Canadian Responses to Proxy Access Proposals

Courteney Keatinge is Director of Environmental, Social & Governance research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Keatinge. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

After months of suspense, both Royal Bank of Canada and Toronto-Dominion have bowed to investor pressure and adopted U.S.-style proxy access. Both companies faced non-binding shareholder proposals requesting the provision at their 2017 AGMs, receiving 47% and 52% support respectively, and both companies have protested that the U.S. standards of a 3% ownership threshold and 25% nominating power are incompatible with the existing proxy access rights provided under the Canadian Bank Act. From some investors’ perspective, it’s clearly a positive that the banks have responded to the non-binding votes; however, it’s less clear whether the hybrid, faux U.S.-style proxy access they’ve now adopted actually represents an improvement on what they already had under the Bank Act.

Under the terms of the Bank Act, any shareholder (or group of shareholders) owning 5% of a company can nominate an unlimited number of directors to the board—with certain onerous restrictions. Nominating shareholders are only given a 500-word statement to make the case for their candidates; and can only directly solicit up to 15 other shareholders without preparing a dissident proxy circular. Given these restrictions, for a number of years some shareholders, as well as the Canadian Coalition for Good Governance (“CCGG”) have been pushing companies and regulators to adopt proxy access with provisions that are more commonly seen at U.S. companies. Thus, advocates viewed the strong support for the banks’ shareholder proposals as a victory for more progressive proxy access rights.

The policies adopted by Toronto Dominion and Royal Bank of Canada certainly resemble aspects of U.S. style of proxy access. Notably, the Bank Act’s aforementioned restrictions on supporting disclosure and solicitation are absent. However whereas U.S. companies have settled on a 3% ownership threshold, the banks have stood firm at 5%, contending that, due to current regulations, they are prohibited from permitting shareholders owning only 3% of shares the ability to nominate directors (CCGG states that it “does not agree with this position” but has not elaborated on this assertion). The banks have requested that regulators review current proxy access rules in order to consider lowering the threshold to 3%, though it is unclear when or if these regulations will be reviewed or changed in the near future. Moreover, whereas the Bank Act allows 5% holders to nominate unlimited candidates, the banks’ approach caps nominations at 20% of the board. As such, the new “U.S.-style” proxy access adopted by Toronto Dominion and RBC is arguably less shareholder-friendly than the Bank Act’s existing provisions.

Investors should rightly be pleased that two major banks have responded to their concerns, and that proxy access is now firmly on the Canadian agenda. Moreover, there is certainly value in removing restrictions on disclosure and solicitation and, in light of the close ties between the U.S. and Canadian markets, in ensuring that investors have proxy access on similar terms across borders. However, given that the approach taken by the banks effectively trades restrictive provisions for a cap on nominations without lowering the ownership threshold, investors should carefully consider whether this represents an appropriate template for Canadian proxy access—and whether a regulatory solution that harmonises the existing rights under the Bank Act with U.S. style proxy access would be a more effective solution than private ordering.

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