CHAPTER 01 10 Regulatory and Judicial Developments That GCs and Boards Need to Know
Prior to August 31, CBCA public company director elections were decided by plurality voting. Shareholders were presented with only two options when casting their votes for a director nominee (“for” or “withhold”) such that, in an uncontested election, a director nominee could have been elected with only a single “for” vote, regardless of the number of votes withheld. The amendments to the CBCA, in the case of an uncontested meeting, now require shareholders of federal public companies to vote “for” or “against” each director nominee and also require each director nominee to receive a majority (i.e., at least 50% + 1) of “for” votes to be elected as a matter of law. While a simple majority is the default voting threshold under the new regime, the rule permits issuers to mandate a higher threshold; however, we do not expect many issuers to avail themselves of this option. The statutory plurality regime continues to apply in contested board elections for public companies (i.e., where there are more nominees than seats available on the board). For Canadian public companies listed on the Toronto Stock Exchange (TSX), the impact of statutory majority voting should be lessened in light of the existing majority voting standard that applies to TSX-listed issuers. Under the current TSX rules, all listed issuers other than majority-controlled corporations must have a majority voting policy and disclose the results of that vote. In an uncontested election, the TSX requires that each director receive in their favour at least a majority (50% + 1) of the votes cast, failing which the director (although elected as a matter of law under the applicable corporate statute) is required to submit a resignation for acceptance by the board. The board must then accept the resignation within 90 days of the meeting unless there are “exceptional circumstances” that warrant the director remaining on the board.
Under the new CBCA rules, following the failure of a nominee director to receive the requisite majority support, a board is prohibited from relying on its corporate law right to fill the vacancy by appointing the director to the board after the meeting, except in two limited circumstances: first, if that director is needed on the board to satisfy CBCA (not securities law) independence requirements and, second, if that director is needed to satisfy CBCA Canadian residency requirements. By contrast, the “special circumstances” in which the TSX will permit a board to refuse the resignation of a director are broader in principle and may include cases in which the director’s resignation would result in the issuer not complying with corporate or securities laws or commercial agreements, or in which the subject director is a member of a key active special committee; these cases are, however, case-specific and expected to meet a high threshold. Thus, even for a TSX-listed federal corporation subject to the exchange’s current majority voting rules, CBCA statutory majority voting means real change to the election process. The CBCA amendments of course apply to all federal public companies, including those listed on the TSX Venture Exchange (TSXV), which currently does not impose a majority voting standard (an omission intended to avoid undue governance burdens on such issuers). For non-TSX listed federal issuers, the CBCA changes may represent a significant departure from the governance regimes under which they have been operating. This may put pressure on boards of TSXV-listed issuers to pay closer attention to their governance practices relating to the identification, selection, nomination and election of directors. And although the new rule contemplates that the regulations may from time to time exempt certain classes of public companies from the majority voting requirement, no such exemptions are currently provided.
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