Canadian Lawyer

w w w . C A N A D I A N L a w y e r m a g . c o m J A N U A R Y 2 0 1 7 53 for incumbents to submit a resignation, no process for the board to consider the circumstances, or to have a dialogue with investors to find out why a director may have failed to receive the level of support necessary to have been elected. "And that loss of dialogue is a signifi- cant loss, I think, because it precipitated a conversation that needs to happen between boards and shareholders," says MacDougall. "With the [proposed] election standard … there's no debate, there's no discussion, there's no feedback as part of that process." There's a material difference between majority voting as currently applied by TSX-listed issuers, and the standard that is being proposed under the CBCA, he says, "I don't think the majority voting standard as proposed in the legislation works." Ruf also fears that, because the proposed majority voting rules read differently than TSX rules, "what do we comply with? Pre- sumably, the more stringent one," which would be the CBCA rule. But if companies can rely on their own exchange's rules — for example, the Toronto Stock Exchange's requirements — she worries it could lead to jurisdiction shopping. Also, she says, "I really see . . . the major- ity voting/risk of failed director election as being the main risk at this stage." Diversity reporting Under Bill C-25, reporting issuers will be required to provide to their shareholders information concerning the composition of their boards of directors and senior man- agement by sex, and disclose any diversity policies or explain why none are in place. Ruf notes that "there's no real meat" around what the government is proposing in the CBCA. "The details will be in the regula- tions, which don't exist yet." More likely than not, she says, the government will go with something very similar to what the most of the provincial securities commissions require with respect to diversity, meaning it won't be mandatory or carry quotas. Minister of Innovation Navdeep Bains, sponsor of Bill C-25, has said his gov- ernment may consider targets if there is no improvement to diversity on corporate boards in the next few years. A report issued in June by Catalyst, a non-profit organiza- tion that promotes inclusive workplaces for women, found that in 2014 women filled just 20.8 per cent of director positions at publicly traded Canadian companies. Catalyst has called for targets in order to improve those numbers. The Ontario Securities Commission and others "have rules that you have to comply or explain diversity on your board," says Ruf. "It sounds like that's largely where the feds will go on the CBCA as well." The OSC has considered models in other parts of the world, she says, including Europe, which has quotas, and it has shown results because there is no choice but to comply. "But the [Canadian] government is saying, 'let's try to let the market and peer pressure do its work.' " Companies are making serious, con- crete efforts to do something about it, she adds, though, "I don't think anyone wants mandatory quotas. It's nice to have half women on a board, but what if there aren't that many qualified women" to elect? 'Notice and access' The CBCA's requirements for paper-based communications will be replaced with a "notice and access" system, which would allow corporations to use electronic com- munications to provide notice of share- holder meetings. Ruf calls the notice and access provision welcome, though MacDougall is concerned with the wording of the amendment. He says, "The legislative change is to allow the director to grant an exemption on any terms that she might think fit on annual meeting delivery requirements, whereas the statute should provide authority to pre- scribe by regulation that if you're comply- ing with notice and access under securities laws, there should be absolutely no need to apply for relief under the corporate statute." MacDougall also notes that a director's authority to grant exemptions from annual shareholder delivery requirements does not extend to the proposed new diversity dis- closure requirement. Diversity disclosure must be provided "along with" the notice of meeting, he says. Under the amendments, the director can exempt corporations from sending the notice of meeting to sharehold- ers, but he or she cannot exempt the cor- poration from providing shareholders with the diversity disclosure required under the new section 172.1. What's been left out of Bill C-25 One suggestion the federal government received, says MacDougall, was "say on pay." The Canadian Coalition for Good Governance suggested a non-binding vote in which annual shareholders would have a right to say whether they supported executive compensation as described in the company's circular. "There's no pro- posed change here." Another suggestion was to require separation of the CEO and chairperson roles, though most large public companies in Canada have already done so, he says: It's something that differentiates Canada from the United States. And should shareholders of public com- panies be required to vote in person? Most vote by proxy, says Ruf, and "there's no way to cross-check how many shares that person represents." An even more interest- ing issue, she says, is that of empty voting and over-voting, which she calls "the proxy plumbing system." In a public company, many shareholders hold shares through a stockbroker, she says, who holds them through the Canadian Depository for Securities. "So, it's hard to know whether a person who shows up at a meeting by proxy is . . . actually the holder of the shares or has leant shares. . . . Is a vote still in their hands? That's empty voting, when you have no economic risk at stake." Over-voting is when shares may have been transferred or lent before or after a record date and two people end up voting. "That's been an ongoing process that Cana- dian securities administrators have been looking at for years, but [it] was raised for comment in 2014 for the CBCA," says Ruf. "Maybe they want to let securities regula- tors deal with it. They're completely silent on that now." What's next It could be upwards of a year before the bill becomes law, MacDougall predicts. "It's got another couple of seasons in House, and has to go through Senate," says Ruf. The Liberal government is in major- ity in both houses, she notes, and she wonders if the government will have sufficient concern about failed director elections caused by the proposed major- ity voting rule. "The rest will be the meat they put into the regulations, and which we haven't seen yet. That will give us more guidance as to the circumstances, which count as exceptional."

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