New shareholder communication rules

New shareholder communication rules, designed to improve communication between companies and their shareholders, have been approved by the Canadian Securities Administrators. The new rules, which will apply to all exchange-listed companies, are incorporated in National Policy No 41. The policy will apply to shareholder meetings held on or after March 1.

The policy tackles the problem of shareholders not receiving information or proxy material because their shares are registered under the name of their dealer, bank or some other intermediary. This frustrates corporations’ efforts to reach underlying shareholders who, as a result, are unable to vote their stock.

The goals set up by the Joint Regulatory Task Force on Shareholder Communication in developing the new National Policy Statement were: to ensure that non- registered shareholders have the same access to corporate information and voting rights as registered shareholders; to ensure that all of the parties involved in the shareholder communication chain have clearly defined and fair obligations; and to ensure that regulation and procedures are uniform nationwide.

The problems of cost-conscious junior issuers were a major concern of the task force. It recognized that many investments in junior issues are speculative and that often shareholders may not wish to exercise their voting rights. On the other hand, the task force noted that in the case of many smaller companies there is a lack of public information about corporate developments. It is because of this that smaller issuers should be communicating with all of their shareholders. The policy also provides that those shareholders can waive their rights to receive materials. Because the distribution system will be regulated, issuers can be reasonably confident that funds will not be wasted and that materials will actually get to shareholders who are interested in receiving the material. This will assist even the smallest issuer in maintaining shareholder loyalty, especially from the viewpoint of the cost of capital.

The policy further permits issuers to apply to the relevant securities regulator for limited waivers or exemptions from the new requirements. The policy notes, however, that the size of the company or its cash flow should mot be the basis for an exemption and that exemptions not be granted very readily.

The following summary outlines the obligations of reporting issuers under the new policy. Interested persons should refer to the National Policy and the report of the Joint Regulatory Task Force on Shareholder Communication for more detailed information. Companies should discuss the new requirements with their Toronto advisory agents. Issuer obligations * All reporting issuers will be required to set a record date for those security holders entitled to receive notice of a security holder’s meeting at least 35 days, but not longer than 60 days, before the meeting date. * Issuers will be required to send out “search cards” at least 20 days before the record date to the depositories, their participants and registered nominees, specifying the record date and the meeting date and requesting that intermediaries identify their quantities of proxy-related materials needed to send to non-registered shareholders. This will permit issuers to produce the appropriate quantities of materials.

* All issuers will be required to use the depository by-pass procedure currently known as the “Appointment of Proxy Attorney System.” Both Canadian depositories will use an “Omnibus Proxy” that will effectively remove the depositories from the communication chain, permitting issuers to deal directly with dealers, banks and other intermediaries.

* Issuers are required to provide sufficient quantities of material for distribution as specified by the search card.

Most issuers will be exempted from the requirement of sending interim financial reports to registered shareholders. This will assist in offsetting the increased costs of distributing proxy-related material. Because the communication system will only mandate the distribution of proxy-related material, however, issuers will also be required to establish “supplemental mailing lists” for receipt of other materials, such as interim reports.

The recommended fee schedule for the service is based on the principles that issuers should bear the basic cost of communicating with their shareholders and that intermediaries should bear the costs of protecting the confidentiality of their relationships with their clients. The fee to be charged by intermediaries to issuers for delivery of proxy- related material is $1 per underlying shareholder plus postage, with a minimum fee of $15 per intermediary whose records disclose at least one non-registered holder entitled to receive the materials. Bradley Doney is a lawyer in the Market Policy division of the Toronto Stock Exchange. The article appeared in the TSE Review of November, 1987.