Two posts in regard to majority voting in Canada by this author on the Harvard Law School Forum on Corporate Governance site, namely Majority Voting Finally Arrives in Canada (2014)and Majority Voting: Latest Developments in Canada (2017), discussed:
- The Toronto Stock Exchange (“TSX”) implementing a majority voting listing requirement in 2014, which requires each TSX listed issuer (other than those which are majority controlled) to adopt a majority voting policy for non-contested director elections pursuant to which a director is required to tender his or her resignation immediately if he or she was not elected by a majority of votes cast by shareholders and the board is required to accept the resignation within 90 days absent exceptional circumstances (the “TSX Majority Voting Requirement”);
- The TSX’s 2017 notice providing guidance with respect to the TSX Majority Voting Requirement as a result of a review of 200 randomly selected majority voting policies adopted by TSX-listed issuers pursuant to the foregoing requirement;
- The amendments proposed by the Canadian government to the Canada Business Corporations Act (“CBCA”) in 2016 to enshrine true majority voting in that federal corporate statute (i.e., each director candidate in a non-contested director election would be elected only if the number of votes cast in their favour represents a majority of the votes cast by shareholders); and
- Statements in regard to majority voting made in the Province of Ontario in 2015 by an expert panel convened by the Ontario government (i.e., “shareholders should have the ability to effectively choose their boards” and they “should be entitled to vote against candidates for election to the board”) and in 2017 by a Business Law Advisory Council convened by the Ontario government (i.e., under a heading entitled “Issues for Future Consideration” the Council stated that “Majority voting is an important priority for the Council. We are reviewing the approach in the proposed amendments to the CBCA and whether improvements could be made to this approach in developing proposals for the OBCA [Ontario’s Business Corporations Act]”).
This bulletin examines the latest developments in Canada with respect to the CBCA amendments and the TSX Majority Voting Requirement as well as the status of majority voting in Canada beyond the CBCA and the TSX.
The CBCA Amendments
In the annual report of the Canadian Coalition for Good Governance (“CCGG”) published in June 2018, CCGG explained that after the Canadian federal government introduced Bill C-25 in 2016 (which, if adopted, would amend the CBCA to mandate true majority voting for non-contested director elections), CCGG instituted a “full court press” in support of majority voting. CCGG’s full court press included “appearing before committees of the House of Commons and the Senate, writing a letter to the Prime Minister of Canada, initiating a letter writing campaign to the Canadian government by CCGG Members and others, meeting with numerous members of the House of Commons and the Senate as well as civil servants and other government officials, and publishing an op-ed piece in The Globe and Mail [Canada’s largest circulation national newspaper]”. In April 2018 the majority voting provisions in Bill C-25 were passed into law by the House of Commons and by the Senate and Royal Assent was granted in May. To date, however, regulations to implement majority voting have not been proclaimed and thus true majority voting – rather than just the TSX Majority Voting Requirement – is not yet in force with respect to companies governed by the CBCA.
The TSX Majority Voting Requirement
The functioning of the TSX Majority Voting Requirement was one issue in a complex case decided by the Ontario courts in Baylin Technologies Inc v Gelerman. The decision of the Ontario Superior Court of Justice Commercial List in January 2020 interpreted how the TSX Majority Voting Requirement applied in a scenario where a director refused to resign after 70.87% of the votes were “withheld” and 29.13% of the votes were cast in his favour at the company’s 2019 annual general meeting of shareholders. The court held in effect that a “withhold” vote (which under Canadian proxy rules is the only vote that a shareholder can make other than a vote “in favour”) should not be counted as a vote that is cast, with the result being that only “in favour” votes were counted as cast votes and thus the director was not required to resign even though only 29.13% of the votes were cast in his favour.
The decision was appealed to the Court of Appeal for Ontario. The Court of Appeal’s decision was issued in January 2021 and it overturned the lower court’s ruling in regard to the functioning of the TSX Majority Voting Requirement. The Court of Appeal stated in relevant part as follows:
“The application judge held that votes withheld are not votes cast and therefore do not count in the election results. In reaching this conclusion, the application judge misunderstood the TSX policy. The TSX policy is clear that votes withheld are votes against a director. To conclude otherwise would mean that any director who received even a single vote in favour would have achieved more than 50%+1 of the votes cast. Indeed, in the singe favourable vote scenario, the director would have received 100% of the votes cast, if the application judge’s interpretation were to be accepted.”
The Court of Appeal then ordered that the director was required to have submitted his resignation to the board for consideration following the 2019 annual general meeting at which only 29.13% of the votes cast were in favour of his election.
Thus, Canada now has an important precedent from a respected Canadian court which explains how the TSX Majority Voting Requirement functions.
The Status of Majority Voting in Canada beyond the CBCA and the TSX
CCGG’s annual report published in June 2018 concluded its discussion of majority voting with the following statement as to the path forward:
“The logical next steps for CCGG are to work on convincing the provinces and territories to amend their corporate statutes to align with the majority voting provisions in the CBCA and convincing the federal government to amend the statutes governing publicly traded federal financial institutions, such as banks and insurance companies, similarly.”
Following in those logical next steps, CCGG attempted to have majority voting implemented in Ontario, including by stating in its November 2019 comment letter to Ontario’s Business Law Modernization and Burden Reduction Council that the Council’s recent proposals did not address the “critical” need to have majority voting for non-contested director elections adopted in the OBCA to replace the plurality voting system currently in the OBCA.
In February 2020 the Ontario government established the Capital Markets Modernization Taskforce (“Taskforce”) to review and modernize Ontario’s capital markets and to report thereon directly to Ontario’s Minister of Finance. In July 2020 the Taskforce issued a consultation report for discussion which contained 47 proposals, but implementing majority voting was not one of the proposals.
CCGG took the opportunity to raise the issue of majority voting in its September 2020 comment letter to the Taskforce, stating as follows:
“CCGG has most recently been advocating for the adoption of majority voting in Ontario in connection with MGCS’s [i.e., Ministry of Government and Consumer Services] current review of the OBCA in the hope that the OBCA will be amended to adopt majority voting provisions similar to those in the CBCA. Given the importance of this issue to investors, and the efficiency and competitiveness of Ontario’s capital markets, we request that the Taskforce include in its recommendations to the Government of Ontario that MGCS pursue implementation of majority voting through amendments to the OBCA. If MGCS does not move to adopt majority voting, then CCGG recommends that securities law be amended to reflect this very fundamental principle of shareholder democracy.”
In advocating that majority voting be enshrined in Ontario’s corporate statute, CCGG was echoing the following comments made by Senator Howard Wetston (a past Chair of the Ontario Securities Commission) during the 2018 Senate debate on amending the CBCA to adopt majority voting:
“Colleagues, the corporate statute is the legitimate place to enshrine majority voting. Shareholders deserve to have this improvement to corporate governance. My hope is that other provincial corporate statutes will eventually be amended to align with the CBCA. Historically that has been the case.”
The Taskforce published its final report in January 2021. The report did not recommend implementing majority voting in the OBCA, but it did take up CCGG’s alternative scenario by recommending “adding a majority voting requirement to securities law”.
Canada now has a clear decision from the Court of Appeal of Ontario which explains how the TSX Majority Voting Requirement functions and there has been slow progress in implementing true majority voting for non-contested director elections in Canada, but there still is much more work to be done. Regulations have yet to be proclaimed under the CBCA. Corporate statutes in Ontario and the other provinces and territories have yet to be amended. The federal statutes that regulate public companies such as federal banks and insurance companies also have yet to be amended. The U.S. has been even slower than Canada to move forward with majority voting (for example, the Council of Institutional Investors (“CII”) – after seeing the implementation of the TSX Majority Voting Requirement in Canada – has not been able to convince the NYSE and NASDAQ to adopt a majority voting listing requirement nor has the CII been able to convince the American Bar Association or the Delaware State Bar Association to embrace majority voting), but if the U.S. Securities and Exchange Commission under newly elected President Biden decides to put majority voting on its agenda it will be interesting to see if that action will become an impetus to move matters forward more quickly in Canada.
Author: Stephen Erlichman, LLM (NYU), MBA (Harvard), RIPC (RIA), Partner, Fasken. From 2011 to 2018 Stephen also was the Executive Director of the Canadian Coalition for Good Governance and in that capacity led CCGG’s efforts in connection with making majority voting a Toronto Stock Exchange listing requirement and having the CBCA amended via Bill C-25 to adopt majority voting.