Hellen Siwanowicz, McMillan LLP
Shareholders of Canadian public companies have in the past devised schemes to remove existing directors by nominating a dissident slate from the floor of a shareholders’ meeting to the surprise and prejudice of other shareholders. Advance notice by-laws ensure that all shareholders are treated fairly and are provided with timely information in connection with the nomination of directors, and thereby prevent such an ‘ambush’.
Background
Advance notice by-laws have been utilized by American public companies for more than 20 years and are prevalent in the United States. Over the past year, advance notice by-laws or policies have been widely accepted in Canada, following the adoption of such a by-law in October 2011 by one of our firm’s clients.
Under applicable corporate legislation in Canada, there are generally only two methods available to shareholders to nominate directors at a meeting without providing ample notice to all shareholders:
- Proxy fight. Following the mailing of proxy materials by an issuer relating to the election of directors, any person may solicit proxies, so as to elect his or her own nominees to the board of the issuer, by delivering a dissident's proxy circular (or by way of public broadcast, speech or publication in circumstances prescribed by the legislation). This type of activity is generally referred to in business parlance as a proxy fight. There is no time restriction as to when one may solicit proxies through these means, subject of course to practical time constraints. As a result, a proxy fight could be commenced without much prior notice to the issuer or its shareholders.
- Nominations at a meeting. Shareholders or proxyholders may, at a meeting called for the purpose of electing directors, nominate from the floor of the meeting one or more persons to serve as a director. No prior notice of such nomination need be given to the issuer or its shareholders. A nomination made in such circumstances is referred to herein as an ‘ambush’.
Advance notice provisions have been designed to prevent shareholders from nominating directors through a proxy fight or an ambush, without in each case providing an issuer with adequate time to consider and respond in an informed way to such proposed nominations. Advance notice provisions benefit shareholders by:
- ensuring that all shareholders – including those participating in a meeting by proxy rather than in person – receive adequate notice of the nominations;
- allowing shareholders to register an informed vote;
- facilitating an orderly and efficient meeting process; and
- preventing an ambush.
Advance Notice Provisions
The length of the notice period for advance notice provisions varies but, in the case of an annual meeting of shareholders, is usually no less than 30 nor more than 65 days prior to the date of the annual meeting. ISS and Glass Lewis support advance notice by-laws and policies, which provide for such minimum notice provisions. Also, ISS supports issuers making a reasonable request from dissidents for information additional to that required under applicable law, in order to review any proposed nominee.
Implementation of By-law or Policy
The directors of an issuer may by resolution pass an advance notice by-law, following which the by-law must be submitted by the directors to the shareholders at the next meeting of shareholders. The advance notice by-law would be effective from the date of such directors' resolution. If the advance notice by-law is confirmed by shareholders at the next meeting, it would continue in effect in the form in which it was so confirmed. If the advance notice by-law is rejected by shareholders at the next meeting, or the directors do not submit the advance notice by-law to the shareholders at the next meeting, the advance notice by-law would cease to be effective from the date of the meeting.
For British Columbia companies, advance notice provisions have recently been adopted by way of a policy of the board. Such a policy, which is effective upon adoption by the board, is put to shareholders for approval, on the basis that the policy would terminate on expiry of the shareholders’ meeting (but after the election of directors) if not approved by shareholders at that meeting. Notwithstanding a recent court decision upholding such a policy, we remain concerned with the adoption of advance notice provisions outside of a corporation’s articles and by-laws.
Conclusion
An advance notice by-law is an important tool for a public company in order to ensure that all shareholders are treated fairly and are provided with timely information in connection with the nomination of directors. We have been genuinely surprised by the rapid rate of adoption of advance notice by-laws over the past year and humbled by the fact that the form of advance notice provisions adopted by Canadian public companies have been based on the form adopted by our clients. We will be introducing a new form of advance notice by-law for Canadian public companies for the 2013 proxy season, which we believe will further enhance the rights of shareholders.
Hellen Siwanowicz is a Partner at McMillan LLP.