The Court of Appeal for Ontario has issued an important decision on majority voting policies of TSX listed issuers. Such policies require directors to submit their resignation to the board of directors if they do not receive more “for” votes than “withheld” votes. The board then determines whether to accept that resignation. The TSX expects that boards will accept the resignation except in “exceptional circumstances”, in order to give effect to the will of the issuer’s shareholders.
The facts in this case are complicated and are explained in detail in our article on the lower court decision from early last year. The relevant facts for our purposes are that a director who received fewer votes for his election than were withheld refused to resign.
The Court of Appeal decision in Baylin Technologies Inc. v. Gelerman corrected the errors in the application judge’s decision about how the votes cast for and withheld from the election of each director are counted for the purposes of majority voting. It clarified that votes marked “withheld” on a proxy are counted as votes against the election of the director. The vote total includes both those voted for and those withheld.
The Court of Appeal addressed whether the provision of a majority voting policy (which is simply a policy of the board) can be enforced against the director, requiring that director to resign. In its final order, the Court declared that the director in question was required to have submitted his resignation when he received less than a majority of the total votes.
The Court of Appeal also addressed the inclusion of examples of “exceptional circumstances” in a majority voting policy. The Baylin policy enumerated certain circumstances that the Baylin board would consider to be “exceptional”, and as a result of which it may not accept a director resignation. These circumstances were broadly similar to the examples in the TSX majority voting policy, but it did not include non-compliance with commercial agreements (which is included as an example in the TSX policy). The Court found that the TSX does not stipulate what would or would not constitute exceptional circumstances and that the examples that it provided were just that, examples. An issuer may, but is not required to include any examples of or specify particular exceptional circumstances in its policy. It also found that whether the circumstances referred to in the TSX policy that would in fact constitute exceptional circumstances is to be determined on the particular facts of any given case.
The Court of Appeal acknowledged the position taken by the Canadian Coalition for Good Governance (“CCGG”) in its factum as an intervenor in this matter. CCGG is the pre-eminent corporate governance organization in Canada. In its submission CCGG noted that it favours a narrow approach to exceptional circumstances, including a restriction to an enumerated list of such circumstances. As the Court acknowledged, CCGG’s position is that the narrower the exceptional circumstances exception is made in any given policy, the more it promotes the purpose of such policies, which is to hold directors accountable to shareholders