Lexpert US Guides

www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2016 | 11 tion disruption. You'll oen see a limit on dissents in an M&A transaction — a condition if more than 5 per cent or sometimes 10 per cent of the deal is represented by a dissenter, the parties have the opportunity to walk away." With the changes to the take-over bid regime expected to lead to more and longer proxy battles, Canada's outdated proxy regime is becoming a concern. Many securities lawyers say the proxy infrastructure is poorly constructed and, in parts, disconnected, with no common standards for vote reconciliation or for communication among key market participants. Instead, proxy agents use proprietary systems and processes. Navigating through the process to understand who has the right to vote and whether those votes are being properly tabulated is seen as so complicated and opaque that in some cases it may cast doubt about the accuracy of the result. In a 2015 progress report on proxy reform issued by the umbrella group of Canadian securities regulators, the CSA acknowledged the system is "antiquated and fragmented and needs to be improved." ey found widespread over-reporting and over-voting, missing and incorrect omnibus proxies, and intermediaries being le in the dark regarding their voting entitlements. ey also found inconsistent vote-reconciliation methods and undetected errors made by meeting tabulators. US counsel should be aware of the potential for problems if they become involved in a situation in Canada, says Kevin Morris, a corporate and securities partner at Torys LLP in Toronto. He nearly found out the hard way how easily the fragmented system can cause problems. A couple of years ago a Torys client was involved in a battle for board control. Mid-campaign, Morris says, it was discovered "there were some back-office steps that weren't being followed" by the proxy-processing company that was distributing materials to shareholders. e problem was a recap letter the agent sent to all sharehold- ers. It listed all the board candidates but failed to identify which one management was supporting. "ere was a disconnect between what management's recommendations were, a shareholder who wanted to follow management's recommendations, and the piece of paper share- holders got that didn't show who management nominees were." Luckily, he says, "someone contacted them to say, 'I got this piece of paper and it doesn't say who your nominees are,' so we had to deal with the back office. at actually happened, and it's just one example of the mechanics not working." Morris says he's pleased the CSA is looking at an overhaul, adding that "in the meantime, companies need to be aware that there are all these back-office steps – and potential missteps – they need to be alert to." The umbrella group of Canadian regulators didn't just look at proxy agents, they also looked at proxy advisors as well. ere was a strong call from Canadian issuers to regulate firms like Institutional Shareholder Services (ISS) and Glass Lewis, with complaints they can tilt proxy battles based on sometimes incorrect or incomplete information. Large institutional share- holders pushed back, arguing securities regulators should not interfere in an essentially private business arrangement. e CSA sided with the institutions and said it would not regulate proxy advisors, just issue guidance on best practices. Many in the Bar are not happy. "ere is a concern that those firms can have much more influence on the system than perhaps they should," says Kufeldt at BLG. "I know ISS in particular, I haven't seen Glass Lewis, is trying to engage folks on how to better work through their system. But to a certain extent that's a sales pitch for ISS so they can increase their services. I think there still is, within the Bar, the feeling that those organizations carry a lot of weight — perhaps more than is warranted." US companies in general carry a lot of weight in Canada. With more than 300 interlisted companies trading on the Toronto Stock Exchange, reducing friction for issuers doing business in both jurisdictions is always on the radar screen. e exchange recently implemented amendments to its company manual to expand the exemptions available to inter- listed issuers whose primary exchange is other than the TSX. Eligible companies can benefit from a ra of new exemptions, including a transaction exemption that says, subject to prior approval from the exchange, they will be exempt from rules regarding acquisitions, shareholder approval, prospectus offer- ings, private placements, unlisted warrants, convertible securities and security-based compensation arrangements, among a number of other things. Eligible companies will also be exempt from the TSX corpo- rate governance rules, including director election requirements and annual meetings. Heather Zordel, a securities practitioner at Gardiner Roberts LLP in Toronto, says the Toronto Stock Exchange – whose parent company is publicly traded – is motivated to make things as seamless as possible for the more than 300 interlisted compa- nies that use its platform. "e big incentive is it helps for their numbers," says Zordel, who worked at the exchange in the 1990s. "We're competing for trading. e exemptions reduce known irritants and make it clear that the exchange wants listings from foreign jurisdictions. On a global basis they want to attract parties on the AIM or places like that. at's what globalization's all about. "So they're saying: 'We recognize you guys are well regulated and we're not going to mess around and make your life difficult.' is is an international business, you've got to be looking inter- nationally and making it easy for people around the world to participate in your market." "Companies need to be aware that there are all these back-office steps [in Canada's proxy-voting system] – and potential missteps – they need to be alert to." Kevin Morris Torys LLP SECURITIES

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