Canadian securities regulators have published a staff notice reporting on their recent work on Canada’s proxy voting infrastructure, together with proposed protocols that contain guidance on operational processes for tabulating proxy votes for shares held through intermediaries. They have requested comments from market participants on these protocols by July 15, 2016. The proposed protocols have been designed to address information and communication gaps in meeting vote reconciliation that were identified after a detailed review of shareholder meetings.
Gowling WLG Focus
With an increase in shareholder engagement over the last several years imposing greater stress on Canada’s proxy voting infrastructure, Canadian securities regulators have been looking very carefully at the system and, in particular, issues relating to over-voting and missing votes. For additional insight and background on these issues, please see our August 2013 MarketCaps. The protocols are an initial attempt to address these issues. They set out expectations and guidance on the roles and responsibilities of the principal entities involved in the meeting vote reconciliation process, namely CDS, intermediaries, Broadridge, meeting tabulators/transfer agents and issuers, and on the operational processes necessary to improve information flows and communication channels between and among the participants. In our view, the protocols provide a comprehensive tool-kit for participants and, if properly adopted, should inject consistency, efficiency and transparency into Canada’s proxy voting infrastructure.
In their 2015 staff notice, Canadian securities regulators identified information and communication gaps between participants, stemming from the intermediated system of holding securities, as the root of inaccurate proxy reconciliation. As discussed in our August 2013 MarketCaps, the intermediated holding system results in a layered structure of registered ownership which must be traversed, by way of omnibus proxies, in order to obtain the voting instructions of the ultimate beneficial holders of securities. This process can sometimes lead to proxy votes being discarded, over-counted or pro-rated because at some point along the current fragmented process the numbers do not reconcile among the participants. Furthermore, where such proxies are discarded, pro-rated or counted otherwise than in accordance with the proxy, the ultimate beneficial owner/investor has no way to confirm that his, her or its vote has been properly recorded and tabulated.
The following are examples of the types of expectations and guidance contained in the protocols, which aim to address the current process deficiencies.
To address information gaps:
- Guidance on the vote entitlement information that intermediaries should provide to the tabulator to allow the tabulator to accurately count the appropriate number of proxy votes, as well as guidance on how to generate the information required by the tabulator.
- Guidance on how the tabulator should use the information provided to establish which intermediaries are entitled to vote, and how many proxy votes they can submit.
- Guidance on how the tabulator can match proxy votes to vote entitlement positions.
- Guidance on what the tabulator should do if it appears that depositories or intermediaries have not provided the necessary vote entitlement information.
To address communication gaps:
- Expectation that tabulators, intermediaries and Broadridge should develop appropriate mechanisms to confirm that all votes submitted by Broadridge on behalf of intermediary clients have been received by the tabulator and guidance on appropriate mechanisms.
- Guidance on steps the tabulator should take to obtain any missing vote entitlement information if the intermediary appears to be in an over-vote position.
- Guidance on how the parties should communicate with each other where proxy votes from an intermediary were rejected, uncounted or pro-rated to enable beneficial owners to know if proxy votes submitted in respect of their shares were not accepted at a meeting and the reason why.
For additional details relating to the protocols, please see Annex A of the staff notice.
Impact of the Protocols on Issuers
While the protocols are designed largely to address the operational processes among CDS, intermediaries, Broadridge and meeting tabulators/transfer agents, there are two particular expectations imposed on issuers:
- Issuers are expected to ensure that their tabulator has the DTC omnibus proxy which is required to enable U.S. beneficial owners to vote through U.S. intermediaries. DTC is supposed to deliver this omnibus proxy to the issuer and, under the protocols, the issuer is expected to take all steps necessary to obtain such proxy, with the tabulator’s assistance. This is intended to ensure that the votes of U.S. beneficial owners will not be missed.
- Where a final tabulation results in the rejection or pro-ration of intermediary proxy votes by the tabulator or the meeting chair, issuers are expected to instruct the tabulator to notify Broadridge within 2 business days of completing the final tabulation. Broadridge is then expected to provide this information to the relevant intermediary clients, who are then expected to make this information available to their beneficial owner clients. While intermediaries, with the assistance of Broadridge, are expected to put appropriate processes in place to ensure the issue does not arise going forward, we expect issuers will be hearing from their shareholders if their votes are being rejected or pro-rated.
Canadian securities regulators are establishing a technical committee to support the implementation of improvements to meeting vote reconciliation and anticipate holding round tables in the Fall of 2016 with the final version of the protocols to follow towards the end of 2016 in time for the 2017 proxy season. They will monitor the voluntary implementation of the protocols in the 2017 proxy season and measure their impact on improving the accuracy, reliability and accountability of meeting vote reconciliation.
As with all regulatory guidance, if Canadian securities regulators do not see sufficient improvement in meeting vote reconciliation after implementation of the protocols, we believe it is possible that the operational processes set out in the protocols could become mandatory in the future.