Amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) are now in force. These amendments give reporting issuers and others the option to use the “notice-and-access” method to post proxy-related materials on a website (in addition to SEDAR) instead of having to mail materials to registered holders (under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102)) and to beneficial owners (under NI 54-101).
This is the second part of our two-part series which addresses the implementation of notice-and-access. In the first part, we provided a summary of how notice-and-access is intended to work and highlighted items that reporting issuers needed to prepare for in advance. In this part, we examine some of the issues and considerations involved with implementing notice-and-access.
Governing Law Considerations
Given the various sources of regulation for reporting issuers, while notice-and-access has been specifically recognized for securities law purposes, reporting issuers who intend to utilize it must ensure that in doing so they also comply with their constating documents, by-laws and governing law. For non-corporate entities such as partnerships and trusts, for example, this would include ensuring that notice-and-access is compatible with the relevant provisions of the limited partnership agreement or declaration of trust. Concerns involving compliance with governing corporate law, in particular, include whether electronic delivery of proxy-related materials is permitted by such governing law, whether such delivery requires express or implied consent, and whether obligations of intermediaries to forward materials to beneficial owners can be satisfied where notice-and-access is used.
Notice-and-access permits a reporting issuer to send proxy-related materials (including its financial statements and MD&A, should it so choose) to its registered holders and beneficial owners by sending to them by mail (or other means if they have consented), a “Notice-and-Access Notice” together with the relevant voting instruction form or form of proxy, and posting the proxy-related materials (i.e. the notice of meeting and management proxy circular) on a non-SEDAR website (provided all other notice-and-access requirements are satisfied). The crux of the issue with respect to the Canada Business Corporations Act (the CBCA), and other CBCA-based statutes, is that electronic delivery of proxy-related materials requires express written consent, and it is unclear whether the statute’s delivery obligations can be considered to be satisfied without obtaining such consent.
The CBCA prescribes a number of specific matters relating to the calling of a shareholders’ meeting and sending of proxy materials. In particular, the CBCA requires that shareholders be sent a notice of meeting, form of proxy and information circular (if proxies are being solicited) and clarifies that the requirement to provide a document under the CBCA is not satisfied with the provision of an electronic document unless consent in the prescribed manner is obtained. The CBCA also requires that copies of the financial statements and related auditors’ report for the most recently completed financial year must be sent to shareholders, other than those who have informed the corporation in writing that they do not wish to receive them. The net effect of these provisions is that it is doubtful whether notice-and-access, in its current iteration, can be used under the CBCA without a shareholder's express consent or instructions. The CBCA does, however, give the Director under the CBCA some latitude to provide relief and could be one avenue to overcome these issues. While it is arguable that these provisions of the CBCA have a specific purpose to ensure that shareholders have access to proxy-related materials, the Canadian Securities Administrators (the CSA) would also have had regard to similar concerns in making notice-and-access available, which is arguably more than “mere” electronic delivery, but is structured with the realities of modern communication in mind, and to reasonably ensure that a shareholder has easy access to all relevant documents and ample opportunity to request paper copies. Similar issues also arise under the Bank Act (Canada) and the Insurance Companies Act (Canada).
While the above discussion highlights issues pertaining to the use of notice-and-access in relation to registered holders, certain provisions in the CBCA pertaining to the duties of intermediaries also create concerns about the viability of utilizing notice-and-access in relation to beneficial owners. In particular, such provisions prohibit the voting of any shares that are registered in the name of an intermediary and not beneficially owned by it, unless the intermediary sends to the beneficial owner copies of all proxy-related materials that it receives. Notice-and-access, however, provides that the intermediary would only receive a “Notice-and-Access Notice” (and paper copies of the financial statements and MD&A, if applicable) and it is not clear whether the forwarding of this Notice-and-Access Notice alone would satisfy that requirement and permit those shares to be voted (in contrast, see for example similar provisions in s. 49 of the Securities Act (Ontario) or s. 165 of the Securities Act (Québec) which apply to “registrants” and “custodians” (or, in Québec, to “dealers or any other persons holding the securities of a reporting issuer on behalf of clients”) but do not condition the ability to vote shares on the documents having been forwarded).
In a recently posted notice, Corporations Canada has provided some clarity in stating that notice-and-access “provides shareholders with sufficient disclosure to support an application for an exemption from the requirement set out in ss. 150(1) of the CBCA to send the prescribed management proxy circular to each shareholder whose proxy is solicited.” Notably, however, the same notice indicates that the authority to grant an exemption does not extend to the requirement under s. 159 to send financial statements to shareholders nor to the requirements applicable to intermediaries under s. 153 and that Corporations Canada takes “no position as to the effect of the exemption on the duties of an intermediary as detailed under s. 153 of the CBCA.”
The Business Corporations Act (Ontario) (the OBCA) also requires that shareholders be sent a notice of meeting, form of proxy and information circular. However, there is no equivalent provision expressly requiring consent to electronic delivery. Further, the OBCA acknowledges electronic delivery in accordance with the Electronic Commerce Act (Ontario) (the ECA), which in turn encompasses a concept of implied consent. The CSA have also provided some comfort in this respect by setting out in the Companion Policy to NI 54-101 and NI 51-102 that, in their view, notice-and-access is consistent with the principles of electronic delivery under National Policy 11-201 Electronic Delivery of Documents, and this policy states that such principles are compatible with the legal framework for electronic delivery under corporate legislation.
Unlike the CBCA (and the OBCA), the Business Corporations Act (Québec) (the QBCA) does not have provisions dealing with the solicitation of proxies, including, for example, the requirement that an issuer send a management proxy circular to shareholders if the issuer is soliciting proxies. Moreover, the QBCA does not have provisions pertaining to the duties of intermediaries in connection with proxy-solicitations, including notably the prohibition to vote any shares that are registered in the name of an intermediary unless the intermediary sends to the beneficial owner copies of all proxy-related materials that it receives. As a result, the notice-and-access regime would be available for a corporation governed by the QBCA, subject to complying with the issuer’s constating documents and by-laws, and provided all other notice-and-access requirements are satisfied.
Next Steps and Take-Aways
We understand that efforts are underway with staff of the Ontario Securities Commission, other members of the CSA and relevant corporate authorities to attempt to resolve these issues. While regulatory guidance may be forthcoming, we caution that not all regulators may have the discretionary authority to interpret or provide relief from all relevant statutory provisions, and it is unlikely that statutory amendments could be made in time for the current proxy season. However, these issues will continue to evolve and reporting issuers who intend to make use of notice-and-access are encouraged to contact us regarding compliance with applicable law and the preparation of proxy materials.