TSX Mandates Majority Voting

May 26, 2014

Beginning on June 30, 2014, Toronto Stock Exchange (the “TSX”) listed issuers will be required to adopt majority voting policies and each director of such issuers will need to be elected by a majority of votes cast by shareholders.  This is a departure from the “plurality” system that exists under Canadian corporate law, in which shareholders have the option to vote “for” a director or to withhold their votes in respect of that director, but they cannot vote “against” a director.  Under the plurality system, a single “for” vote can elect a director, even if every other vote is withheld.  While this approach ensures that a company will never find itself without a board, it has been criticized for reducing investor confidence in the public markets and impeding shareholders from voting against underperforming directors. 

The amendments adopted by the TSX build upon a set of amendments adopted in 2012, which introduced the requirement that TSX listed issuers (a) elect directors individually (as opposed to “slate” voting); (b) hold annual elections for all directors; (c) disclose annually in their meeting materials (i) whether they have adopted a majority voting policy for directors at uncontested meetings; and (ii) if not, to explain their practices for electing directors and explain why they have not adopted a majority voting policy; (d) advise the TSX if a director received a majority of “withhold” votes (if a majority voting policy has not been adopted); and (e) promptly issue a news release providing detailed voting results for the election of directors. 

In an effort to “improve corporate governance standards in Canada by providing a meaningful way for security holders to hold individual directors accountable”, the TSX has adopted certain amendments to its Company Manual (the Amendments“).  Subject to limited exceptions (discussed below), the Amendments require that each director must be elected by a majority (50% + 1 vote) of the votes cast with respect to his or her election (the “Majority Voting Requirement“) and further require that each TSX listed issuer adopt a majority voting policy (a “Policy“) containing certain prescribed provisions.

The amendments require that any director who is not elected by a majority must immediately tender his or her resignation and, absent “exceptional circumstances”, the board must accept the resignation within 90 days, with the resignation becoming effective upon acceptance by the board.  To address the concern that binding majority voting could impede the ability of directors to fulfill their fiduciary duties, the TSX has provided an “out” by allowing the board to not accept a resignation if it determines that “exceptional circumstances” exist.  Rather than prescribe what constitutes exceptional circumstance or even provide guidance on the matter, the TSX has left such determination to an issuer’s board of directors, as the board “is better positioned to determine what constitutes ‘exceptional circumstances’ for itself”.  For example, if an issuer has given nominating rights to a person or persons and the nominee of such person(s) does not receive a majority of votes, the board may determine that there are exceptional circumstances and not accept the resignation from the nominee.  In accordance with the Amendments, the board would then be required to promptly issue a press release that fully states the reasons for its decision. 

There are limited exceptions to the Amendments:

  • the Majority Voting Requirement does not apply
    • at a contested meeting (that is, a meeting at which the number of directors nominated for election is greater than the number of seats available on the board); and
    • to TSX listed issuers that are majority controlled (“majority controlled” is defined as a security holder or company that beneficially owns, or controls or directs, directly or indirectly, voting securities carrying 50 percent or more of the voting rights for the election of directors, as of the record date for the meeting); and
  • the requirement to adopt a Policy does not apply to an issuer that otherwise satisfies the Majority Voting Requirement in a manner acceptable to the TSX (for example, if majority voting is already mandated by statute or the issuer’s articles or by-laws).

Issuers that are majority controlled are required to annually disclose in its meeting materials in connection with a meeting at which directors are being elected that:  (a) it is exempt from the Majority Voting Requirement; and (b) its reasons for not adopting a Policy.

TSX listed issuers with fiscal years ending on after June 30, 2014 (the “Effective Date“), must comply with the Amendments at their first annual meeting following the Effective Date.



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