Review of Canada’s Proxy Voting System

The Canadian Securities Administrators (CSA) have responded to concerns about Canada’s proxy voting system by launching a review of the infrastructure that supports that system. Concerns about the current proxy voting system have ranged from technical criticisms about proving the entitlement to vote at one end of the spectrum, to broader concerns about the quality of the shareholder vote and empty voting (see our M&A Bulletin on Empty Voting: A Challenge to Shareholder Democracy?).

The background to the review is increased emphasis on shareholder democracy. Hedge fund activism, institutional shareholder ownership and shareholder engagement with issuers on governance and performance matters are leading to a rising number of proxy contests. These developments are placing a strain on the proxy voting system, a strain likely to grow if securities regulators implement proposals on shareholder rights plans that are focused on shareholder voting in the regulation of hostile takeover bids (see our M&A Bulletin on the New Poison Pill Proposals).

At this time, the CSA is seeking feedback about the integrity of the proxy voting infrastructure, and have identified two specific issues they wish to examine further and on which they are inviting comment: vote reconciliation and vote confirmation. Addressing these issues will help to ensure that shares are only voted once, and that cast votes are received and counted.

Accuracy of Vote Reconciliation

Canada’s indirect shareholding system poses a challenge for the reconciliation of proxy votes from registered shareholders, who are the only shareholders entitled to cast votes, and voting instructions from beneficial owners. The indirect shareholding system is complex, in some cases involving many layers of intermediaries between investors and the Canadian Depositary for Securities Limited, the registered holder of most reporting issuers’ shares. The indirect shareholding system means that there is a risk that beneficial shareholders are not being given the opportunity to provide voting instructions in respect of their shares, as well as a risk that other shares are being voted more than once.

In addition, the CSA are considering the following factors that contribute to vote reconciliation concerns:

• the use of voting agents by investors, and the absence of a mechanism for confirming that the agents are being solicited for voting instructions;
• the right of investors not to disclose their identities to issuers, and the impact of this on issuer communications and solicitation; and
• securities lending practices, and the absence of a mechanism for tracking lending activity and the potential for double-voting of lent shares.

The CSA is seeking feedback on vote reconciliation, on specific questions relating to securities lending, omnibus voting by intermediaries on behalf of beneficial shareholders, and the problem of over-reporting and over-voting, including seeking information about the extent of the vote reconciliation problem and any regulatory intervention that may be needed to address it.

End-to-end Vote Confirmation

The other issue relating to the integrity of the proxy voting infrastructure identified by the CSA for review is vote confirmation: the ability of investors to confirm that their voting instructions have actually been received and counted towards a shareholder vote. The lack of such confirmation in the proxy voting system undermines investor confidence in the accuracy and reliability of proxy voting results. Although this type of functionality is currently being developed, the CSA is seeking feedback on the system's potential features.

Next Steps

The CSA is specifically seeking comment on whether or not the focus on vote reconciliation and confirmation is appropriate, and intend to conduct targeted consultations with stakeholders to assist with gathering information. While the CSA consultation paper requests comments on these specific issues, it also invites broader comments on the proxy voting system.

Comments on the CSA consultation paper are due November 13, 2013.