OSC Invites Input from Public Companies and others on Shareholder Democracy Proposals

On January 10, 2011, the Ontario Securities Commission published OSC Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy (the Notice),  which provides an update on the status of shareholder democracy issues and identifies three issues for additional review and potential regulatory proposals for reporting issuers. The three issues identified are slate voting and majority voting for uncontested director elections, shareholder advisory votes on executive compensation, and the effectiveness of the proxy voting system.

Slate Voting and Majority Voting

Securities legislation in Ontario does not currently prohibit or restrict slate voting at shareholder meetings. In the Notice, the OSC invites comment on whether a proposal related to slate voting and majority voting is desirable.

Canadian corporate legislation provides that shareholders can choose to either "vote for" or "withhold their vote for" directors. As a result of this legislation, directors are elected in uncontested elections if a single vote is cast for a nominee, even if a majority of votes are withheld. The predominant practice followed by corporations in Canada is to solicit a single vote for an entire slate of directors, nominated by management. Shareholders typically can choose to either vote for or withhold their vote for a slate of directors. This process allows directors to be elected without necessarily receiving a majority vote in their favour.

This practice has been criticized, and some issuers have adopted majority voting policies (a list of such issuers is available here).  Any director who is elected after receiving 50 per cent of the votes plus one withheld vote is normally obliged to resign under these policies. A typical element of a majority voting policy is that directors must be elected in separate votes, and not as part of a slate.

The OSC is considering whether reforms to securities legislation are appropriate to facilitate individual director voting and majority voting for uncontested elections of directors of reporting issuers.

Shareholder Advisory Votes on Executive Compensation

The OSC is also inviting comment on the introduction of mandatory "say on pay," shareholder advisory votes on an issuer’s executive compensation.

Other countries have already introduced mandatory say-on-pay legislation. For example, the United Kingdom requires public companies to give shareholders an advisory vote on executive compensation. In the United States, the recent Dodd-Frank Wall Street Reform and Consumer Protection Act and the related rules promulgated by the Securities and Exchange Commission require issuers to hold a non-binding advisory vote on its executive compensation as disclosed in its proxy materials, beginning at the first shareholder meeting occurring on or after January 21, 2011. Thereafter, the vote is required at least once every three years. Shareholders must also make a non-binding vote on whether the say-on-pay vote should occur every one, two or three years.

While a number of Canadian issuers have voluntarily instituted a say-on-pay vote, there is no regulatory initiative underway in Canada to make shareholder advisory votes on executive compensation mandatory for reporting issuers.

The Notice advises that OSC staff, who have been monitoring international developments in respect of say on pay, are considering whether regulators should introduce mandatory say on pay, and welcome comments on the desirability and scope of such initiatives.

The Effectiveness of the Proxy System

The OSC notice also invites comment on the effectiveness of the proxy system. This is a vast and complex topic that presents many issues of potential interest.

Most holders of voting securities in Canada are not directly represented as security holders on the shareholder registers of the issuers in which they invest. The general rules for soliciting voting instructions from individual beneficial owners are laid down in corporate and securities law, but the process of aggregating those instructions and conveying the results back to the issuer on an accurate and timely basis is murky, hard to police, and prone to error. Consequently, beneficial owners don’t really know whether their instructions are being acted upon, whether aggregation of votes is accurate, or whether overvoting is occurring.

Where a proxy contest is in progress and information available to shareholder changes frequently between the time a management information circular is sent and the time a shareholders’ meeting is held, existing rules and practices make it difficult for beneficial owners to change their vote or to show up at meetings and vote in person. Information is being disseminated in proxy contests by websites and newspaper advertisements after the management circular has been mailed. Also, the content of such information is not typically policed by regulators, despite the fact that the language used and ideas expressed can be more inflammatory than that of the management information circular.

Unregulated proxy advisory firms that claim to independently examine the merits of proposals submitted to shareholders for approval, but accept lucrative consulting engagements from issuers, influence the voting responses of many institutional shareholders. Often competing firms provide conflicting advice on how right-thinking shareholders should vote.

Comment Period

The deadline for submission of comments on the issues raised in the Notice is March 31, 2011. We would be pleased to raise with the OSC, on your behalf, any comments you may have on these issues. We will continue to monitor any comments received to the issues discussed in the Notice and any future regulatory proposals.