Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

The Delaware Court of Chancery recently released its Opinion in the case of In re Citigroup Inc. Shareholder Derivative Litigation, a derivative action initiated by shareholders of Citigroup against current and former directors and officers of the company. The plaintiffs claimed that the defendants breached their fiduciary duties by not adequately overseeing and managing the risks associated with the company’s involvement in the subprime lending markets. The plaintiffs maintained that the defendants ignored numerous “red flags” that indicated problems in the real estate and credit markets. The plaintiffs also alleged that the directors of the company were liable for corporate waste for, among other things, approving a letter agreement providing a multi-million dollar payment and benefits package for the company’s CEO upon retirement in November 2007. The defendants, meanwhile, brought a motion to dismiss the action, since the plaintiffs did not make a pre-suit demand to the company's directors to pursue litigation. The plaintiffs countered by pleading that demand would have been futile.

In its decision dismissing the oversight claims (for failing to adequately plead demand futility), the Court expounded on the business judgment rule and its application in the present case, where the plaintiffs framed their allegations as Caremark (failure of oversight) claims, when, in fact, the plaintiffs were “attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company” (emphasis added). With respect to the corporate waste claim, the Court found that without further information regarding the additional compensation received by Citigroup’s CEO as a result of the letter agreement and the real value of various restrictive promises provided by him, there was reasonable doubt as to whether the compensation provided by the letter agreement was unconscionable. As such, the motion to dismiss this particular claim was denied.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Keith Chatwin and Rose Anderson |  PDF Version | Version française

Although the disclosure of reserves has been mandated in Canada for a considerable period of time, both pursuant to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101) since September 2003 and prior to that pursuant to National Policy 2B, those policies have not, until recently, ventured further down the commerciality spectrum to provide guidance in respect of contingent and prospective resources.

Not surprisingly, while disclosure in relation to proved and probable reserves, and to a lesser extent possible reserves, has improved, the same cannot be said of resource disclosures. Just as investors have benefited from the enhanced comparability of reserve reports by virtue of the consistency of disclosure in relation to reserves, so they have suffered from the relative lack of guidance in relation to resource disclosures and the resultant diminished comparability and consistency.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 26, 2009, the TSX published a notice continuing temporary relief to listed issuers with respect to the Remedial Review Process. Originally granted on November 3, 2008 due to "extraordinary market conditions", the relief extends the maximum time period that an issuer has to remedy deficiencies that triggered a delisting review from 120 to 210 days. Unless further extended, the relief continues until September 30, 2009.

• Comments
• Trackbacks (1)
• Email This
• Print
• Share Link

On March 23, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice providing guidance on the introduction and supervision of new financial products. Citing the gatekeeper role played by dealer members, the notice provides sample criteria for identifying products that may require review, as well as a list of best practices for product due diligence.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Effective for the 2009 proxy season, the Canadian Securities Administrators (CSA) have adopted new requirements for executive compensation disclosure in the form of the revised Form 51-102F6 (the New Disclosure Requirements). The following excerpt from "Executive Compensation After the Boom" reviews the use of compensation consultants.

Compensation Consultants

Benchmarking analysis and information is one of the key services provided by compensation consultants. Given their expertise and access to often proprietary information on industry practices, compensation consultants can also help to structure compensation packages. Under the SEC’s disclosure rules, the Compensation Discussion & Analysis (CD&A)  is required to include disclosure on whether a company has relied on compensation consultants in determining what to pay its executives.¹ While this requirement was not included by the CSA in the new disclosure requirements, it is required disclosure under National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101).² This disclosure is proposed to be expanded pursuant to recently proposed amendments to NI 58-101.³ The expanded disclosure is proposed to include a requirement to identify any compensation consultant or other adviser that is used, a summary of their mandate, when they were first retained, whether they have performed any other services for the company (and if so, a description of the nature of that work) and the aggregate fees billed by the consultant or adviser in the last two financial years for professional services relating to executive compensation and for other professional services.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

On March 2, 2009, the SEC provided notice of proposed changes to the NASD Rules as filed by the Financial Industry Regulatory Authority (FINRA). FINRA (a consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the New York Stock Exchange) is responsible for regulating securities firms doing business in the U.S. and prescribes the training and competence standards of securities representatives. The proposed changes to the NASD Rules would create a new limited representative registration category for investment banking professionals. In lieu of the current General Securities Registered Representative (Series 7) exam, those whose activities are limited to investment banking would take a more targeted qualification exam, while those already holding Series 7 registration would be "grandfathered" and not need to take the new exam.

• Comments
• Trackbacks (1)
• Email This
• Print
• Share Link

Mike Devereux and Ramandeep K. Grewal |  PDF Version | Version française

On October 24, 2008, the Canadian Securities Administrators (the CSA) adopted a revised form of National Instrument 52-109 Certification of Disclosure of Issuers’ Annual and Interim Filings (NI 52-109 or the Instrument).^[1] Effective December 15, 2008, NI 52-109 has introduced new interim and annual certification requirements and new disclosure requirements for interim and annual management discussion and analysis (MD&A).

Under the revised NI 52-109, the issuer’s chief executive officer (CEO) and chief financial officer (CFO), or other persons performing similar functions (referred to as certifying officers), are required to personally certify as to certain matters. The revised NI 52-109 expands significantly upon the items that were previously included in interim and annual certificates. These expanded certifications may also have a significant impact on related MD&A depending on the state of an issuer’s design and effectiveness of disclosure controls and procedures (disclosure controls) and internal control over financial reporting (internal control). 

• Comments
• Trackbacks (1)
• Email This
• Print
• Share Link

The OSC has approved amendments to the procedures of Clearing and Depository Services Inc. (CDS) to reflect the transfer of the ISIN issuance service from CDS to a subsidiary as well as amendments to the rules of CDS relating to issuer electronic payments. The latter amendments will require that entitlement payments made to CDS be in electronic format as of November 1, 2011.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The OSC has approved the revocation and replacement of OSC Rule 13-502 Fees and its Companion Policy as well as OSC Rule 503 (Commodity Futures Act) Fees and its Companion Policy. If the Minister of Finance approves the Rules, the changes will come into force on June 1, 2009.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Ontario Securities Commission (OSC) recently announced that it has approved the new Rules of Procedure of the Ontario Securities Commission. The new Rules, which will apply to all proceedings heard before the OSC, will replace the current Rules of Practice effective April 1, 2009. The Rules set out the various steps involved in participating in a hearing before the OSC and provide "clearer guidance on key procedural issues." The OSC states that the objective of the new Rules is to ensure that adjudicative proceedings are "more transparent and accessible".

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Last year, the Performance Reporting Board of the Chartered Accountants of Canada published guidance and recommendations for preparing and reporting non-GAAP financial measures. The document provides standardized definitions for EBITDA and Free Cash Flow and recommendations for utilizing those two specific measures. Particularly relevant in the current environment is the definition of Standardized EBITDA, which excludes "amounts included in net income or net loss for: ... (iii) amortization and impairment charges for capital assets."

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Effective for the 2009 proxy season, the Canadian Securities Administrators (CSA) have adopted new requirements for executive compensation disclosure in the form of the revised Form 51-102F6 (the New Disclosure Requirements). The following excerpt from "Executive Compensation After the Boom" will review the new disclosure requirements as they affect the principle of benchmarking.

Benchmarking

Developing an appropriate compensation package does not stop at pay-for-performance considerations. Once a company has determined the types of performance that it seeks to reward, there remains the challenge of measuring performance to determine if and when rewardable goals have been attained, and when attained, how they should be rewarded. For the purpose of setting performance targets, companies can look to comparable internal or external peer groups (i.e. other similarly situated companies) or forecasted budgets. Analysis based on peer group evaluation, or benchmarking as it is referred to in some circumstances, can be useful to the development of compensation packages in a number of different ways. In relation to performance targets, peer group analysis can be used to determine the appropriate target levels to award. While companies may primarily rely on internal budgets for these numbers, setting targets relative to peer group performance can be useful in circumstances of economic uncertainty and instability, where external market forces might have an unexpected impact on industry performance in general. 

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Investment Industry Regulatory Organization of Canada recently published a strategic plan, dated December 2008, which sets out IIROC's broad goals and strategies. Goals include driving a culture of compliance among those subject to IIROC's jurisdiction and delivering effective, efficient and expert regulation.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Income trusts have played a relatively unique role in Canadian capital markets over the last few years and, with the recent changes to their tax treatment and the proposed "conversion" rules, they promise to do so for at least another few years. The following excerpt from our Income Trust Conversion Guide discusses the issue of retained interests.

Update: A revised 2010 version of the Guide has now been published. Download a copy here.

Dealing with a Retained Interest

Many income trusts feature “retained interests”; i.e., individual equity interests held by the pre-IPO owners of the underlying business of the trust. These retained interests are, for tax (and other) reasons, often held at a different structural level than the public (i.e., often directly in the underlying operating business), are usually exchangeable for units of the trust, and often carry voting rights at the trust level on an “as exchanged” basis. The retained interests also frequently have substantial governance rights and protections, including veto rights over certain kinds of transactions by the trust.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently published a consultation report with respect to policies on direct electronic access (DEA) to markets. The report reviews risks and concerns associated with DEA arrangements and proposes guidance with respect to pre-conditions for DEA, information flow and adequate systems and controls. Comments on the report may be submitted to the IOSCO until May 20, 2009.

• Comments
• Trackbacks
• Email This
• Print
• Share Link