Kathleen M. Ritchie
Associée
Chef du groupe Droit des affaires de Toronto
Article
9
On August 15, 2013, the Canadian Securities Administrators (the "CSA") published CSA Consultation Paper 54-401 - Review of the Proxy Voting Infrastructure (the "Consultation Paper") to facilitate discussion among market participants regarding the integrity and reliability of Canada's proxy voting infrastructure. The CSA state that it is a priority of the CSA to review the proxy voting infrastructure because the increase in shareholder engagement over the last few years has imposed greater stress on Canada's proxy voting infrastructure.
Proxy voting refers to the regime though which votes of shareholders are solicited, collected, submitted and tabulated for use at a shareholder meeting. Proxy voting infrastructure refers to the network of organizations, systems, legal rules and market practices that support proxy voting. Noting the importance of proxy voting to capital markets in Canada and the challenges faced by public companies and investors with the reliability and integrity of the Canadian proxy voting infrastructure as a whole, the CSA intend to take an active role in reviewing the appropriateness of the proxy voting infrastructure, consistent with their mission to foster fair, efficient and vibrant capital markets.
Based on their investigations to date, the CSA identify in the Consultation Paper the following two issues as having the most potential to impact the ability of the proxy voting infrastructure to function accurately and reliably and propose to examine these issues further:
With respect to each issue, the CSA set out a non-exhaustive list of questions that they think is relevant to their examination. The CSA are seeking comments from stakeholders on whether the focus on these two issues is appropriate and whether they have asked the right questions in respect of these two issues. The comment period will end on November 13, 2013.
Importantly, the CSA stress that they have not come to any conclusions as to whether any specific regulatory measures are merited. The CSA state that public comment on the Consultation Paper will inform their next steps, which could include the development of an ad-hoc advisory committee to provide the CSA with different stakeholder perspectives as well as public consultation sessions.
Below, we have briefly highlighted some of the issues that the CSA raise in the Consultation Paper relating to vote reconciliation and end-to-end vote confirmation and how they may impact the accuracy and reliability of the proxy voting infrastructure. We also set out some additional matters on which the CSA are seeking information.
The CSA identify the intermediated system of holding shares and share lending as giving rise to concerns surrounding vote reconciliation and whether the accuracy and reliability of the proxy voting infrastructure may be called into question.
Canadian capital markets have adopted a system of centralized clearing and settlement services for publicly-traded shares in order to increase trading efficiency and reduce risks in the trading, clearing and settlement process. In conjunction with this system, shares of publicly-traded companies are registered in the name of a central depository which maintains accounts for participant financial institutions, who in turn maintain accounts for investors or other intermediaries, who in turn maintain accounts for investors or other intermediaries, and so on. A key feature of this system involves the pooling of shares by intermediaries. For example, a participant financial institution knows the aggregate number of shares of a particular public company held by an intermediary, but does not have direct visibility of the specific account holders at the intermediary. This system is known as an intermediated holding system, and a significant majority of shares of public companies are held in this system.
As a result, for each share held in an intermediated holding system, registered ownership of that share is held by the central depository, whereas the beneficial ownership of that share is held by the ultimate investor (or more precisely, the ultimate investor holds a securities entitlement, which is a right that is equivalent to a direct property right in the share).
This bifurcation of ownership causes the following issue: under corporate law, only a registered shareholder is entitled to vote, but the ultimate investor (and not the central depository) should be deciding how to vote. Securities laws address this issue by establishing a mechanism through which the central depository transfers its voting rights by proxy (i.e., omnibus proxies) to participant financial institutions, who in turn are required to seek voting instruction from their account holders. If an account holder is an intermediary, the process is repeated until the ultimate investor's instructions are sought.
The process of determining who is the ultimate investor and entitled to provide voting instructions involves traversing the chain of intermediaries starting at the central depository and ending at the intermediary with whom the ultimate investor holds an account. Moreover, appropriate omnibus proxies must be executed by the appropriate intermediary entities in order to ensure that the voting instructions of the ultimate investor are properly reflected when votes are tabulated.
This is a complex process and the CSA express their concern that unless there is an effective system of vote reconciliation, there is a risk that valid proxy votes submitted for tabulation may be discarded because they cannot be properly matched to an appropriate omnibus proxy or registered position at the central depository.
This complexity can also lead to multiple votes being cast. Over-reporting and over-voting have been found to occur and refer to situations in which an intermediary returns more votes than the shares reflected in its account with another intermediary or the central depository.
Share lending also raises the spectre of multiple voting. Share lending refers to the market practice whereby one investor lends shares to a second investor in return for a fee. As the CSA note, share "lending" involves an actual transfer of title whereby the borrower becomes entitled to vote the shares. If the lender is still noted as an "owner" in the intermediary's records, without appropriate reconciliation mechanisms in place, the CSA are concerned that there is a risk that the lender and the borrower may both vote and that same share could be voted multiple times.
The Consultation Paper sets out a series of questions relating to vote reconciliation, including the impact of share lending on generating the voter lists, the requirement for omnibus proxies and the use of restricted proxies and over-reporting and over-voting.
The Consultation Paper cites a concern regarding the lack of end-to-end vote confirmation. Generally speaking, this involves the ability of the investor to confirm that its vote has been received and properly recorded. The lack of confirmation has become more problematic as shareholder meetings have become more contested. The CSA note that the lack of such functionality may undermine confidence in the accuracy and reliability of proxy voting results, and that they wish to review the current development status of such a system and consider what features such a system should incorporate.
In addition to the foregoing, the CSA have determined or received suggestions that the following aspects of the proxy voting infrastructure may impact its accuracy and reliability:
The Consultation Paper is a comprehensive review of Canada's proxy voting infrastructure (although certain issues have not been addressed in detail, like empty voting). We believe that this is a timely undertaking by the CSA given the recent increase in contested shareholder meetings and shareholder activism generally. We encourage clients and other market participants to review the Consultation Paper and let us know if they have any questions or comments.
CECI NE CONSTITUE PAS UN AVIS JURIDIQUE. L'information qui est présentée dans le site Web sous quelque forme que ce soit est fournie à titre informatif uniquement. Elle ne constitue pas un avis juridique et ne devrait pas être interprétée comme tel. Aucun utilisateur ne devrait prendre ou négliger de prendre des décisions en se fiant uniquement à ces renseignements, ni ignorer les conseils juridiques d'un professionnel ou tarder à consulter un professionnel sur la base de ce qu'il a lu dans ce site Web. Les professionnels de Gowling WLG seront heureux de discuter avec l'utilisateur des différentes options possibles concernant certaines questions juridiques précises.