Federal government proposes changes to corporate law: what it means for corporate governance and shareholder activism

On September 28, 2016, Canada’s federal government introduced a bill proposing amendments (the Amendments) to the Canada Business Corporations Act (the CBCA), among other acts. The Amendments include new requirements for electing directors, mandatory diversity disclosure, and changes to shareholder communications. These proposed changes, if enacted, will have significant effects on corporate governance and shareholder activism in Canada. Here are some of the key things issuers and investors will need to know.

Election of directors

The Amendments introduce several changes to the election of directors. They will require publicly traded corporations, with some prescribed exceptions, to:

• hold annual elections for directors;
• elect directors individually; and
• use a majority voting standard for uncontested director elections (i.e., when the number of director candidates is the same as the number of director positions to be filled).

Annual and individual voting

These rules are similar to rules that are already in place for issuers listed on the Toronto Stock Exchange (TSX), which were announced in October 2012 and February 2014. Though most Canadian companies already hold annual elections, the Amendments will formally preclude longer director terms beyond one year for CBCA companies. The declining practice of slate voting—where shareholders can vote only for slates of directors rather than individuals—will also be disallowed. Federally incorporated issuers listed on the TSX Venture Exchange (TSXV), which already requires annual elections and restricts slate voting, will now be explicitly barred from slate voting.

Majority voting for directors

The majority voting requirement addresses a controversial issue that arises from the way Canadian directors are now elected. In Canada, corporate statutes provide for the election of directors by plurality voting, meaning that shareholders can either vote for a director or “withhold” their vote. Without a majority voting standard, a director can be elected by just one vote, regardless of the number of votes withheld. This has fed significant concerns about “zombie directors,” appointed against the will of the majority of shareholders. Director majority voting requires that in uncontested elections, a director be elected by the majority of votes cast.

The majority voting requirements will have several practical implications. One is to address a perceived weakness in the TSX majority voting rule. The TSX rule, which applies to all issuers other than majority-controlled issuers, requires issuers to have a majority voting policy stipulating that a director who does not receive a majority of votes will tender his or her resignation within 90 days of the vote. However, the TSX rule also gives the board the power to decide whether or not to accept the resignation, and allows the board to refuse the resignation if there are “exceptional circumstances.” In practice, this provision has frequently resulted in defeated directors remaining on the board. The Amendments do not allow this discretion and state that, “Each candidate is elected only if the number of votes cast in their favour represents a majority of the votes cast for and against them.” In addition, federally incorporated issuers listed on the TSXV will now be required to comply with majority voting.

It remains to be seen whether the Amendments will lend further impetus to ongoing provincial law reform efforts along similar lines.

Mandatory diversity disclosure

The Amendments will also require publicly traded companies to disclose information with respect to the diversity of directors and senior management. While the precise details of these requirements remain to be prescribed by regulation, the government has indicated that, “Distributing CBCA corporations will be required to identify the gender composition of their boards and senior management and to disclose their diversity policies or explain why none are in place.”

As we have noted in a number of previous posts on the Special Situations Blog, investors and other stakeholders are increasingly demanding that boards and executive teams be diverse. In recent years, securities regulators have tried to quicken the pace of change by adopting new measures in the face of stubborn statistics. National Instrument 58-101 Disclosure of Corporate Governance Practices contains similar “comply or explain” requirements with respect to gender, which as a practical matter now apply to all TSX-listed issuers.

The Amendments will give further force to the expectation that issuers consider gender and other forms of diversity in determining whom to nominate to their boards. Issuers without diverse boards and senior management may face an elevated prospect of “withhold” votes for their nominees, as well as criticism from the media and shareholder activists.

Shareholder communications

The Amendments will also simplify shareholder communications. For the first time, they will allow CBCA companies to take full advantage of notice-and-access. In 2012, the Canadian Securities Administrators adopted rules that allow companies to provide a notice of the meeting either physically, or electronically if the shareholder consents. The notice informs shareholders (among other things) that proxy materials have been posted electronically and provides instructions on how to obtain them. Under the present iteration of the CBCA, issuers face several barriers to full implementation of notice-and-access. The Amendments will also simplify the timeframes for submitting shareholder proposals to CBCA companies by setting prescribed periods.

We expect that the Amendments will increase the attraction of using notice-and-access for CBCA companies, reducing costs for issuers. We also expect that they will simplify and enhance participation in shareholder democracy.