[co-author: Zev Smith]
On September 28, 2016, the federal Minister of Innovation, Science and Economic Development introduced Bill C-25, which includes proposed amendments (the Proposed Amendments) to the Canada Business Corporations Act (the CBCA). Pursuant to the Proposed Amendments, distributing corporations (generally, this means reporting issuers), that are incorporated under the CBCA will be required to: (1) have its board of directors elected on an annual basis; (2) enable shareholders to cast "For" and "Against" votes in respect of director nominees; and (3) make certain additional disclosures in respect of diversity among the board of directors and senior management that are in-line with industry best practices espoused by the Canadian securities regulatory authorities. The Proposed Amendments are subject to a number of exceptions that are to be "prescribed" in amendments to the CBCA regulations. Unfortunately, as no proposed amendments to the CBCA regulations have been presented at this time, the scope of the “prescribed” exceptions and their corresponding impact on the Proposed Amendments remains unclear.
Current director election practices
Under Canadian corporate statutes, elections of directors by shareholders are based on a plurality system under which shareholders can either vote for a director nominee or withhold their vote. Shareholders do not currently have the option to vote "Against" the election of a director. Assuming that the number of nominees presented for election is equal to the number of directors to be elected, each nominee is elected even if only one vote is cast in favour of such nominee's election and all other votes are withheld. The rationale behind the current Canadian practice is that, while shareholders are enabled to express their objection, corporations cannot be bereft of a board of directors.
On June 30, 2014, the Toronto Stock Exchange (TSX) amended the TSX Company Manual (the Company Manual) to, among other things, require that TSX-listed issuers adopt a majority voting policy requiring that directors immediately tender their resignation if they are not elected by at least a majority of the votes cast at the meeting of shareholders, other than in the context of a contested meeting. As a result of the TSX amendments, TSX-listed issuers are further required to ensure that their majority voting policies provide that the board of directors accept or refuse (but only in exceptional circumstances) a tendered resignation within 90 days of the shareholders’ meeting. Promptly following the board’s determination, the issuer is required to issue a news release disclosing the board’s decision and, if the directors refuse to accept a resignation, fully stating the reason for such decision.
"For" and "Against" voting
The Proposed Amendments require that where there is only one candidate nominated for each board position, a director nominee will be required to obtain the approval of a majority of shareholder votes in order to be elected, except in certain prescribed circumstances. Whereas shareholders have historically been unable to directly oppose the election of directors and could only withhold their votes, the Proposed Amendments will empower shareholders to actively oppose the election of individual director nominees by voting "Against" the election of any such nominees, without any requirement to propose alternative nominees. In the event the majority of the votes cast are “Against” the election of a nominee, the nominee will not be elected. In addition, shareholders will no longer be able to withhold their votes and will instead be required to cast a definitive vote "For" or "Against" director-nominees.
In the event that a meeting of shareholders fails to elect the minimum number of directors, as required by a distributing corporation’s articles, the directors elected at the meeting will be empowered to exercise all the powers of the directors if the number of directors elected constitutes a quorum. Unfortunately, the Proposed Amendments do not contemplate a circumstance whereby a shareholders meeting fails to elect any nominee directors as a result of the nominees not receiving majority approval.
Annual elections of individual directors
In addition to "For" and "Against" voting, the Proposed Amendments provide that directors of distributing corporations will need to be elected on an annual basis and that distributing corporations governed by the CBCA will no longer be able to stagger the terms of directors, which has historically been an avenue to ensure continuity of experience and an orderly succession of directors, albeit rarely utilized. Notwithstanding the foregoing, the Proposed Amendments indicate that there will be exceptions to this requirement in prescribed circumstances. In any event, this particular amendment is unlikely to impact TSX-listed issuers, as the Company Manual already requires that those issuers hold annual director elections.
In addition to the annual election requirements, the Proposed Amendments provide that shareholders of a distributing corporation will need to elect each director on an individual basis and that "slate" voting will no longer be permitted, except for certain prescribed corporations. The removal of slate voting in respect of distributing corporations is consistent with the current requirements of the TSX, which mandates individual voting for each director; whereas non-TSX-listed distributing corporations often nominate a slate of directors, whereby shareholders either vote to elect the entire slate or withhold their vote. As a result of the Proposed Amendments, directors who have historically been elected on the basis of their position on a slate—as opposed to their individual merits—will no longer have the luxury of such elections.
Appointment of directors by directors
At present, the CBCA permits the board of directors of a corporation to appoint up to one or more additional directors to hold office for a term expiring no later than the close of the next annual meeting of shareholders, provided that the total number of directors so appointed may not exceed one third of the number of directors elected at the previous annual meeting. The Proposed Amendments seek to ensure that directors of distributing corporations cannot simply be appointed by their compatriots in the event they fail to obtain a majority of the votes in favour of their election. Directors who failed to obtain the necessary votes in favour of their election cannot be appointed by the board of directors before the next meeting of shareholders at which an election is required, except in prescribed circumstances. However, the Proposed Amendments do not otherwise modify the right of elected directors who constitute a quorum to fill vacancies.
Diversity disclosure obligations
At present, National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101) requires reporting issuers that are non-venture issuers (excluding reporting issuers in British Columbia, Alberta and Prince Edward Island), to disclose certain information regarding women on boards and in executive positions. NI 58-101 requires disclosure of a number of specific items related to the diversity of an issuer's board, including: (1) the number and percentage of women on the board and in executive positions; (2) whether the issuer has a policy relating to the identification and nomination of women directors; (3) whether it has director term limits or other mechanisms of board renewal; and (4) if the issuer considers representation of women in its director and executive officer identification and selection process. NI 58-101 requires that issuers implement a "comply or explain" model, whereby issuers publicly file their disclosure of either their policies addressing the foregoing areas or the reasons for not having implemented such policies.
The Proposed Amendments provide that directors of a prescribed corporation are required to annually disclose prescribed information to shareholders regarding diversity among the issuer’s directors and senior management. While the exact scope of the prescribed information is unknown, there appears to be a commitment from the legislature to encourage board diversity. It is not clear whether the Proposed Amendments will be harmonized with securities law requirements.
If implemented, the Proposed Amendments could have a significant effect on current election practices for CBCA-governed distributing corporations. In addition to ensuring that distributing corporations hold annual meetings of directors and provide increased disclosure regarding their diversity processes, which are already generally perceived as corporate best practices for Canadian issuers, the Proposed Amendments will likely empower shareholders and provide for a significant departure from the current electoral system for directors. This is especially relevant to TSX Venture Exchange-listed issuers that are not subject to the TSX majority voting requirements.
The Proposed Amendments would provide the opportunity for a significant shareholder or group of shareholders to effectively oppose the election of certain directors by ensuring that a greater percentage of votes are cast "Against" the election of such directors without proposing alternative nominees. This would alter the current landscape faced by CBCA corporations and could greatly limit the benefits of advance notice by-laws, which generally seek to ensure that all shareholders are fully informed and receive advance notice where the election of directors will be contested. For example, an aggrieved shareholder could conduct a last minute proxy fight, relying on the exceptions to the requirement to prepare a dissident circular where not more than fifteen shareholders are solicited, to contest the election of all or a portion of the nominated directors without providing alternatives. In the event such a strategy was employed, it could force issuers into negotiations with the aggrieved shareholder to ensure the election of at least some mutually acceptable directors.