshold of owning three percent of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on the company's ballot. The requirement for a hold period of three or more years ensures that short-term investors are not able to manipulate the governance of the company to the detriment of long-term value. Institutional Shareholder Services (ISS) has supported proxy access with these features.
It should be highlighted that the initial 75 targets of the project were either carbon-intensive coal, oil and gas or utility companies, companies with few or no women on the board or no apparent racial or ethnic diversity and companies that received significant opposition to their prior year say-on-pay advisory votes on executive compensation. As proxy access proposals make their way into Canada, companies fitting these profiles should be on alert.
CCGG Proposals in Canada
As indicated earlier, the CCGG has urged Industry Canada to amend the CBCA to provide for legislated proxy access, beyond what is provided for in the CBCA.
In particular, the CCGG has suggested:
- a shareholding threshold (which may be an aggregate position of multiple shareholders) of five percent (for a company with a market cap of less than $1 billion) or three percent (for a company with a market cap of $1 billion or more). Shareholders must hold both voting and economic control, thereby removing the ability of derivative holders to nominate directors.
- a cap on the number of nominees to the lesser of three directors or 20 percent of the board, and a prohibition on the same shareholders presenting additional nominees so long as the previously nominated directors are elected and remain on the board. Companies could require a representation that the shareholder is not seeking to change control of the company.
- fair disclosure be included in the management proxy circular, including a requirement that shareholder nominees be placed in the same location as company nominees in the circular, the same opportunity to present information on nominee background and qualifications be available for all nominees and that a fair form of universal proxy be used.
- a change to corporate law allowing shareholders who have nominated directors to communicate with other shareholders to solicit proxies without being required to file and distribute a dissident proxy circular.
Most notably, the CCGG has advocated against a minimum hold period to qualify for proxy access, suggesting that all shareholders, regardless of their history with the company, should be able to make board nominations provided they are not seeking to change control of the company.
Advice for Canadian Companies
It remains to be seen whether the CCGG proposals find support from the federal and provincial governments, and Canadian companies may determine to take a wait and see approach. However, regardless of whether more robust proxy access legislation is adopted in Canada, large shareholders may use the shareholder proposal provisions under the CBCA and equivalent provincial statutes to enact proxy access bylaw amendments after the pattern set in the U.S. As proxy access becomes more broadly pursued in Canada, ISS and other proxy advisory firms are expected to become more assertive in recommending that Canadian companies adopt meaningful proxy access bylaws.
We recommend that boards educate themselves further on proxy access matters and consider whether it is appropriate to pre-emptively design and implement proxy access bylaws that represent the best interests of the company. Any new proxy access bylaws would need to respect the minimum requirements under the CBCA and equivalent provincial statutes. Companies considering these issues would be well advised to contact their legal advisor.