In our Winter 2017 edition of InSync, we provided you with an update on Canadian proxy reform, and the publication of CSA Staff Notice 54-305 (SN 54-305) Meeting Vote Reconciliation Protocols (the Protocols), by the Canadian Securities Administrator (CSA) on January 26, 2017.
Computershare worked through the 2017 proxy season to consult with the CSA Proxy Technical Committee and to implement specific Protocols involving the tabulator. The Protocols are voluntary and focus on the processes used to tabulate votes held through intermediaries, as well as addressing the following areas:
- Generating and sending vote entitlement information
- Setting up vote entitlement accounts
- Sending proxy vote information and tabulating and recording proxy votes
- Informing beneficial owners of rejected/pro-rated votes
The proxy plumbing process involves multiple parties, and when problems occur, they are most impactful on the shareholder and the issuer. The shareholder wants to ensure that their vote is tabulated as they have directed. The issuer is required to request shareholder approval annually for the election of the board of directors and appointment of auditors, as well as for other special items of business that may be required. The proxy reform conversations are primarily occurring between the other parties in the process: the intermediaries, agents and tabulators.
Computershare believes it is important for issuers to be involved in the proxy reform conversations and understand the developments that are occurring, including certain Protocols which include the issuer as a responsible party. Some of these encompass the technical processes involved in vote tabulation, such as Protocol A.2.3, where the issuer should take all steps necessary to obtain a DTC Omnibus Proxy.
End-to-end vote confirmation
The last item on the list above, however, includes Protocols that are the basis for one of the "next steps" that was included in SN 54-305: the monitoring of industry initiatives to find solutions for end-to-end vote confirmation. End-to-end vote confirmation means a confirmation that a shareholder's vote was received and tabulated as cast, can be sent from the issuer (or tabulator on their behalf) through to the shareholder. This process is straightforward for shareholders who appear on the share register that is maintained by the issuer's transfer agent, as the confirmation can be sent directly from the tabulator, but becomes very complicated for beneficial shareholders who can only receive confirmations indirectly.
Rejection or proration of votes
In SN 54-305 it states "...the Protocols lay the foundation for the key entities to work collectively to ... develop end-to-end vote confirmation capability that would allow beneficial owners, if they wish, to receive confirmation that their voting instructions have been received by their intermediary and submitted as proxy votes, and that those proxy votes have been received and accepted by the tabulator." Also, Protocol D.1 states that if there has been rejection or pro-ration of votes, either by the tabulator or meeting chair, "...the issuer should instruct the tabulator to notify Broadridge within a reasonable period of completing the final tabulation." The specifics of the information to be provided are also set out, as is the requirement for Broadridge to continue with the multi-step process by providing the information to the required intermediary, who should then provide it to the beneficial shareholders. The tabulator cannot start this process without the issuer's instruction.
There have been discussions with the CSA about end-to-end vote confirmation, however we believe there needs to be further conversations as it is important for the key entities to clearly understand why this process is required and who is requesting it. Without this groundwork, it is impossible to develop the capabilities to meet the requirements.
OMERS' Proposal
At the roundtable held by the OSC in 2016, OMERS, a large institutional investor that holds its positions beneficially, stated that in connection with end-to-end vote confirmation "We're looking for confirmation from the issuer, through intermediaries as appropriate, that voting instructions have been received and properly recorded at a meeting, that the votes cast have been given their full weight..." OMERS went on to say that they "...would like [vote confirmation] to be sent at three stages: When the voting instructions have been received by the tabulator; when the voting instructions have been accepted and...processed... by the tabulator; and finally, when the voting instructions have been confirmed as voted at the shareholder meeting."
This three stage process proposed by OMERS has not been agreed to, but if reviewed at a high level, there are various hurdles that would need to be overcome. The lack of transparency as a result of the intermediated holding system in Canada means that the beneficial owner cannot receive issuer confirmation directly but would have to rely on a cascading of confirmations, adjusted for omnibus holding positions, through the intermediary chain.
- The sending of an initial message upon receipt of the vote by the tabulator would require, at a minimum, daily confirmations for multiple intermediaries.
- The second message could, in reality, be multiple messages. For example, the vote may be initially accepted but subsequently rejected, where the tabulator receives additional votes from the same intermediary on behalf of other beneficial holders; or vice-versa on receipt of required omnibus paperwork.
- The third message, post meeting, could only be completed upon issuer authorization, and would be the only "official" confirmation of how the vote was treated. This eliminates the possibility of the shareholder being able to take any steps to correct problems with their vote.
Although the principle of vote confirmation is generally accepted, the process does not currently work efficiently for beneficial shareholders in Canada. Until such time as a more formal, standardized process can be implemented, Computershare advocates for an on-demand, "user pay" system whereby confirmation is provided upon issuer agreement and payment by the requestor. The other possibility is consideration of a system piloted in the Unites States, whereby if a beneficial holder does not receive confirmation that their vote was rejected, they can assume they were tabulated as submitted. This, however, would require the beneficial shareholder to have a level of trust in the system itself.
Understanding the impact of Vote Protocols
Computershare, through its membership with The Securities Transfer Association of Canada (STAC) has been working with the CSA representatives and other members of the Technical Committee to understand the impact of the implementation of the Vote Protocols during the 2017 proxy season and will continue this work through the 2018 proxy season. The CSA has stated that after the 2018 proxy season, they will assess the need for any enhanced regulatory measures that may be required.
It is worth noting that Bill 177 – Stronger, Fairer Ontario Act (Budget Measures), 2017 received Royal Assent on December 14, 2017, and it included amendments to the Ontario Securities Act that provide the OSC with new rulemaking power regarding meetings of the security holders of a reporting issuer, including requirements relating to communication with owners of securities, and requirements related to entities involved in tabulation and validation of proxy votes. We have not seen any indication at this point that new rules are forth coming, however will continue our ongoing monitoring of any developments.
