Regulation set for July 1 lets shareholders vote ‘for,’ ‘against’ or ‘withhold’ for director spots
A proposed regulation under the Canada Business Corporations Act (CBCA) would establish the right of shareholders to vote “for” or “against” a director of a company’s board, starting July 1, a change to a board election procedure that up until now only allowed shareholders to vote for a director or withhold their votes.
The new regulation will give greater authority to shareholders to voice any concern against a proposed director, “as they will now be able to vote specifically against that director,” says Blake, Cassels & Graydon LLP partner Mathew Merkley. If the proposed regulations come into force on July 1, as planned, “true majority voting” for uncontested director elections “will become operational under the CBCA.”
While on a practical level, Merkley says he doesn’t think elections of boards will be that much different from now, “the fact that this rule will be in place provides some discipline that might result in shareholder-friendly choices” when it comes to proposed directors. For example, Merkley says a current board member whose attendance at meetings is less than admirable could be voted off the board due to the new rule.
Merkley says regulators chose the July 1 date for proposed regulations to come into force to ensure that the changes to the election of directors’ process would minimally disrupt the election of directors at this year’s shareholders’ meetings, usually held in the spring.
Right now, if there is even one vote for a proposed director, Merkley says, that is enough to have that person voted to the board, as the only other option is for a shareholder to withhold a vote. However, under the new regulation, if more shareholders vote against a proposed director than in favour, the director can’t take a seat on the board, with some exceptions.
One exception is when a proposed director is needed to meet the corporation’s obligations under the CBCA to have at least two directors who are not officers or employees of the corporation or its affiliates. The second is if the person is needed to satisfy the requirement that a certain percentage of the board be resident Canadians.
Merkley notes one possible conflict the proposed regulations might have with existing rules. He says that regulation NI 51-102 still exists as an independent provincial law binding on all Canadian public companies, including those governed by the CBCA.
Public CBCA companies might be subject to two inconsistent laws, he says: the new CBCA proposed regulations under Section 9.5 of NI 51-102, providing a “for or against” vote in the form of proxy, as well as the existing provincial NI 51-102, section 9.4 (6) providing a “vote” or “withhold” requirement in the form of proxy.”
However, Merkley says the relevant section of NI 51-102 (section 9.5) states that section 9.4 does not apply to a reporting issuer if it “complies with the requirements of the laws relating to the solicitation of proxies under which the reporting issuer is incorporated.” And if those requirements “are substantially similar” to Part 9 (entitled Proxy Solicitation and Information Circulars) of NI 51-102.
So, Merkley says, as long as a company governed by the CBCA complies with the proposed regulations, it will be exempt from the “vote” or “withhold” requirement in the other section of NI 51-102.
Merkley says the exemption in section 9.5 of NI 51-102 likely exists for certain foreign companies whose securities trade on a Canadian stock exchange.
To avoid confusion, he says the Canadian Securities Administrators should consider publicly clarifying, before the July 1 implementation date, that Section 9.5 of NI 51-102 exempts CBCA reporting issuers from the “vote” or “withhold” requirement to elect directors set out in Section 9.4(6).
While the proposed measures are a step in the right direction towards true majority voting for directors of boards, ‘there still is more to be done.” Other changes include amending the corporate statutes in the provinces and territories to adopt majority voting and amending the federal laws that regulate public companies such as banks and insurance companies to adopt majority voting.
“Until these latter steps take place, there will be a hodgepodge of different rules dealing with director elections at public companies in Canada depending on what statute governs the public company and on what stock exchange the public company is listed.”
He adds that shareholders with companies under the CBCA impacted by the proposed regulations have some “enhanced” disclosure and education “because there might be some confusion why forms from different issuers have different voting options.
