Opinion: In Canada, shareholders face a stacked deck when they take on company management

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Christine Carson is the president and chief executive officer of Carson Proxy, a proxy solicitation firm that specializes in contested shareholder meeting, and is an adviser to Mithaq Capital SPC.

Canada is considered an attractive environment for shareholder activism, thanks to favourable regulatory rules. For example, a recent shareholder-friendly change to the Canadian Business Corporations Act requires incumbent directors seeking election to step down if they fail to secure majority support in an uncontested director election.

However, that perception hardly reflects reality.

In response to these regulations, some companies have introduced by-laws, notionally to protect shareholders by ensuring that they are adequately informed of outside director nominees. Unfortunately, some of these new by-laws appear to be a way to entrench boards by allowing them to postpone a meeting, simply because one or more directors doesn’t have enough votes to be elected.

Public companies also benefit from some key regulatory advantages, including a lack of independent vote-counting for shareholder meetings. Almost all shareholder votes are tabulated by a company’s transfer agent with direction from the chair – often a company insider – who gets to decide what votes are accepted and rejected. The Securities Transfer Association of Canada provides guidelines for the counting of votes; however, there is no regulatory requirement to follow those guidelines.

In contrast, the United States employs a different approach. An independent inspector of elections is responsible for tabulating all of the votes received at shareholder meetings, providing for a higher level of impartiality in the process. They make efforts to ensure that every shareholder vote that is received is counted regardless of how its been voted.

When such an approach is lacking, the result is a deck stacked against shareholders.

In a contested board election, the company and the activist each typically distribute and collect their own voting cards (“proxies”) independently of each other. Neither side knows how many votes the other side has – until the proxy vote deadline, when the activist must submit their proxies to the company’s transfer agent (typically 48 business hours before the meeting).

So, the company has a way to know the tally beforehand. But the activist shareholder, meanwhile, is in the dark about where the vote stands until the shareholder meeting, when the totals are announced. The tabulation of votes is conducted in a black box that the company has full control over, without independent oversight and shareholders who question the result must seek a court injunction to do so.

A recent headline-making case involves Aimia Inc. AIM-T and its largest shareholder, Mithaq Capital SPC. When Aimia’s shareholder meeting vote results were announced, Mithaq questioned the outcome of the director election and was forced to seek a court application to allow a review of the votes. This situation highlights the challenges that can arise when the vote tabulation is not transparent and independent. Shareholders may need to resort to lengthy and costly legal battles, which could possibly be avoided by simply having independent oversight of the shareholder meeting.

Not all shareholders are sophisticated multibillion-dollar funds. Many are retail investors who are simply tired of seeing their life savings dwindled away by poor management and excessive spending. Shareholders should have the ability to elect a board of directors that best represents their interests, but the reality is that it is extremely difficult and expensive for shareholders to nominate alternative board members and to support their election. Shareholders deserve a level playing field and they shouldn’t have to spend hundreds and thousands of dollars on legal fees to get it.

At the core of this discussion is the principle of shareholder democracy, where shareholders have a say in corporate governance. It is meant to safeguard the interests of all shareholders, regardless of their size or investment level, while ensuring equal chances for all.

Canada should consider adopting more transparent and independent procedures for shareholder meetings. This approach would help address concerns about fairness and accuracy, ultimately strengthening the principles of shareholder democracy.