Reaction to CSA’s Proposed Amendments to the Beneficial Owner Communication Process
November 29, 2010
In April 2010, the Canadian Securities Administrators (CSA) published a notice and request for comments on proposed amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) and other related instruments and policies designed to improve the beneficial owner communication process. A discussion of the notice and request for comments may be found in our article CSA Proposes Amendments to Streamline Communication with Beneficial Owners.
At the end of the 144-day comment period on August 31, 2010, the CSA had received feedback from 25 commentators including reporting issuers, institutional investors, investment consultants and members of the legal community. Several common themes emerged from the commentary (currently under review by the CSA), including recommendations that the CSA:
- expand the application of notice-and-access to include special meetings;
- limit selective use of notice-and-access and require disclosure of rationale for selective use;
- strike a balance between prescribing form and content and allowing flexibility with respect to the form of notice;
- improve integration of notice-and-access with the requirements of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102);
- take steps to ensure that any differential treatment of Objecting Beneficial Owners (OBOs) and Non-Objecting Beneficial Owners (NOBOs) does not lead to disenfranchised securityholders; and
- learn from the United States Securities and Exchange Commission’s (SEC) experience of implementing notice-and-access in the US.
Expand the application of notice-and-access to include special meetings
The proposed amendments introduce a notice-and-access procedure for the delivery of proxy-related materials. Notice-and-access allows reporting issuers to send beneficial owners a notice advising that proxy-related materials have been posted online and directing them to a website (other than the website of the System for Electronic Documents Analysis and Retrieval, i.e., SEDAR) where the materials can be accessed, while still providing printed materials upon request. The proposed amendments limit the use of notice-and access to meetings that are not "special meetings" as defined in NI 54-101.
Most commentators agreed that notice-and-access should be extended to special meetings for the following reasons:
- Creating a distinction between special meetings and other meetings might imply that the business conducted at one type of meeting is more important than that conducted at the other, or that notice-and-access is a less effective means of communication, and therefore should not be used for meetings that are conducting business of fundamental importance.
- Differentiating between meeting types reduces efficiency and adds complexity for all participants. Reporting issuers may rely on service providers to offer notice-and-access to their securityholders; the fewer the meetings at which notice-and-access is available, the greater the implementation costs will be for the benefits received. In addition, securityholders may become confused as to when notice-and-access is used and how proxy-related materials will be delivered to them.
- Issuers listed on the TSX Venture Exchange must present stock option and similar plans annually as a special resolution under the exchange rules. As a result, if notice-and-access is not extended to special meetings, TSX Venture Exchange-listed issuers, for whom the cost savings of using notice-and-access may be of particular benefit, would not be able to use it.
Limit selective use of notice-and-access and require disclosure of rationale for selective use
The proposed amendments would allow reporting issuers to use notice-and-access selectively, such that for any given meeting, some securityholders might receive paper materials while others might be informed by way of notice-and-access. Critics argue that the CSA has not provided adequate guidance or public policy justification for allowing differential treatment. If notice-and-access has the potential to affect voting levels, then offering it selectively could affect voting results. Some commentators noted that the CSA should require reporting issuers to disclose that they use notice-and-access selectively and provide their rationale for doing so.
Other commentators supported selective use of notice-and-access and provided examples of when it may be justified, such as a circumstance in which a reporting issuer uses notice-and-access with participants in an employee share ownership program while providing paper materials to other securityholders. There may be specific circumstances or legislative restrictions that limit the use of notice-and-access to certain groups of securityholders. Such commentators asserted that this limitation should not interfere with the efficiency and cost savings realized from using it where available.
Strike a balance between prescribing form and content and allowing flexibility with respect to the form of notice
Reporting issuer commentators were generally opposed to a prescribed form of notice, opting for as much flexibility as possible in their communications with securityholders. Other commentators called for some level of standardization in which the definition of "specified information" would provide guidance on minimum standards sufficient to ensure that securityholders have a uniform level of understanding of the options available to them.
With regard to the inclusion of additional materials with the notice, commentators generally agreed that the CSA should provide more guidance on the type, content and purpose of such materials. Most reporting issuer commentators suggested that the CSA set out minimum information requirements and allow reporting issuers to augment it as they see fit to best communicate with securityholders; other commentators suggested that there should be limits as to what additional items may be included in a notice-and-access package. For example, it was suggested that only proxy-related materials and regular disclosure documents such as annual financial statements should be included; marketing materials should not.
A few commentators suggested that educational materials about the notice-and-access process (prepared by the CSA) should be included with notice-and-access packages. Many commentators expressed concern that the existing proxy system is confusing, that many investors do not understand the mechanics, benefits or rules around their voting rights, and that the proposed amendments only add to their confusion. There is general support for the CSA to design a national investor education campaign to explain the proxy voting process and to encourage individual investors to vote their proxies at securityholder meetings.
Improve integration of notice-and-access with the requirements NI 51-102
NI 51-102 requires reporting issuers to send an annual request form to registered holders and beneficial owners of their securities to request financial statements and management’s discussion and analysis (MD&A). Several commentators suggested that the CSA provide additional guidance regarding the interaction of NI 51-102 with NI 54-101. There is support for the CSA to implement a single process that allows securityholders to fill out a form (either in writing or through notice-and-access) stating whether and how they want to receive financial statements, MD&A and proxy-related materials.
Take steps to ensure differential treatment of NOBOs and OBOs does not lead to disenfranchised securityholders
The proposed amendments would result in differential treatment of shareholders based on their OBO or NOBO status. Many commentators expressed concern that securityholders who exercise their right to privacy by electing to be OBOs would become disenfranchised.
Many commentators expressed a view that the requirement to disclose in the information circular that the reporting issuer is not paying to send materials to OBOs is insufficient, as it will increase transparency but will not result in OBOs receiving meeting materials, meaning OBOs may still be disenfranchised. If the issuer, the intermediary and the securityholder are all unwilling to absorb delivery costs, the securityholder would have no way of knowing that this was disclosed as they would never receive the document. Several commentators viewed payment for OBOs as a substantive matter, rather than merely a disclosure issue, and noted that the reporting issuer should be required to state that it is not paying for delivery to OBOs and explain why it is not doing so.
Other commentators suggested that the transparency objectives would be better served by ensuring that any party who wishes to become an OBO should be made aware of the potential costs of this decision when making the choice on the initial disclosure form.
Learn from the SEC’s experience of implementing notice and access in the US
The SEC implemented a notice-and-access model in January 2009. Although the proposed amendments vary from the SEC approach, Canadian reporting issuers that are also SEC reporting issuers can elect to comply with the SEC standards instead.
One criticism of the SEC’s model is that it has resulted in a reduction in the levels of retail investor voting. However, some commentators argue that the reduction in retail investor voting may have other causes, including recent changes to New York Stock Exchange rules regarding brokers voting on behalf of beneficial securityholders who did not cast a ballot.
The proposed amendments differ from the SEC model in a number of ways, including that the proposed amendments would require a Voting Instruction Form to be included with the notice to help the recipient understand that action is required.
In the US, notice-and-access has resulted in cost savings due to reduced printing and mailing costs and has also been lauded as an environmentally friendly development. On a proportional basis, however, some commentators stated that the opportunity for significant cost savings for reporting issuers in Canada is likely to be less than that seen in the US. For example, cost savings are reduced if reporting issuers conduct stratified mailings and if notice-and-access is limited based on meeting type. In addition, the magnitude of savings will differ between reporting issuers. For example, larger retail securityholder bases will likely result in greater cost savings.
We will continue to monitor the progress of the CSA’s implementation of the proposed amendments.