How Can an Issuer Reduce the Risk of a Failed Election Under the New Majority Voting Regime? With true majority voting, at each uncontested meeting an incumbent board will be subject to the risk that a quorum of directors or the number of directors required by the statute or its constating documents will not be elected – an outcome referred to as a “failed election.” What is more, the new regime could also inject new potency into public withhold campaigns (presumably to be restyled as “against campaigns”) that can now set out to block the election of management nominees as a matter of corporate law. When a failed election occurs, the incumbent directors must promptly call a special meeting of shareholders to fill the vacancy. While the risk of a failed election should prove more theoretical than actual for most issuers at most meetings, the CBCA’s elections saving clause was amended on August 31, 2022 to provide that if shareholders fail to elect the number or minimum number of directors required by the corporation’s articles because director nominees did not receive the required majority vote, the directors elected may nonetheless exercise all the powers of the board provided that such elected directors constitute at least a quorum. For a board to avail itself of this saving provision, then, at least the required number of directors to establish a quorum must be elected. The CBCA permits corporations to set the director quorum level in their constating documents, failing which the threshold for quorum will default under the statute to a majority of the number of directors or minimum number of directors required by the issuer’s articles. In light of the new risk of a failed election, CBCA issuers should be mindful to review their board
quorum and required director levels to determine if any thresholds are unnecessarily high. Issuers that are contemplating any changes to such thresholds should consider the policy guidelines of proxy advisory firms, together with appropriate governance practices. For example, ISS’ current guidelines for TSX-listed companies provide that ISS may recommend voting against proposals to amend bylaws that provide for a quorum of directors that is less than 50% of the number of the directors. Will Other Jurisdictions Adopt Majority Voting? Although the CBCA is currently a Canadian standout in mandating majority voting, it is not unforeseeable that at least some of the provincial and territorial corporate statutes would follow the federal regime’s majority voting standard (indeed, a private member’s bill to introduce true majority voting to the Ontario Business Corporations Act emerged in 2017 but died on the order paper). Companies going public, in particular on exchanges that do not require majority voting, should take into account the election governance responsibilities imposed by the CBCA when considering the appropriate corporate regime for their business. In light of the new risk of a failed election, CBCA issuers should be mindful to review their board quorum and required director levels to determine if any thresholds are unnecessarily high.
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Governance Insights 2022
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