On March 3 this author wrote a bulletin (Majority Voting in Canada: Latest Developments) that summarized the history of majority voting in Canada as set out in his prior postings 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)) and which also described current developments. The March 3 bulletin concluded stating that “there still is much more work to be done” to implement true majority voting for non-contested director elections in Canada, including proclaiming regulations under the Canada Business Corporations Act (“CBCA”). On March 27 proposed regulations under the CBCA were announced which, if brought into force following a 30-day comment period, would implement the majority voting provisions in the CBCA (“Proposed Regulations”).
This bulletin discusses the Proposed Regulations and also points out a possible problem resulting from the Proposed Regulations that may need to be addressed.
Proposed Regulations to implement Majority Voting in the CBCA
On May 1, 2018 the amendments to the CBCA adopting majority voting (“CBCA Amendments”) received royal assent, but those provisions could not become operational until regulations were enacted. The announced Proposed Regulations indicate they are to come into force on July 1, 2021. That date was chosen in order “to ensure that the changes to the election of directors’ process would minimally disrupt the election of directors at the annual shareholders’ meetings”.
The Proposed Regulations will implement majority voting in the CBCA in the following manner:
- The Proposed Regulations provide that only distributing corporations (i.e., public companies) will be required to elect directors on an individual basis rather than by a slate system. Under a slate system, all directors are elected or defeated in a single vote.
- The CBCA Amendments prohibit the board of directors appointing a person as a director if that person failed to be elected under the majority voting rules, except in prescribed circumstances. The Proposed Regulations prescribe two circumstances: if the person is needed either 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, or the person is needed to satisfy the requirement that a certain percentage of the board be resident Canadians.
- The Proposed Regulations amend the form of proxy to be used by CBCA distributing corporations to allow shareholders to vote “For” or “Against” the election of proposed directors (rather than “For” or “Withhold”).
The current proxy voting system, in which a shareholder filling out a form of proxy for a CBCA corporation can check off either the “For” or the “Withhold” box, results from the combination of i) section 149(1) of the CBCA which requires the corporation to send a form of proxy in prescribed form, ii) section 54 of the CBCA regulations which prescribes the form of proxy as the form provided for in section 9.4 of National Instrument 51-102 (“NI 51-102”) and iii) section 9.4(6) of NI 51-102 which specifies that a form of proxy must provide an option for the security holder to specify that the securities are to be “voted or withheld from voting” in respect of the election of directors.
The Proposed Regulations provide that in the case of majority voting under the CBCA Amendments, instead of the references to “voted or withheld from voting” in section 9.4(6) of NI 51-102, the form of proxy “shall allow the shareholder to specify, for each candidate nominated for director, whether their vote is to be cast for or against the candidate”.
A possible problem is that although the Proposed Regulations provide for a vote “for or against” the proposed director, NI 51-102 still exists as an independent provincial law that is binding on all public Canadian companies including those governed by the CBCA. Thus, public CBCA companies might be subject to two inconsistent laws: the new CBCA Proposed Regulations providing a “for or against” vote in the form of proxy, as well as the existing provincial NI 51-102 providing a “vote” or “withhold” requirement in the form of proxy.
The counter argument, however, is that section 9.5 of NI 51-102 states that section 9.4 does not apply to a reporting issuer (i.e., a public company) 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 the requirements of Part 9 (entitled Proxy Solicitation and Information Circulars) of NI 51-102. Under this argument, as long as the CBCA company complies with the Proposed Regulations, it will be exempt from the “vote” or “withhold” requirement in section 9.4(6) of NI 51-102.
The exemption in section 9.5 of NI 51-102 likely was intended for certain foreign companies whose securities trade on a Canadian stock exchange. In order to allay any confusion, the Canadian Securities Administrators should consider publicly clarifying, before the July 1 proposed implementation date of the Proposed Regulations, that Section 9.5 of NI 51-102 will be interpreted as exempting CBCA reporting issuers from the “vote” or “withhold” requirement to elect directors set out in Section 9.4(6).
If the Proposed Regulations are brought into force on July 1, true majority voting for non-contested director elections will become operational under the CBCA. As stated in this author’s March 3 bulletin, however, there still is more to be done to implement majority voting in Canada, including amending the corporate statutes in the provinces and territories to adopt majority voting and amending the federal statutes that regulate public companies such as federal 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.
Author: Stephen Erlichman, LLM (NYU), MBA (Harvard), RIPC (RIA), Partner, Fasken. From 2011-2018 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.