OSC assailed for dragging feet on proxy reforms

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A group of Canada's largest institutional investors are criticizing the Ontario Securities Commission for dropping mention of plans to reform the mechanics of the proxy voting system from its annual to-do list of priority issues.

The OSC's annual "statement of priorities" last year listed various corporate governance issues related to voting shares and reforming the proxy voting system as top priorities, but the commission did not introduce reforms. When its new statement of priorities for the 2013-2014 year made no mention of the issues, investors grew concerned the OSC has dropped its focus on the subject.

Pension plans such as Alberta Investment Management Corp., British Columbia Investment Management Corp., Ontario Teachers' Pension Plan and the federal Public Sector Pension Investment Board have all sent letters to the OSC in recent weeks saying they are disappointed by the lack of action and urging the commission to make proxy voting reform a priority this year.

"It seems that this isn't something that's really on their radar screen to be looking at, or to be really pushing forward ," Wayne Kozun, senior vice-president of public equities at Teachers, said in an interview.

Shareholders argue flaws in the mechanics of the voting system by which major corporate decisions are made are leading to inaccurate vote counts, and investors often don't even know if their shares have been counted properly. Mr. Kozun said reliable "plumbing" in the voting system is critical to a pension plan like Teachers because it votes its shares carefully and publishes its voting record on its web site.

He argues that either the OSC itself, or Canada's umbrella group of securities commissions known as the Canadian Securities Administrators (CSA), should conduct an independent study of the proxy voting system. He says it must be done separately from service providers such as transfer agents and proxy solicitors that work within the system.

Teachers is concerned that regulators have been "too dependent" on proxy service providers for information about the operation of the system and the state of problems. Mr. Kozun said the firms are heavily invested in the current model, so regulators need independent advice.

The OSC says it has not finalized its statement of priorities for the 2013-2014 year, so amendments are still possible.

"We've received a number of comments from stakeholders indicating this is an area of concern," spokeswoman Carolyn Shaw-Rimmington said this week. "We're considering these comments in finalizing our statement of priorities, which we anticipate will be published later this month."

Investors and companies have long complained about problems getting shares counted properly on important votes, saying there is no workable system to confirm shareholder votes are accurately counted by the time they go through a host of intermediaries such as brokerage firms, transfer agents and proxy advisory firms.

A research paper on the proxy voting system, completed by Toronto law firm Davies Ward Phillips & Vineberg LLP in 2010, found numerous cases in which investors' shares were either not counted on key matters, or were counted twice, leading to cases of significant "overvoting" in which more shares are voted than even exist.

Toronto lawyer Carol Hansell, who spearheaded the review, said she understands the OSC is working on a consultation paper on proxy voting issues in collaboration with the CSA. But she said the OSC should continue to publicly signal the issue is a priority.

"I would be happy to see all of the commissions individually say, 'Yes, this is important to us,'" she said in an interview. "The CSA is not a separate organization from the individual commissions, and none of the other commissions have done it so far. I think the OSC should carry on with their commitment to it."

BCIMC chief executive officer Doug Pearce told the OSC the proxy battle between Agrium Inc. and Jana Partners LLP earlier this spring spurred a new debate over whether companies such as Agrium should be allowed to pay compensation to retail brokers who encourage their clients to vote for management rather than the dissident slate.

He argues broker fees should be banned in proxy battles, and said it is a voting issue that regulators should add to the proxy reform agenda.

"Over the past year, the urgency of our ability as investors to be able to rely on the integrity of the proxy voting system has escalated," he said in a letter to the OSC.

Some of Canada's highest-profile corporate deals have been marked by errors in counting the votes

Hollinger Inc.'s takeover of Southam Inc.

In 1996, Conrad Black's Hollinger was locked in a battle with what he termed an "obdurate rump" of Southam board members, who opposed his plan to sell a chunk of the company's newspapers. Holding 41 per cent of Southam's shares, Mr. Black called a meeting to oust independent directors who opposed his proposal. Mutual fund company Trimark Investment Management Inc., which owned almost 10 per cent of Southam's shares, voted against Mr. Black's plan, but the vote passed handily with 86 per cent support. When the voting results were announced, Trimark discovered only 6.97 million shares in total had been voted against the directors' removal – fewer than the 7.5 million it alone owned. The mutual fund firm asked for a review, and discovered its votes had not been counted due to an administrative error in the proxy voting system.

Iamgold Corp.'s proposed merger with Wheaton River Minerals Ltd.

Toronto-based Iamgold announced a plan in March, 2004, to merge with Wheaton River in a friendly deal. After months of legal disputes and competing bids, shareholders of Iamgold were expected to vote July 6 on the Wheaton deal. The night before, however, the company discovered it had received proxy votes adding up to 125 per cent of all its outstanding shares – evidence of a significant voting error. Company executives and their lawyers worked through the night to diagnose the problem, and the meeting to vote on the deal was postponed by seven hours the next day. In the end, Iamgold concluded many votes that had been lent by institutions in share lending programs had been voted twice. After questionable proxies were eliminated, the company reported the deal had been rejected by 58 per cent of votes cast.

Molson Inc.'s merger with Adolph Coors Co.

The Canadian beer company faced significant opposition to its proposal in 2005 to merge with Denver-based Coors, including dissent from within the Molson family itself. Ian Molson, a cousin of then-chairman Eric Molson, spearheaded a campaign to see the deal rejected. The vote went strongly in favour of the deal, however, winning 78 per cent support. After the voting results were announced, showing 2.4 million Class B shares were voted against the deal, two shareholders stepped forward to complain, saying they alone had cast a combined 3.52 million Class B shares against the merger and wanted assurance the opponents had actually lost the vote. A court review later revealed another 3.6 million shares were also excluded from the count. Even with the votes all included, the deal would have been approved.

Gateway Casinos Income Fund's takeover of Cascades Langley Casino and Hotel.

Gateway held a vote of unitholders in 2006 to approve its takeover of Cascades, reporting the acquisition received 52.4 per cent support and would be concluded. A week later, however, an unidentified unit holder requested a review of the vote, and Gateway later issued a press release disclosing there had been errors made in the vote count. The company revealed some 'no' votes had not been counted, which "could have resulted in the resolution not passing" but that there had been another tabulation error that might have offset those votes "depending on the manner of its resolution." The company said it would allow the meeting results to stand because the vote was recorded in good faith by the chairman of the meeting. Gateway refused to disclose the voting result in light of the review, and the deal was concluded.

Biovail Inc.'s proxy battle with Eugene Melnyk

Biovail's founder launched a campaign in 2008 to oust the company's directors and elect his own slate. The day before the meeting, a major shareholder withdrew 6.3 million proxies that had been voted for management's slate, a move Mr. Melnyk said gave him hope momentum was swaying to his side. He decided to delay the vote to win further support, withdrawing his own 18 million shares from the vote and leaving the company without a quorum at the meeting. Following a hasty effort by the board to change the quorum threshold and a chaotic vote, the matter went to Ontario Superior Court for a resolution. In the end, Biovail discovered the 6.3 million shares had been withdrawn by Royal Bank of Canada because it discovered shares it had tendered were "overvoted" in error. There had been no shift in momentum as Mr. Melnyk had thought, and the legal action could have been avoided.

Source: The Globe and Mail and The Quality of Shares Votes in Canada by Davies Ward Phillips & Vineberg LLP

(Janet McFarland is a Globe and Mail Business Reporter.)

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