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JANET McFARLAND, JAMES BRADSHAW

Thursday, November 30, 2017

Canada's largest coalition of institutional investors wants shareholders to have the right to nominate directors for board elections, saying it has obtained an expert legal opinion that its proposed model for proxy access is allowed under business law statutes.

The Canadian Coalition for Good Governance, which represents most of Canada's largest pension funds and other institutional investors, is urging companies to amend their bylaws to permit shareholders to propose nominees for board elections as long as they own 3 per cent of a company's shares and have held the shares for at least three years.

CCGG executive director Stephen Erlichman said it is not sufficient to give shareholders the right to vote on directors but give them no choice about the slate of nominees.

"The slate of nominees is prepared by the existing board, sometimes with the CEO's involvement in that," Mr. Erlichman said. "We believe shareholders should have some sort of say in who at least some of the nominees are."

Canada's six largest banks all agreed this fall to allow so-called proxy access for shareholders, giving them the right to propose nominees for up to 20 per cent of board seats, but have said they must own at least 5 per cent of their shares to make a nomination.

The banks say they cannot lower the threshold to 3 per cent as the CCGG proposes because of a provision in the Bank Act that allows shareholders to submit a proposal - including a proposal for director nominees - for a vote at a company's annual meeting if they own at least 5 per cent of a company's shares.

A similar provision is also found in the Canada Business Corporations Act, which governs federally incorporated companies, as well as provincial business statutes governing provincially incorporated companies.

Mr. Erlichman said his group commissioned an expert legal opinion from University of Montreal law professor Stéphane Beaulac, who specializes in the interpretation of legislative statutes, that the 5-percent threshold in the Canada Business Corporations Act is not a mandatory minimum level, and that companies can pass their own bylaws to bring the requirement down to 3 per cent.

Mr. Erlichman said the opinion applies equally to the Bank Act, which has similar wording. The CCGG favours a 3-per-cent threshold because it is the norm in the United States, where proxy access has been widely adopted by hundreds of companies, and because the 5-per-cent threshold is a high hurdle at a large company with wide ownership, including Canada's major banks.

Royal Bank of Canada and Toronto-Dominion Bank were the first banks to reveal in late September they will allow proxy access for nominating directors after shareholders of both banks voted strongly in support of the proposal at their annual meetings in the spring.

The two banks also wrote a joint letter to the federal Department of Finance, urging changes to the Bank Act to allow them to lower the ownership threshold to 3 per cent.

Royal Bank spokeswoman Tanis Feasby said the banks received their own legal opinion from an unnamed "acknowledged expert in Canadian corporate law" saying it would be contrary to the Bank Act to voluntarily provide for a lower ownership threshold.

The CCGG will publish a revised proxy access policy Thursday, which it is urging companies to adopt. The proposed wording would allow shareholders - or groups of shareholders working together - to nominate up to 20 per cent of a board's directors, or a maximum of two directors, whichever is greater.

Mr. Erlichman said the CCGG agreed to add a requirement that shareholders must have held their shares for three years before they can propose director nominees after receiving "a huge amount of push back" from companies worried the power would be used by activists to take control of boards.

He said it is not the intention that the policy would be used to allow activist investors to take over a board. The CCGG's policy also says shareholders should have to state that they are not seeking to take control of a company if they want to use proxy access.

"We do not believe that institutional investors are foolish," Mr. Erlichman said. "They will look at the nominees and make the determination themselves as to whether one of the nominees put forward by proxy access is better for this board than one of the nominees put forward by the board of directors.

"We believe it's going to be used in very, very, very few circumstances, but it's a right that should be held."

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