In our latest memo, members of Norton Rose Fulbright’s Canadian Special Situations team weigh in on proxy access. The memo is written by Walied Soliman and Orestes Pasparakis, Partners and Co-Chairs of our Canadian Special Situations team, and Joe Bricker, Associate. The memo is reproduced below:
Recently, two prominent Canadian companies became the first major issuers to adopt proxy access policies.
These policies allow shareholders to nominate directors to serve on a company’s board and have their nominees featured in management’s circular and form of proxy. Typically, they afford nomination rights to one or more shareholders (up to 20) who have collectively held 3 per cent of shares for 3 years, and allow shareholders to nominate up to 20 per cent of directors.
We believe that Canadian companies should generally resist proxy access proposals.
Proxy access policies are proving popular in the United States, with over 60 per cent of S&P 500 index companies having adopted them. While proxy access is new to Canada, experts predict that many more Canadian companies will soon introduce it for shareholders. But while this may suit U.S. law and practice, it makes less sense in Canada.
Consider the tension between the roles of directors and shareholders. If we assume that shareholders are best characterized as “owners,” it is still not desirable for owners to make every decision themselves or oversee management directly.
Shareholders are entitled to accountability from directors, but Canada already gives them the tools they need to achieve it, within careful limits. This makes proxy access unnecessary.
The Canada Business Corporations Act and most provincial equivalents allow shareholder proposals in management’s proxy, and specifically allow proposals to include nominations. In other words, a limited form of proxy access already exists. The nomination provisions are rarely used though, in part because of their limitations. These include word limits for shareholder proposals, and the fact that management’s circular need not feature shareholder nominees with the same prominence as management nominees.
Canadian law also affords greater opportunities for shareholder activism than does U.S. law. In most jurisdictions, holders of 5 per cent of a company’s shares can requisition a meeting at any time to replace directors. That said, while activism is an crucial part of healthy capital markets, it should not be a cost-free proposition. The current practical requirement for activists to file a dissident circular to solicit proxies demands a certain level of seriousness and conviction.
It is vital to note the fundamental differences in ethos between U.S. and Canadian corporate law. In some respects, the U.S. has embraced a more shareholder-centric view. For instance, where a change of control is imminent, Delaware law has interpreted the best interests of the company as meaning simply the highest price for shareholders. Proxy access is an extension of such thinking, privileging direct shareholder participation over other considerations.
In contrast, the Supreme Court of Canada held in 2008 in the BCE case that the “best interests of the corporation” require Canadian directors to look to “inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.”
Canadian directors are accountable to more than shareholders, let alone any one of them. This makes good sense. As UCLA law professor Stephen M. Bainbridge argues, delegation is “what makes the modern corporation feasible.”
Proxy access is not just unnecessary to ensure adequate oversight of directors, it also threatens a number of negative practical consequences in the Canadian market. Given that companies here tend to have low market capitalizations by American standards, allowing shareholders to gain large positions more easily, the impacts are likely to be greater in Canada than in the U.S.
Proxy access threatens to turn every meeting into a contested one. This adds to the enormous governance burdens placed on Canadian public companies.
It undermines the careful thought that nominating committees put into board composition and cohesion. In our experience, nominating committees usually look carefully at the skills matrix of their directors, ensuring it matches the needs of the company.
As the eminent American lawyers Martin Lipton and Steven A. Rosenblum have suggested, institutional investors are not necessarily experts in corporate management. Their employees tend to be trained in financial analysis. Under ordinary circumstances, directors should therefore be entrusted with delegated authority to nominate in the long-term best interests of the company.
There is also the spectre of boards perennially divided into two or more warring camps of directors, whose allegiances are rigidly determined by who nominated them. This risk of boardroom conflict is compounded by the fact that proxy access unfairly favours certain shareholders over others. The typical policy assumes that large holders who have held their shares for an arbitrary length of time—most often institutional investors— should have a greater say than noninstitutional ones who have held them for less than that arbitrary time.
Finally, widespread proxy access would enhance the influence of proxy advisors, which ironically is a particular concern for many of the same good governance proponents who advocate proxy access. Proxy advisors provide a vital service to clients by helping large investors make voting decisions responsibly. But they cannot make the perfect decision for every investor or situation. In a world of proxy access, many investors might be less engaged. Third-party advisors will consequently wield even greater influence.
Proxy access upsets the careful Canadian equilibrium. In the interests of good governance and long-term value creation, most companies should resist attempts to import this U.S. trend. Canadians should simply say: “access denied.”
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