TSX Wages World War Z on Zombies in the Boardroom: Mandatory Majority Voting for All TSX-Listed Issuers

Authors: Patricia L. Olasker, Jennifer F. Longhurst and Neil Kravitz

On February 13, 2014, the Toronto Stock Exchange (TSX) announced rule changes requiring all TSX-listed issuers, other than issuers that are majority controlled, to implement majority voting for director elections at uncontested meetings. Significantly, the rule requires the resignation of a director who fails to get a majority of votes, unless there are “exceptional circumstances”. The amendments become effective June 30, 2014.

Majority Voting Explained

Majority voting replaces the historical practice of electing directors on a plurality basis where in an uncontested election a director could be elected even if more shares are “withheld” against a director nominee than voted “for” the nominee. Under a majority voting policy, such a director would be required to tender his or her resignation for consideration by the board of directors.

Background to Majority Voting

Many TSX issuers have already voluntarily adopted majority voting. In 2013, 97% of issuers on the S&P/TSX 60 Index and 87% of issuers on the S&P/TSX Completion Index (the S&P/TSX Composite Index, excluding S&P/TSX 60 issuers) disclosed that they had a majority voting policy. These figures reflect significant year-over-year increases in issuers’ implementation of majority voting.

This trend is a result of a combination of strong support for the practice among institutional investors and shareholder advisory groups, as well as TSX rule changes adopted at the end of 2012. As a result of the 2012 amendments, the TSX requires that all TSX-listed issuers hold annual individual director elections (rather than elections by “slate”), publicly report the results of the vote on each director, and disclose whether or not (and if not, why not) the issuer has adopted majority voting.

Scope of the Amendments and Effective Date

The new TSX amendments have long been expected, having first been proposed for comment in October 2012 concurrently with the announcement of the implementation of the 2012 amendments.

Under the new rules

  • Each director must be elected by a majority (50% plus one vote) of the votes cast.
  • The issuer’s majority voting policy must require a director who fails to get the requisite percentage of votes to immediately tender his or her resignation.
  • The board must accept the resignation absent exceptional circumstances.
  • The issuer must promptly issue a news release with respect to its decision on the resignation and, if it decides not to accept the resignation, it must fully state its reasons for that decision in the press release.
  • An issuer must describe its majority voting policy annually in its proxy materials.
  • Following the election of directors at an uncontested meeting, an issuer must issue a news release disclosing the voting results in a manner that provides the reader with insight into the level of support received for each director.
  • Majority voting rules do not apply to issuers that are majority controlled or to TSX-V issuers.

Issuers with a fiscal year ending on or after June 30, 2014, must comply with the new rules at their first AGM following June 30, 2014.

Implications of the Rule Change

Under voluntary majority voting policies, it has been observed that directors who failed to get a majority vote had their resignations rejected by the board and continued to serve on the board in what has come to be known as a “zombie director” capacity. A mandatory majority voting rule that requires that the director’s resignation be accepted and imposes on the board an obligation to disclose in a press release its reasons for a contrary decision may spell the end of the phenomenon of the zombie director.

The new regime may also result in an increase in the incidence of shareholders exercising their voting rights to convey dissatisfaction with a company’s performance, strategy, corporate governance or compensation practices.

Important Next Steps for Boards

Whether or not you agree with majority voting, it is now the reality in Canada and can provide boards with a useful early warning system for surfacing and responding to investor concerns before unhappy shareholders take more aggressive measures, like launching a proxy contest.

Check your policy now to make sure it complies with the new rule, in particular in respect of the acceptance of resignations.

The TSX has not provided any guidance as to what might constitute an exceptional circumstance warranting the rejection of a resignation. Boards should give careful thought to the circumstances in which it would be reasonable to reject a resignation tendered by an undersupported director. For many investor advocates, the extraordinary circumstances in which it would be legitimate for a director’s resignation to be rejected by a board after a majority of votes are withheld from that director is far more limited than practice has shown to-date. For example, the Canadian Coalition for Good Governance in Canada and the Council of Institutional Investors in the United States advocated rules that would require boards to accept resignations tendered by undersupported directors, unless the director’s continuing service is necessary only to maintain compliance with securities regulations, avoid a violation of a contractual provision, or to avoid a violation of state/provincial law or the company’s constating documents.


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