Hellen Siwanowicz, McMillan LLP
In May 2015, the Canadian Coalition for Good Governance (“CCGG”) issued a paper entitled Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access, which was premised on the view that shareholders of Canadian public corporations should have meaningful input into the director nomination process, otherwise called “proxy access” by CCGG.
Currently, Canadian corporate law provides shareholders with the ability to nominate directors from the floor at an annual shareholders meeting, which is hardly the best solution in 2015 when physical attendance at shareholders meetings is not the norm. In addition, one or more shareholders holding at least 5% of the shares of a Canadian corporation have (i) the right to requisition a shareholders meeting for the purpose of nominating a director and (ii) the right to submit a proposal nominating a director. In the case of a proposal nominating a director, the shareholders must have held the requisite number of shares for at least six months immediately prior to the date the proposal is submitted. Corporations that receive a shareholder proposal nominating a director are not required to include a director nominated by shareholders in the same proxy as the directors nominated by the corporation. Also, shareholders submitting a proposal nominating a director are not permitted to solicit more than 15 existing shareholders unless they prepare and distribute a dissident proxy circular to the corporation’s shareholders, which is an expensive process.
Public corporations have long been encouraged to engage with shareholders as a way of ensuring that the corporations are aware of and able to address any shareholder concerns before they turn into full-fledged shareholder activism. Under Canadian corporate law, directors of a corporation have a great deal of authority and discretion when making or approving important decisions for the corporation. Shareholders, on the other hand, as the owners of the corporation have the right to elect directors at annual shareholders meetings but have no corporate authority to nominate the directors who will stand for election at such meetings. CCGG’s proxy access proposal is aimed at addressing this issue in Canada.
In 2010, the United States Securities and Exchange Commission (“SEC”) recommended that shareholders holding 3% of the outstanding voting shares for a three-year period should be able to nominate up to 25% of the directors in a corporation’s proxy materials, provided that such shareholders certify that they are not holding the shares for purposes of changing control of the corporation or to gain more than minority representation on the Board. This rule was challenged and struck down by the U.S. Court of Appeals on the basis that the SEC did not do sufficient cost/benefit analysis of the rule.
In November 2014, Scott M. Stringer, the New York City comptroller, who oversees pension funds with US$160 billion in assets, announced an initiative with the goal of convincing 75 U.S. companies to adopt by-laws allowing shareholders who have held at least 3% of a corporation’s voting shares for at least three years to nominate up to 25% of the Board of Directors. According to Stringer, “The bottom line is, friends still put friends on Boards....My job as a long-term investor is to make sure that these companies truly represent the interests of shareowners”.
In 2015, a number of large U.S. corporations voluntarily allowed shareholders to nominate directors. For example, General Electric adopted a by-law that allowed shareholders to nominate directors if they held 3% of the outstanding voting shares for a three-year period. Citigroup, Bank of America and others also adopted or proposed similar proxy access by-laws.
CCGG believes that proxy access should be available to shareholders of Canadian public corporations on the following basis:
1. Shareholders holding a meaningful percentage of a corporation’s voting shares should have the ability to present director nominees to shareholders in a corporation’s proxy materials. The appropriate threshold is 5% for a corporation with a market capitalization of less than $1 billion and 3% for a corporation with a market capitalization of $1 billion or more.
Shareholders would be required to continue to hold the relevant percentage of shares up to the time of the shareholders meeting. CCGG does not believe that a specific holding period is necessary either to ensure that proxy access is restricted to shareholders with a long time perspective on the corporation or to avoid vexatious nominations. Rather, in CCGG’s view, shareholders should be required to make a representation to the effect that they are not seeking control of the Board as part of the nomination process.
2. To avoid ‘creeping Board control’, shareholders would be restricted to nominating the lesser of three directors or 20% of the Board. Shareholders would not be able to nominate another three directors or 20% of the Board in following years so long as the previously nominated directors, if elected, remain on the Board. Where more than one shareholder or group of shareholders holding 3% or 5% of an issuer’s shares (depending on market capitalization) wish to nominate directors by proxy access, each eligible shareholder will select one nominee until the maximum number is reached, going in order from the largest to the smallest shareholder. If the maximum number is not reached in this manner, the selection process will continue as many times as necessary, following the same order each time until the maximum number is reached.
3. The disclosure about directors nominated by shareholders in a corporation’s proxy circular should be set out fairly and on an equal footing with the directors nominated by the corporation. Equal footing means that the shareholder nominees be placed in the same location as company nominees in the proxy circular, that the same opportunity to present information on nominee backgrounds and qualifications is available to all nominees, and that a fair form of universal proxy be used. In addition, all relevant information about any compensation being paid to shareholder nominees should be clearly disclosed in the proxy circular.
CCGG’s proposed proxy access mechanism would require amendments to relevant corporate and securities legislation. In addition, amendments would be required to permit shareholders who have nominated directors to communicate with other shareholders and solicit proxies with respect to their nominees without requiring the preparation and distribution of a dissident proxy circular, on the basis that the corporation’s proxy circular effectively functions as a proxy circular for the shareholders as well.
If CCGG’s proposal is accepted, the process of amending the relevant corporate and securities legislation would take considerable time. In the interim, CCGG is encouraging Canadian public corporations to follow the example set by various large U.S. companies by voluntarily adopting this form of proxy access.
Hellen Siwanowicz is a Partner at McMillan LLP.