Majority Voting: Latest Developments in Canada

A previous post on this site was written about (i) the Toronto Stock Exchange (“TSX”) adopting a majority voting listing requirement, effective June 30, 2014, which requires each director of a TSX listed issuer (other than those which are majority controlled) to be elected by a majority of the votes cast, other than at contested meetings (the “TSX Majority Voting Requirement”) and (ii) Bill C-25 which was introduced by the federal Canadian government on September 28, 2016 and proposes amendments to the Canada Business Corporations Act (“CBCA”) that include true majority voting (i.e., by requiring shareholders to cast their votes “for” or “against” each individual director’s election and prohibiting a director who has not been elected by a majority of the votes cast from serving as a director except in prescribed circumstances) (the “Bill C-25 Amendments”). This post explains the latest developments in Canada with respect to both of these initiatives, as well as a further development with respect to majority voting in the Province of Ontario.

TSX Majority Voting Requirement

On March 9, 2017, the TSX issued a notice providing guidance with respect to the TSX Majority Voting Requirement. The notice stated that the TSX’s Majority Voting Requirement “was introduced to improve corporate governance standards in Canada by providing a meaningful way for security holders to hold individual directors accountable”. The notice indicated that the TSX conducted a review of 200 randomly selected majority voting policies adopted by TSX-listed issuers pursuant to the TSX Majority Voting Requirement (the “Reviewed Policies”) in order to assess issuers’ compliance with the TSX Majority Voting Requirement. The TSX stated that in its review and based on its experience from the 2015 and 2016 proxy seasons, the TSX “identified a number of deficiencies in the Reviewed Policies, as well as inconsistencies with the policy objectives” of the TSX Majority Voting Requirement.

The TSX stated its key findings as follows:

• certain Reviewed Policies did not have the effect of requiring a director to tender his or her resignation immediately if he or she was not elected by a majority of votes cast;
• certain Reviewed Policies did not provide a time frame for the board of directors to render a decision as to whether or not to accept a resignation or the time frame was outside the 90 day period permitted by TSX;
• certain Reviewed Policies did not specifically require the board of directors to accept the resignation of a director who was not elected by a majority of votes cast, absent exceptional circumstances;
• a number of the factors identified as exceptional circumstances in the Reviewed Policies were inconsistent with the policy objectives of the [TSX] Majority Voting Requirement;
• very few of the Reviewed Policies contained the requirement to provide a copy of the news release with the board of directors’ decision to TSX; and
• certain Reviewed Policies contained additional requirements that may have the effect of circumventing the policy objectives of the [TSX] Majority Voting Requirement.”

The TSX also provided specific guidance with respect to the key findings. For example, the TSX stated that it does not consider the following factors to be “exceptional circumstances” that would permit a board to not accept a resignation from a director who did not receive a majority of the votes cast:

• the director’s length of service;
• the director’s qualifications;
• the director’s attendance at meetings;
• the director’s experience; or
• the director’s contributions to the issuer.

The TSX also stated that it considers the following requirements to be inconsistent with the TSX Majority Voting Requirement:

• a higher quorum requirement for the election of directors compared to the quorum requirement for other resolutions; and
• majority voting policies that exclude certain nominees, such as insider nominees or incumbent directors, from certain requirements or that otherwise treat certain nominees more favourably than other nominees.

The TSX advised its non-compliant issuers that they should amend their majority voting policies “as soon as practicable and sufficiently in advance of the next meeting of security holders at which directors are elected to allow nominees to comply”. The TSX also stated that it is conducting another review of majority voting policies adopted by TSX-listed issuers to assess compliance and that the TSX will “continue to monitor the corporate governance landscape in Canada and internationally, as well as the effects of the TSX Majority Voting Requirement on its issuers and the marketplace”.

Bill C-25 Amendments to the Canada Business Corporations Act

The Canadian federal government has been moving forward to modernize the CBCA via Bill C-25. Bill C-25 was published on September 28, 2016 and proposed regulations under the Bill were published on December 14, 2016. The proposed majority voting requirement under Bill C-25 would apply to all public CBCA companies and its key features would be as follows:

• shareholders would be able to vote “for” or “against” each director individually and a director would not be elected at an uncontested meeting if he or she failed to receive a majority of the votes cast
• a board of directors would not have discretion to reappoint the non-elected director, unless necessary to satisfy the Canadian residency requirement or the requirement that at least two directors not be officers or employees of the corporation
• if the number of directors elected is less than the minimum required by the company’s articles, the powers of the board of directors would be held by the elected directors provided there is a quorum. If there is not a quorum, a special meeting would have to be called for another director election.

On December 9, 2016 Bill C-25 had second reading in the House of Commons and then was referred to the House’s Standing Committee on Industry, Science and Technology (the “Committee”) for review. The Canadian Coalition for Good Governance (“CCGG”) appeared before the Committee on February 16, 2017 to provide views on the Bill. In response to another witness’ view that the TSX Majority Voting Requirement was sufficient and thus the CBCA should not be amended to require majority voting, CCGG noted that:

• the TSX Majority Voting Requirement, which requires its issuers to adopt a majority voting policy, is merely a work-around the problem that majority voting is not a legal requirement in corporate statutes in Canada
• the TSX Majority Voting Requirement does not apply to the over 1,600 public companies listed on the TSX Venture Exchange
• the TSX could decide in the future to change this listing requirement.

The Committee’s clause by clause consideration of the Bill commenced on March 7.

After the Committee completes its deliberations and recommendations, the Bill will go back to the House of Commons for third reading and then will be considered by the Senate. In light of the majority Liberal government in power, as well as the fact that the other major political parties are supportive of the majority voting provisions in Bill C-25, majority voting is expected to be adopted in the CBCA this year.

Ontario’s Business Corporations Act

In February 2015 an expert panel was convened by Ontario’s Minister of Government and Consumer Services in order to provide advice to the Minister on the priorities for reform of Ontario’s business legislation. The summary of recommendations from the panel’s June 2015 report stated that “[p]riority” should be given to …[a]llowing shareholders to effectively determine the composition of their boards of directors by eliminating certain legislative requirements” and the report went on to state that “[s]hareholders should have the ability to effectively choose their boards. For example, they should be entitled to vote against candidates for election to the board.”

In March 2016 the Ontario government formed a Business Law Advisory Council (the “Council”) to advise on priorities and recommendations for reform of Ontario’s business legislation. The Council provided its initial report in November 2016 (the “November Report”). The November Report was totally silent as to whether the Ontario Business Corporations Act (“OBCA”) should be amended to adopt majority voting, notwithstanding that federal Bill C-25 had been brought forward two months earlier and was proposing to amend the CBCA to adopt majority voting. CCGG and various CCGG members made written submissions critical of the November Report’s omission of majority voting. On March 7, 2017 the Ministry of Government and Consumer Services stated that following the Council’s consideration of the various comments received on the November Report, the Council finalized its report on February 3. The finalized report, which the Ontario government publicly posted on March 7, contained a new section entitled “Issues for Future Consideration” and made the following statement under the sub-heading “Majority Voting”:

There are many who do not believe that the TSX requirement is enough. Among other things, it leaves with the board of directors the authority to decide whether a director who has not received a majority of votes in favour of his or her election should remain on the board. Moreover, the TSX provisions do not apply to public companies that are listed on the TSX Venture Exchange. In September 2016, the federal government introduced proposed amendments to the CBCA which would result in director candidates who have not received a majority of votes cast in favour of their election not being elected (subject to certain exceptions).

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.

Accordingly, it is expected that the Ontario government will continue to monitor what transpires with respect to the majority voting amendments to be adopted in the CBCA via Bill C-25 in order to consider whether it will adopt similar amendments to the OBCA.