The federal government is proposing to change the way that directors of public companies governed by the Canada Business Corporations Act (CBCA) are elected. If Bill C-25 comes into force, “majority voting” will be enshrined in the CBCA. A director will be elected only if a majority of votes are cast in favour of his or her election.
Amending the CBCA to incorporate majority voting is viewed by some as a step forward for shareholder democracy. It is not a step forward. It is an unnecessary change that will further fragment the regulation of Canadian capital markets and create a risk of unnecessary governance distractions.
We already have majority voting in Canada. The TSX adopted its majority-voting requirements in 2014. Over the last two years, only seven directors of TSX-listed companies that were subject to the TSX requirements failed to receive majority support of shareholders. Six resigned. The seventh remained on the board (having resolved the issue).
Two aspects of the TSX approach to majority voting that are not included in the proposed CBCA amendment should be noted. First, boards have 90 days to accept the director’s resignation. This gives them some time to identify someone to serve in place of the defeated director. Second, if the board believes that it is faced with an “extraordinary circumstance” as a result of the defeat of one or more of its directors, it may discuss the issue with the TSX and find a solution that best serves the corporation.
Under the proposed CBCA amendments, an incumbent director who does not receive majority shareholder support will be off the board immediately — in other words, directors of CBCA public companies will be subject to “sudden-death” elections. Boards will be faced with the need to quickly identify new candidates for appointment to the board. The time required to conduct a thoughtful search may not be available. While boards may maintain “evergreen” lists of potential board candidates, the candidates on that list best suited to the needs of the board at that time are often not available to take on a new board position on short notice.
Public companies may face other issues as a result of sudden-death elections. Depending on who has been defeated, they may no longer have three directors who would meet the audit committee independence standards. The company may suddenly find that it is no longer a foreign private issuer. Sudden-death elections may be used as a means to take control of the board without a proxy battle.
The TSX majority-voting requirements apply only to TSX-listed issuers (not to TSX venture issuers). We note that TSX represents over 98 per cent of the combined quoted market value of the two exchanges.
Enshrining majority voting in the CBCA will create a disincentive for public companies to choose (or stay under) federal jurisdiction for corporate law purposes. The laws in a jurisdiction are an important factor in considering where a business should incorporate. We know that many businesses incorporate in (or move to) British Columbia because B.C. does not require that 25 per cent of directors be resident Canadians. If the CBCA remains as the only corporate statute to override the TSX majority-voting regime by imposing a separate and more restricted regime, it is likely public companies will prefer the laws of one of the provinces or territories.
Finally, enshrining majority voting in the CBCA will exacerbate the checkerboard approach to regulation of public companies. In Canada, we have made very slow progress in breaking down complexity caused by our provincial securities laws. The federal government has played an important role in streamlining regulation by removing requirements that apply only to public companies from the CBCA, leaving regulation of public companies to securities law. It is discouraging that the longstanding commitment to a national approach to securities regulation is being diverted to make an unnecessary change to corporate law.
We have discussed our concerns with senior political staff and civil servants and with a number of senators. Our concerns have received thoughtful consideration, including our suggestion that if Bill C-25 must move forward, it be amended to allow defeated directors to remain on the board for 90 days to allow for a more orderly transition. Our work is based on a close review of Bill C-25 culminating in our release of a discussion paper last spring.
The bill is currently before the Senate and there is still an opportunity for the government to reconsider its approach. We urge it to do so. If the government does proceed, we urge it to support the amendments introduced by the Senate committee to include a 90-day hold period after a director election to avoid the greatest risk of the changes, sudden-death elections.
While the 90-day hold period would be a welcome amendment to Bill C-25, we continue to believe that it is not appropriate to move forward with the proposed changes with respect to majority voting at this time. Shareholder democracy is an important theme in Canadian governance — one embraced not only by shareholders, but also by boards. Majority voting is at the heart of shareholder democracy and the adoption of majority voting by the TSX was an important development in Canadian corporate governance. However, the proposed CBCA amendments offer no practical benefits for public companies or their shareholders to counterbalance the complications and confusion they will create.