The public capital markets provide issuers with access to a larger and more diversified pool of capital-raising opportunities than the private markets. Confidence in the public markets is predicated on the principle that public companies are accountable to investors through robust governance mechanisms intended to align the interests of shareholders and management. However, these accountability mechanisms should not unduly inhibit risk-taking or undermine a board of directors’ role to manage the corporation in the interests of all its shareholders.

The Taskforce notes the current imbalance between activist shareholders and the boards of issuers in large part due to the current proxy and shareholder voting system. Issuers facing activist shareholder campaigns are hindered in responding effectively given the limited transparency in shareholder ownership and voting. Through our consultation, multiple stakeholders raised concerns about the disproportionate influence of proxy advisory firms in the current proxy voting process.

In our view, PAFs are in a clear and unmitigable conflict of interest if they provide consulting services of any kind to companies for which they also provide shareholder voting recommendations.

Invesco Canada

To restore fairness in Ontario’s proxy and corporate governance system, the Taskforce’s recommendations include a number of measures that would increase regulatory oversight of proxy advisory firms, increase transparency for both issuers and investors regarding the ownership and voting structure, and reduce the practices of empty and over-voting. These recommendations would create a modernized proxy voting and corporate governance system in Ontario.

Finally, there is increased global momentum towards enhanced disclosure of the environmental, social and governance (ESG) factors that impact a company’s financial performance. Throughout the Taskforce’s consultations, the increased use of ESG disclosure has received significant support from a variety of stakeholders, which has led to the Taskforce’s recommendation of mandating disclosure of material ESG information.

Globally, we are seeing an increase in regulatory requirements for standardized ESG reporting, particularly in Europe. There is however no such requirement currently in Canada, and the result is a lack of standardized, decision-useful reporting. We believe that standardized ESG reporting will be important for Canada to remain an attractive market for global investors.

Canadian Coalition for Good Governance

The following Taskforce recommendations aim to modernize and enhance the corporate governance standards and proxy voting framework for Ontario’s public companies. These recommendations range from providing a regulatory framework that assists companies to better address stakeholder concerns, providing greater transparency around the ownership of public companies to enhancing shareholder rights over director elections and executive compensation.

38. Introduce a regulatory framework for proxy advisory firms (PAFs) to: (a) provide issuers with a right to “rebut” PAF reports, and (b) restrict PAFs from providing consulting services to issuers in respect of which PAFs also provide clients with voting recommendations

PAFs play an important role in the proxy voting process. Institutional investors often retain PAFs to analyze proxy materials and provide voting recommendations as part of their investment decision-making processes. Issuers and other stakeholders have expressed concerns about the influence of PAFs, errors in the reports produced by PAFs, and conflicts of interest arising from PAFs’ voting recommendations in respect of for issuers that have simultaneously retained the same PAF to provide consulting services.

Recommendation:

The Taskforce recommends introducing a securities regulatory framework for PAFs by September 1, 2022 to ensure that PAFs’ institutional clients are provided with the issuer’s perspective concurrent with the PAF’s recommendation report.

1. Statutory Right to Rebut

Providing an issuer with a statutory right to rebut (at no cost) the reports published by PAFs. In order to avail themselves of this right of rebuttal, issuers would be required to publish the relevant materials (such as the management information circular (MIC)) within a specified time prior to the meeting. This right of rebuttal would apply, with respect to each of the issuer’s resolutions, when the PAF is recommending to its clients to vote against management’s recommendations. The PAF would be required to include the rebuttal in the report it provides to its clients.

2. Addressing Conflicts of Interest

Implementing a framework to address conflicts of interest by restricting the ability of PAFs to provide consulting services to issuers in respect of which they also provide voting recommendations to their clients.

3. Minimum Period for Issuers to File a MIC in Advance of a Shareholder Meeting

Corporate and securities laws permit issuers to send and file a management information circular less than 30 days prior to the date of the applicable shareholder meeting.

The Taskforce recommends introducing a requirement that an issuer intending to exercise its right of rebuttal must file the management information circular at least 30 days prior to the date of the applicable meeting. This requirement would facilitate the exercise of the issuer’s right of rebuttal by providing the PAF with enough time to include the rebuttal in its report and satisfy the PAF’s obligation to provide its report to clients for their consideration in a timely manner.

39. Decrease the ownership threshold for early-warning reporting disclosure from 10 to 5 per cent for non-passive investors

Currently, a shareholder is not required to disclose beneficial ownership of, control or direction over, voting or equity securities of an issuer until they reach the threshold of 10 per cent of the issuer’s shares. However, share ownership at the 5 per cent level is relevant to control of an issuer, given that a shareholder can generally requisition a shareholders’ meeting if it holds 5 per cent of an issuer’s voting securities. Other global jurisdictions, such as the U.S. and U.K., mandate ownership disclosure at the 5 per cent level, or even lower in certain circumstances.

In an era of increasing shareholder activism, the 10 per cent early-warning reporting threshold does not provide adequate transparency to issuers and investors.

Recommendation:

The Taskforce recommends decreasing the shareholder reporting threshold in Ontario from 10 per cent to 5 per cent for non-passive investors. Accordingly, disclosure of significant holdings starting at the 5 per cent level would apply if an investor intends to make a take-over bid, proposes a transaction that would result in the investor gaining control of an issuer, or solicits proxies against any director nominees or corporate actions proposed by the management of an issuer.

These non-passive shareholders who cross the 5 per cent ownership level, or who become non-passive when owning 5 per cent or more of an issuer’s shares, should be required to file a news release and early‑warning report disclosing their ownership but not be subject to a moratorium on further acquisitions following the disclosure of their ownership until their ownership increases to the 10 per cent level.

40. Require all publicly listed issuers to have an annual advisory shareholders’ vote on the board’s approach to executive compensation

There is a growing recognition in Canada and globally that periodic advisory votes on executive compensation provide critical input to boards and facilitate shareholder engagement. Many stakeholders have indicated that they support the implementation of a mandatory vote on a board’s approach to executive compensation for issuers.

Recommendation:

The Taskforce recommends the adoption of mandatory annual advisory votes on executive compensation practices for all publicly listed issuers. However, the annual votes should be non‑binding votes to preserve the board of directors’ decision-making authority and avoid the risk that shareholder proposal campaigns become too burdensome on issuers.

41. Require enhanced disclosure of material ESG information, including forward-looking information, for public issuers

Globally and in Ontario, there is increased investor interest in issuers reporting on ESG-related information. According to a recent survey from RBC Global Asset Management, 98 per cent of Canadian institutional investors expect ESG-integrated portfolios to perform as well as or better than those that do not integrate ESG.footnote 47 As well, over 75 per cent of global investors surveyed now incorporate ESG principles into their investment decision process.footnote 48 While many issuers provide ESG disclosure, both issuers and investors have expressed concerns about the lack of a standardized framework for this disclosure.

Creating a uniform standard of disclosure can enable an equal playing field for all issuers and lead to enhanced ESG disclosure can improve access to global capital markets. As well, the lack of a standardized framework can lead to excess compliance costs as issuers attempt to navigate an ambiguous framework. In 2018, the Ontario government’s Made-In-Ontario Environment Plan included a commitment to enhance corporate disclosure of climate-related financial risks.footnote 49

Throughout the Taskforce’s public consultations, the increased use of ESG disclosure has received significant support from a variety of stakeholders ranging from issuers, investment firms, banks, and law firms. Recently, leading global accounting firms, in collaboration with the World Economic Forum, have urged the global companies which are part of the International Business Council to adopt ESG standards for 2021 reporting.

Currently, a widely prevalent framework that has global support and meets investor needs for concise, standardized metrics on material climate change-related issues is the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations. In November 2020, the U.K. government also announced an intention to mandate climate-related disclosure compliant with the TCFD framework.footnote 50, footnote 51

Most stakeholders also advocate for a phased implementation to allow issuers to comply with new disclosure requirements effectively. The Global Risk Institute reported that many large financial firms are already disclosing in alignment with the recommendations in the TCFD framework.footnote 52 However, smaller firms may require additional time to adjust.

Recommendation:

The Taskforce recommends mandating disclosure of material ESG information, specifically climate change-related disclosure that is compliant with the TCFD recommendations for issuers through regulatory filing requirements of the OSC.

1. Key Elements

The key elements of the proposed ESG disclosure requirements are as follows

  • The requirements would apply to all reporting issuers (non-investment fund).
  • The requirements would include:
    • Mandatory disclosure recommended by the TCFD related to governance, strategy and risk management (subject to materiality). This would exclude mandatory disclosure of scenario analysis under an issuer’s strategy.
    • Disclosure of Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas emissions on a “comply-or-explain” basis.

2. Transition Phase

There would be a transition phase for all issuers to comply with the new disclosure requirements, beginning when the new requirements are implemented. The length of each issuer’s transition phase would depend on the issuer’s market cap at the time the requirements are implemented, with each issuer grouped into one of three market cap tiers that correspond to a certain transition phase. The transition phase would continue to apply to each issuer regardless of whether the issuer’s market cap subsequently changes.

  • Large cap issuers: Greater than $500 million — Transition phase of 2 years
  • Medium cap issuers: Between $150 million and $500 million — Transition phase of 3 years
  • Small cap issuers: Less than $150 million — Transition phase of 5 years

After the transition phase is complete, the requirements would apply to each issuer going forward.

The Taskforce encourages the CSA to proceed in alignment with Ontario and implement similar disclosure requirements across Canada.

42. Require the use of universal proxy ballots for all contested meetings and mandate voting disclosure to each side in a dispute when universal ballots are used

Most shareholders do not attend shareholder meetings and vote by proxy using either the company’s or dissident’s proxy ballot. In Canada, these proxy ballots tend to look very different (universal, blended, single slate, etc.) and are difficult for investors to understand. These proxy ballots typically do not allow shareholders to vote for a combination of nominees, instead forcing shareholders to vote for either the company’s or dissident’s nominee slate. The result is a convoluted process that inhibits the ability of shareholders to participate in proxy voting.

Recommendation:

The Taskforce recommends requiring the use of universal proxy ballots — a single ballot that lists the director nominees of each side of a dispute and allows a shareholder to vote for a combination of nominees — for all contested meetings. This would provide shareholders who vote by proxy with greater flexibility to vote for a combination of board directors. Mandating disclosure of voting tallies on an ongoing basis to each side in a dispute would provide issuers and dissidents with greater transparency.

The Taskforce’s recommendation would require the consideration of additional related requirements necessary to facilitate the use of universal proxies. This would include notice requirements and minimum solicitation requirements applicable to dissidents, as well as form requirements for universal proxies. These additional considerations should be undertaken through further consultation by the OSC in implementing the recommendation.

The Taskforce expects that the changes be implemented by September 1, 2022.

43. Amend securities law to provide additional requirements and guidance on the role of independent directors in conflict of interest transactions

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (>MI 61-101) does not fully address the important role that a committee of independent directors has in evaluating, negotiating, approving and advising on conflict of interest transactions.

>MI 61-101 regulates the most significant conflict of interest transactions involving large shareholders, directors and senior management. These transactions include insider bids, business combinations in which insiders are eliminating public shareholders, and significant related-party transactions with the issuer that could result in the transfer of value from minority shareholders to insiders.

Currently, >MI 61-101 mandates independent director oversight when the transaction is an insider bid but only recommends as guidance the use of special independent committees in other conflict of interest transactions. As well, while the rule mandates minority approval and disclosure to permit shareholders to make an informed decision to vote, >MI 61-101 only considers the role of independent directors in its companion policy and does not comprehensively address their role in reviewing these significant conflict transactions. As a result, there is inconsistency in how issuers use independent committees and inconsistent protection of minority security holder interests in how these transactions are brought to them to vote on.

Recommendation:

The Taskforce recommends that the best practices for independent committees as described in Multilateral Staff Notice 61-302 Staff Review and Commentary on >MI 61-101 and OSC decisions should be codified to strengthen the role of independent directors and their advisors and give minority shareholders greater confidence in the function of independent committees related to transactions regulated under >MI 61-101. In particular, the Taskforce recommends mandating the formation of independent committees to oversee material conflict of interest transactions and the adoption of policy guidance on independent committee practices.

44. Provide the OSC with a broader range of remedies in relation to mergers and acquisitions (M&A) matters and modernize the private issuer take-over bid exemption

The OSC has recognized that the public interest in promoting fairness to shareholders applies to all forms of contests to acquire control of reporting issuers, including both take-over bids and proxy contests. However, the remedies available to the OSC to intervene under section 104 and section 127 of the Securities Act do not adequately address the breadth of compliance and public interest matters engaged in M&A matters and proxy contests.

While the OSC generally has sufficient authority to address abusive transactions in the take-over bid context through its cease-trade power and other section 127 powers, these powers may not always be sufficient in a proxy contest or other M&A matter where control is being obtained through a shareholder vote rather than an acquisition of securities. Outside of a review of an exchange decision, the OSC does not have authority to unwind a transaction or prevent a person from exercising a voting right. Parties generally need to go to court to seek these remedies.

Commenters were generally supportive of ensuring the OSC has the same remedies as the British Columbia Securities Commission (BCSC) and not having to defer to the courts as a result of a lack of appropriate remedies when addressing matters that should properly be considered by securities regulators.

The private issuer take-over bid exemption also does not adequately reflect the reality that private issuer take-over bids increasingly involve higher numbers of arm’s-length security holders. The private issuer exemption for take-over bids is available for take-over bids for non-reporting issuer targets that do not have a published market and have a limited number of security holders that are not employees of the target or its affiliates. This exemption reduces the burden for bidders because they do not have to comply with the more onerous formal bid requirements that normally apply.

However, the availability of a broader range of prospectus exemptions for non-reporting issuers has resulted in some of those issuers accumulating arm’s-length security holders above the existing fifty-shareholder threshold. As a result, bidders must comply with the formal bid requirements, apply for a discretionary exemption from securities regulatory authorities, or undertake alternative acquisition transactions even if a take-over bid is the preferred approach.

Recommendation:

The Taskforce recommends the following:

1. Grant OSC New Remedies

The OSC should be granted new powers to enhance its public interest remedies in control contests and similar transactions. British Columbia recently enacted legislation to provide the BCSC with new powers, including powers to rescind a transaction, require a person to dispose of securities acquired in connection with an M&A transaction or a proxy solicitation, and prohibit a person from exercising voting rights attached to a security.

The OSC should provide clarity on the circumstances in which it anticipates their remedies being appropriate, how it intends to address the overlap with courts and corporate law, and the need for procedural and evidentiary safeguards when these remedies are being requested.

2. Modernize Private Issuer Take-Over Bid Exemption

The Taskforce recommends that the private issuer take-over bid exemption be modernized by increasing the restriction on the maximum number of arm’s-length security holders of the target to three hundred.

45. Prohibit voting with borrowed shares and introduce rules to prevent over-voting

A key principle of shareholder voting that underpins director elections, shareholder approval of executive compensation, M&A transactions and other shareholder rights, is that voting shareholders have an economic interest in the outcome of the election or matter being approved. The Taskforce heard concerns from investors about the risk of empty or negative voting by an investor that has acquired shares through a securities borrowing arrangement or has hedged its economic interest such that the investor is effectively an empty or negative voter in respect of their shares being voted.

There is already an industry standard that votes follow the lent share, so that a lender is not entitled to vote shares. Furthermore, there are also disclosure requirements that apply to empty voting scenarios under securities regulation. However, there is still a risk of empty voting on a case-by-case basis that could impact the outcome of a particular shareholder vote and that could require the OSC to intervene on a public interest basis, including through the additional remedies being recommended by the Taskforce.

In addition, on over-voting, many of the below proposals codify best practices found in CSA Staff Notice 54‑305 Meeting Vote Reconciliation Protocols.

Recommendation:

The Taskforce recommends that the OSC provide guidance on its intention to use its public interest authority in relation to empty voting at public company shareholder meetings and remind market participants of their existing disclosure obligations under securities law.

Furthermore, the Taskforce recommends that the OSC set up a technical implementation committee with representation from the relevant participants in the intermediated holding system to address the technical issues involved in operationalizing the following rules to be introduced to prevent over-voting:

  1. An intermediary must not submit proxy votes for a beneficial owner client unless it has confirmed that vote entitlement documentation has been provided to the reporting issuer’s meeting tabulator.
  2. An intermediary that holds securities on behalf of another intermediary must provide appropriate vote entitlement documentation to the reporting issuer’s meeting tabulator to establish its client’s vote entitlements.
  3. A reporting issuer (or its meeting tabulator) must notify the reporting issuer and any intermediary that submits proxy votes if it rejects those proxy votes because of insufficient vote entitlements and the intermediary must promptly take steps to provide any necessary documentation to establish its vote entitlements prior to the meeting date.
  4. A reporting issuer must obtain and provide to the meeting tabulator the DTC omnibus proxy 10 days or more before the meeting so that its meeting tabulator can verify the vote entitlements of U.S. intermediaries.

46. Allow reporting issuers to obtain beneficial ownership data

The need for reporting issuers to be able to engage effectively with their beneficial owners continues to grow as investors increasingly focus on emerging areas of governance, such as ESG and diversity. Shareholder activism in voting and M&A continues to be a prominent feature of Ontario’s capital markets. The lack of a clear legal right for reporting issuers to know the identity of their beneficial owners hinders the ability of reporting issuers to engage in direct dialogue with their investors. It also raises concerns about the overall transparency of the proxy voting process, because reporting issuers have little insight into how intermediaries or their service provider(s) transmit proxy materials to, and solicit voting instructions from, objecting beneficial owners (OBOs).

In Canada, public issuers have limited ability to discover the identities of beneficial owners of their shares. Corporate governance legislation does not address this issue. Under NI 54-101, at the time of account opening, an intermediary must obtain instructions on whether the beneficial owner client wishes to be a non‑objecting beneficial owner (NOBO) or OBO in respect of the reporting issuer securities held in that account. A reporting issuer can request a list of NOBOs and obtain a partial view of its beneficial owners of securities from intermediaries, including security and address information. Reporting issuers can use the information in the NOBO list to mail proxy materials and solicit voting instructions directly from these beneficial owners. However, issuers do not know the identities of OBOs and cannot mail proxy materials or solicit voting instructions directly.

Furthermore, NI 54-101’s primary purpose is not to achieve beneficial ownership transparency. Its primary purpose is to set up processes to solicit voting instructions from beneficial owners — who would otherwise be disenfranchised because they do not have voting rights under corporate law.

Recommendation:

The Taskforce recommends that, as of September 1, 2022, public companies and other reporting issuers be able to obtain the identities and holdings of all beneficial owners of their securities. To achieve this, the Ontario government should set up a stakeholder group with representation from the relevant regulatory bodies, proxy solicitors, transfer agents, intermediaries, law firms and other stakeholder groups to develop a strategy for achieving this objective. In the interim, the Taskforce recommends that beneficial owner transparency be increased by amending securities law so that NOBO status is the default for beneficial owners.

47. Require standardized granular disclosure of securities grants and option exercises

Some investors expressed concerns that it is difficult and cumbersome to determine the total compensation that a reporting issuer’s management receives in the form of securities grants and that it would be more user-friendly to include option exercises in the Compensation Statement.

Recommendation:

The Taskforce recommends that the OSC and the CSA consult on and propose amendments to Form 51-102F6 Statement of Executive Compensation (the Compensation Statement) to more explicitly standardize disclosure of securities-based compensation by requiring specified disclosure of share‑based share and options awards, as well as the value that a Named Executive Officer or director receives through the exercise of options. The OSC, together with the CSA, should undertake consultations to determine whether the following changes should be adopted:

  • Requiring issuers to provide a look-back analysis, which is essentially based on realized and realizable pay information including value received through exercise of previously granted option and other share-based compensation awards, together with an assessment of whether option grants have been serving their intended purpose as part of the issuer’s overall compensation policies.
  • Current disclosure of all value vested or realized under every prior grant of options or other share‑based compensation as part of the annual compensation disclosure.
  • Adopting a standardized methodology for valuing options and other compensation securities or, if not practical, providing additional guidance on best practices for valuation of grants and consistent disclosure of valuation options and assumptions.

Although this recommendation would marginally increase the burden for issuers, standardized disclosure of share-based compensation would be useful to investors.

48. Enshrine annual director elections and individual director voting requirements in securities law and implement majority voting in uncontested director elections

Two key elements of shareholder democracy are: the requirement to hold annual director elections and the requirement that directors stand for election individually (rather than as a slate). These exist under TSX and TSXV rules but are not currently enshrined in securities law. Securities laws do not prohibit staggered director terms or director terms of more than one year. Similarly, securities laws do not currently preclude a reporting issuer from requiring that shareholders vote in respect of the entire slate of director nominees presented by management rather than each director individually.

The Taskforce also received stakeholder input highlighting that majority voting in uncontested director elections was a fundamental principle of shareholder democracy. Many, but not all, reporting issuers are subject to a majority voting requirement under TSX rules. Under those rules, any director of a TSX-listed issuer that is not elected by a majority of votes cast at an uncontested meeting must immediately tender his or her resignation to the board. The board then has 90 days following the meeting to determine whether to accept the resignation and must accept the resignation absent exceptional circumstances.

Similarly, recent amendments to the CBCA (not yet in force) will impose a majority voting standard on directors of all CBCA‑incorporated public companies. Currently there is no majority voting standard in Ontario securities law.

Recommendation:

The Taskforce recommends adding requirements for annual director elections and individual director voting to securities law.

Furthermore, the Taskforce recommends adding a majority voting requirement to securities law. The majority voting requirement should:

  • Only apply in respect of uncontested director elections;
  • Provide for a reasonable transition period in the event a director does not receive a majority to allow for the recruitment of qualified replacement board members;
  • Provide for an exemption where an issuer is subject to and complies with substantially similar requirements in corporate law; and
  • Permit an issuer to apply to the OSC for exemptive relief in exceptional circumstances.

Footnotes