Coming Soon: Changes to CBCA Director Elections – The Sequel

Effective August 31, 2022, certain long-awaited amendments (Amendments) to the Canada Business Corporations Act (CBCA) and related regulations administered by the Department of Industry (Regulations) impacting director elections will come into force. As noted in our April 2021 Blakes Bulletin: Coming Soon to the CBCA: Majority Voting and Voting Against Directors, the Amendments  were scheduled for implementation on July 1, 2021, but were subsequently pulled from the distribution schedule with no new date of release given.

BIG PICTURE: DIRECTOR ELECTIONS

The Amendments will require the following from distributing corporations (generally, public companies governed by the CBCA) in respect of director elections:

• Individual Voting: Separate votes must be held for the election of each candidate to the board of directors (i.e., slate voting will not be permitted).

• Voting Against: Forms of proxy will need to provide the option for shareholders to vote “for” or “against” (rather than “withholding” shares from voting) each nominee in uncontested elections (i.e., where there is only one nominee for each available board seat).

• Majority Voting: A majority-voting standard must be used for uncontested elections, such that each nominee must receive more votes “for” their election than “against” in order to be elected (failing which such nominee is an “unsupported nominee” for purposes of this bulletin).

• Limited Override of Majority Vote: Other than in prescribed circumstances (see below), CBCA companies will be prohibited from appointing an unsupported nominee to their board of directors before the next meeting of shareholders at which an election of directors is required to be held.

The requirement for individual voting will not have an impact on CBCA companies listed on the Toronto Stock Exchange (TSX) as the TSX Company Manual already mandates individual voting for nominees. However, the Amendments may result in changes for issuers listed on other stock exchanges, which may not impose individual voting requirements for director elections.

The ability for shareholders to vote against the election of a director will be a new development in Canada. It is important to note, however, that under Canadian securities laws, a form of proxy must provide an option for the shareholders to vote “for” or have their votes “withheld” from voting in respect of the election of directors. Accordingly, reconciling these different requirements may result in shareholders of a company governed by the CBCA being given three choices for uncontested director elections: “for”, “against” or “withhold”. While an exception from the securities law requirements is available if (i) the issuer complies with the requirements of the laws relating to the solicitation of proxies under which the reporting issuer is incorporated, organized or continued (e.g., the CBCA) and (ii) such requirements are substantially similar to the requirements under Canadian securities laws, the Canadian Securities Administrators have not yet provided guidance on whether the Amendments will be considered substantially similar to the requirements under Canadian securities laws. 

With respect to majority voting, TSX-listed issuers governed by the CBCA (unless they are majority-controlled) are currently required to have a majority voting policy that provides for candidates to tender their resignation if they do not receive more votes “for” their election than votes “withheld” and, absent exceptional circumstances, for the issuer’s board to accept such resignation. The Amendments will effectively supersede such majority voting policies for CBCA companies by statutorily providing that an unsupported nominee has not been elected, thereby precluding the need for them to resign and denying the board the choice of not accepting such a resignation. However, the Amendments create two exceptions to allow an unsupported nominee to be appointed as a director if that person is necessary for the corporation to meet its obligation under the CBCA for having either (i) at least two directors who are not officers or employees of the corporation or its affiliates or (ii) to meet Canadian residency requirements, such as at least 25 per cent of the board members being Canadian residents (or at least one director if the corporation has less than four directors), or a majority of the board members being Canadian residents for certain corporations required by an Act of Parliament to be Canadian-controlled. In addition, unlike the TSX requirement, the Amendments will apply to majority-controlled companies.

The Amendments contemplate that certain prescribed distributing corporations may be exempted from some of the foregoing requirements, but the Regulations do not currently set out any such prescribed distributing corporations.

PITCHES (SHAREHOLDER PROPOSALS)

The Amendments also revise the deadline for shareholders to submit shareholder proposals, allowing for shareholder proposals to be submitted closer to the date of an annual meeting of shareholders. Effective August 31, 2022, shareholder proposals will be able to be submitted within the 60-day period that begins on the 150^th day before the anniversary of the previous annual meeting of shareholders (currently, the deadline is at least 90 days before the anniversary date of the notice of meeting that was sent to shareholders in connection with the previous annual meeting of shareholders).

STILL IN THE EDITING SUITE

The Regulations do not address the provisions in:

• An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (Bill C-25) relating to the sending of meeting materials to shareholders (i.e., notice and access), which supporting regulations Corporations Canada advised in May 2018 would take approximately 18 to 24 months to develop; or

• An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures (Bill C-97) that would require certain CBCA corporations to provide disclosure on compensation clawback mechanisms and the well-being of employees, retirees and pensioners, and hold annual advisory “say-on-pay” votes (see our March 2021 Blakes Bulletin: Corporations Canada Seeking Feedback on Proposed CBCA Regulations).

POST-CREDITS: RESIDENCY

Notably, unlike Ontario’s Business Corporations Act, which was amended to remove the “resident Canadian” director requirement (see our June 2021 Blakes Bulletin: Changes to Ontario Business Corporations Act to Come into Force on July 5, 2021), the CBCA has retained this residency requirement and there are no signs of it changing for the time being.

For further information, please contact:

Matthew Merkley                    416-863-3328
Jeremy Ozier                            416-863-5824
Liz Litwack-Landsberg           416-863-2386

or any other member of our Capital Markets or Corporate Governance groups.