The Ontario Securities Commission will be hosting two roundtables in June to discuss issues identified in the CSA Consultation Paper 33-403, which considers the imposition of a statutory fiduciary duty on advisers and dealers to act in the best interests of clients. Our own Ed Waitzer considered such international developments in a post of February 2011. A follow up panel discussion for investors and the industry will occur in July.
On December 31, 2012, the Toronto Stock Exchange made amendments to the Company Manual to require, among other things, that TSX listed issuers elect all directors annually. The TSX subsequently issued Staff Notice 2013-0001 on February 22, 2013 to remind listed issuers of the new obligations. The new Section 461 has now been in effect for approximately four months, and while the changes regarding majority voting policies have attracted greater attention for Canadian domiciled issuers (see our posts of October 4 and October 12, 2012), foreign issuers (particularly those from Australia), have been far greater impacted by the annual director election changes.
In Australia, directors are already elected on a “for” or “against” basis, and not on a “for” or “withhold” basis and therefore already have a majority voting “policy” in effect by operation of the Australian Corporations Act 2001. However, the constitution (or articles) for a Corporations Act 2001 company would typically require that 1/3 of the directors resign at each annual general meeting and be re-elected. This means it would take 3 years to turn over the entire board.Continue Reading...
The Canadian Coalition for Good Governance yesterday released a paper prepared by Professor Anita Anand of the University of Toronto that examines the link between corporate governance and firm value. The paper reviews the academic literature and empirical research on the issue and concludes that, while the question of causation has yet to be fully answered, there is a statistically significant relationship between governance measures (such as those related to board composition, ownership structure and disclosure) and firm value.
Last week, IIROC released a notice to address inquiries received regarding amendments to UMIR, effective March 1, that are intended to align IIROC's trading supervisory requirements with the requirements found in NI 23-103 Electronic Trading. Under the amendments, a Participant must notify IIROC if it enters into an arrangement to have a third party perform certain services on its behalf.
The notice released yesterday answers questions regarding certain specific circumstances that require notification, as well as providing information regarding how to contact IIROC and the type of information required.
For more information, see IIROC Notice 13-0044.
On February 5, 2013 the federal government tabled amendments to the Corruption of Foreign Public Officials Act (CFPOA) which, if passed, would give Canada a much broader reach and pose a more serious threat to Canadians and Canadian businesses who attempt to gain a business advantage through bribery. These amendments are evidence of the Government’s tougher approach to enforcement of the CFPOA in recent years, as witnessed already by prosecutions of Niko Resources in 2011 and more recently of Griffiths Energy, both of which pled guilty to offences under the Act (see below for more details). In some ways, the CFPOA will now be tougher than its US counterpart.
Generally speaking, the CFPOA prohibits giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage.Continue Reading...
Stuart S. Carruthers -
Yesterday, Canada's federal financial institutions regulator, the Office of the Superintendent of Financial Institutions (OSFI), released the final version of its revised Corporate Governance Guideline (the Revised Guideline). The Revised Guideline sets forth OSFI's expectations for the corporate governance of federally-regulated financial institutions (FRFIs). Like the previous Guideline issued in 2003, it applies to all FRFIs except foreign bank branches and foreign insurance company branches.
Last August OSFI released an initial draft of the Revised Guideline, which was open for comment until September 14, 2012. We reviewed that initial draft in our August 2012 Financial Services Update. OSFI received detailed and critical feedback on the initial draft from the relevant industry associations and a large number of FRFIs, and a consultation process on the initial draft continued through the fall. In December, OSFI released a significantly revised draft only to the industry associations and sought only very material comments on the December draft. OSFI ultimately accepted some, but not all, of the key comments received (the materials released with the Revised Guideline include an Annex summarizing the key comments received and OSFI's response). As a result, despite the industry's efforts, the Revised Guideline will impose a number of significant new burdens on many FRFIs. This Financial Services Update reviews the key changes to the Revised Guideline from the initial August draft and considers the key consequences of the Revised Guideline for FRFIs and some of the practical implementation considerations for FRFIs.
The Ontario Securities Commission yesterday released a report that provides an overview of the key initiatives undertaken by the regulator during 2012 that impact investment fund issuers. Such projects concern: (i) modernizing investment fund product regulation, (ii) point of sale, (iii) scholarship plans and (iv) mutual fund fees.
Emerging issues and trends are also considered, including prepaid forward structures in prospectus offerings, investment funds with exposure to physical commodities and the increase in linked note offerings.
The report also considered OSC Staff's findings and concerns resulting from a targeted review of the continuous disclosure filings of Ontario-based investment funds. Identified issues included concerns with advertising and marketing materials (observations and guidance on this subject are expected this Spring), as well as with respect to risk ratings in fund facts (which in some cases resulted in mutual fund managers changing the risk rating of the fund). For more information, see OSC Staff Notice 81-718.
In recognition of the fact that executive compensation practices and regulatory reporting requirements have evolved with time, the Canadian Coalition for Good Governance (CCGG) yesterday released an updated version of its Executive Compensation Principles for 2013. The CCGG indicates that the focus of the Principles is on “’pay for performance’ and the integration of risk management functions into the executive compensation philosophy and structure”.
The CCGG issued its initial Executive Compensation Principles in 2009, which were intended to provide guidance to boards and to promote compensation decisions that were aligned with long-term company and shareholder success.
Specifically, the CCGG articulates its executive compensation principles as follows:
CCGG Executive Compensation Principles
- A significant component of executive compensation should be “at risk” and based on performance.
- Performance should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assumed.
- Executives should build equity in the company to align their interests with those of shareholders.
- A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive.
- Compensation structure should be simple and easily understood by management, the board and shareholders.
- Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.
See the full text of the 2013 Principles for further details regarding each of the above.
The Globe and Mail today published Board Games 2012, its annual report on corporate governance among Canadian issuers. The report includes articles on topics such as the progress of women on boards, as well as rankings of corporations and income trusts on governance issues. The overall ranking is based on a methodology that takes into account board composition, shareholding and compensation, shareholder rights and disclosure.
Last week, ISS released its Canadian corporate governance policy updates for 2013. The updates, which reflect changes to its proxy voting policies for the upcoming proxy season, are effective for meetings held on or after February 1, 2013. As we discussed in a post earlier this month, ISS published proposed changes to its guidelines earlier this Fall that focused on pay for performance. While the final policies include the contemplated changes to the methodology to measure pay-for-performance alignment, the guidelines respecting slate voting, majority owned companies and advance notice requirements, among others, have also been updated.
Key changes to ISS policies include an update to its recommendation regarding slate ballots. Specifically, the updated guidelines recommend withholding votes from all directors nominated by slate ballot, regardless of whether additional governance concerns have been identified. Further, the exemptions for companies newly graduated from the venture exchange or that commit to replacing slate director elections within a year have also been removed. The policy, however, does not apply to contested director elections. The main reason cited for this change in policy is the TSX's recently announced amendments that will prohibit single slate ballots (coming into effect on December 31, 2012) and a similar prohibition in the TSX-V's policies.Continue Reading...
Earlier this week, the Canadian Coalition for Good Governance (CCGG) released its 2012 Best Practices for Proxy Circular Disclosure. The annual publication, which is intended to provide issuers with guidance on corporate governance and executive compensation disclosure, also includes a list of the CCGG's "Governance Gavel Awards" winners. In determining the winners, which this year include Suncor Energy, CN Rail and MacDonald, Dettwiler and Associates, the CCGG considered the alignment between an issuer's practices and the recommended practices found in Building High Performance Boards and Executive Compensation Principles.
With respect to the review of disclosure practices, the publication provides a number of examples of actual disclosure the CCGG deems as "excellent", including with respect to topics such as majority voting, director independence, director nominee profiles, board succession, director continuing education, compensation, attendance and evaluation and risk management oversight. The publication also provides examples of "excellent" executive compensation disclosure, including with respect to the effectiveness of compensation programs over time, the linkages between executive compensation and corporate strategy and objectives, and compensation consultants and benchmarking.
On November 9, the Ontario Securities Commission released a guide intended to assist boards and management of emerging market issuers (Canadian public companies with significant business operations in emerging markets) in addressing the risks of doing business in emerging markets and satisfying their governance and disclosure obligations. The guide follows a regulatory review of EMIs announced in June 2011 and a subsequent report setting out the results of the OSC's review published in March of this year. OSC staff has indicated that it expects the guide to be useful to other issuers as well.
The guide highlights eight potential areas of risk which may warrant further scrutiny by emerging market issuers, sets out questions that directors and management should consider in addressing each specific area of risk and outlines expectations regarding compliance with disclosure obligations. The areas of risk identified by the guidance document relate to the need for boards and management of emerging market issuers to: (i) have a thorough understanding of the political, cultural, legal and business environments of the company; (ii) incorporate appropriate policies to overcome language and cultural barriers; (iii) design an appropriate corporate structure that takes into account the political, legal and cultural realities of emerging markets; (iv) effectively identify and monitor related party transactions to prevent abuse; (v) have a sufficient understanding of legal, regulatory, political and cultural risks impacting the company and evaluate these risks in the context of the specific emerging market; (vi) ensure the effectiveness of internal controls; (vii) evaluate the risks associated with the use of and reliance on experts in emerging markets; and (viii) ensure that external auditors have appropriate expertise and experience and that the audit committee can effectively oversee an external auditor's work.
The guide is not intended to be exhaustive (for example, there is no reference to reverse take-over transactions as a listing device) or to create new legal obligations (or modify existing ones).
According to the OSC, the unique challenges of operating in emerging markets require boards to "take extra measures to ensure investors' interests are protected." For more information, see OSC Staff Notice 51-720.
Institutional Shareholder Services (ISS) recently published proposed updates to its benchmark proxy voting guidelines for 2013. Of particular interest are the proposed changes to the Canadian pay for performance guidelines.
Specifically, ISS is proposing a new methodology that would measure long-term pay for performance alignment based on certain quantitative and qualitative factors. Under the proposal, factors would include the CEO pay-to-total shareholder return alignment over the prior five years, the ratio of performance to time based equity grants and the overall mix of performance-based compensation relative to total compensation, the trend in other financial metrics, and the quality of disclosure and appropriateness of the performance measures and goals utilized. As we discussed back in January, ISS introduced a new methodology for evaluating U.S. pay-for-performance last year.
Meanwhile, proposed changes have been released with respect to the U.S. policies concerning Board Response to Majority-Supported Shareholder Proposals, Management Say-On-Pay Proposals, Say on Golden Parachute Proposals and Environmental and Social Non-Financial Performance Compensation-Related Proposals. Further, the global policy on Board nominee Disclosure would recommend against the election of directors if nominee names were not disclosed in a timely manner prior to the meeting.
ISS is accepting comments on its proposals until November 9.
In TELUS Corporation v. Mason Capital Management LLC, the British Columbia Court of Appeal considered the validity of a shareholder's requisition for a general meeting of shareholders. The Court clarified that a requisition made under s. 167 of the Business Corporations Act need not identify the beneficial owner of the shares used to call the meeting in order to be valid. In addition, the Court held that it had no authority under the Act to restrain a shareholder from requisitioning a meeting on the basis of its “net investment” or that its interests are not aligned with the economic well-being of the company.
The requisition concerned the capital structure of the respondent, TELUS Corporation (TELUS). TELUS has two classes of shares: common shares and non-voting shares. TELUS originally adopted this capital structure in order to comply with foreign ownership restrictions on its voting shares.
When foreign investment in TELUS decreased and the rationale for having non-voting shares disappeared, TELUS's board of directors explored the possibility of consolidating the company's share structure by exchanging the non-voting shares for voting shares.Continue Reading...
The Investment Industry Regulatory Organization of Canada (IIROC) earlier this week released draft guidance regarding outsourcing arrangements into which dealers commonly enter. According to IIROC, competitive pressures to contain costs have led to the outsourcing of more business functions to third-party providers through arrangements not adequately addressed by the Dealer Member Rules. IIROC specifically mentions a growing interest to outsource the daily management of books and records by self-clearing dealers as an example of a trend that may increase credit, systemic and investor risk.
As such, IIROC has ultimately categorized activities as either:
- Core activities that may not be outsourced. This includes most central, client-facing activities such as the account opening process, the performance of suitability assessments and the handling of client complaints.
- Core activities that may be outsourced. Such activities include the performance of investment decisions in managed accounts (the Dealer Member Rules specifically allow for such outsourcing to external portfolio managers), the administration of margin loans, the preparation of client account statements and regulatory financial reports, and the preparation of research reports.
- Non-core activities that may be outsourced. These activities include office service management, human resources management and the procurement of external consultant services.
The TSX today published notice that it is adopting amendments to its Company Manual that would require issuers to (i) elect directors annually; (ii) elect directors individually; (iii) publicly disclose the votes received for the election of each director; (iv) disclose whether a majority voting policy has been adopted and if not, explain the practices for electing directors and the reason for not adopting a majority voting policy; and (v) disclose to the TSX if a director receives a majority of "withhold" votes in the case that the issuer does not have a majority voting policy.
An earlier version of the proposals was published for comment in September 2011 and, according to the TSX, a majority of commenters supported the changes. The final amendments, which have been approved by the OSC, will come into force on December 31, 2012. Security holder meetings that have already been set and for which proxy materials have already been approved will be unaffected by the amendments.
The TSX also published for comment further proposed amendments to its Company Manual that would require issuers listed on the TSX to have majority voting for director elections at uncontested meetings. Issuers would be able to comply with the requirement by adopting a majority voting policy. A typical majority voting policy would provide that, while security holders could generally still vote "for" or "withhold" for each board nominee, a director who receives a majority of "withhold" votes would be required to tender his/her resignation, and the board would generally accept that resignation.
According to the Canadian Coalition for Good Governance, 61% of the listed issuers in the S&P/TSX Composite Index have adopted majority voting. The comment period closes on November 5, and the TSX anticipates that the amendments would become effective, subject to OSC approval, as of December 31, 2013.
In its reason for judgement dated September 11, 2012, the Supreme Court of British Columbia ruled that Telus Corporation was not obliged to hold a shareholder meeting requisitioned by Mason Capital Management LLC on the basis that the requisition for the meeting did not comply with the law. While the ruling was based on application of the shareholder requisition provisions of the British Columbia Business Corporations Act (the BCBCA), the court also made some interesting comments regarding the need to disclose beneficial owners when making a requisition, the practice of “empty voting” and, in particular, the implications for corporate law principles where some shareholders have an economic interest that does not align with the interests of shareholders in a broader sense.
Telus had called its own meeting of shareholders to implement a plan of arrangement that would see the conversion of its non-voting shares into common shares. Telus’ historical dual-class shares structure was originally implemented to allow for foreign ownership without tripping Canadian telecommunication company restrictions on foreign control. While similar in attributes, other than voting, the common shares had historically traded at a premium to the non-voting shares. Mason, a U.S. based hedge-fund, proposed instead its own resolutions that would prevent the conversion unless it took place at a ratio which reflected the purported historical premium paid for the common shares. After learning of Telus’ proposal, Mason acquired a significant number of both classes of shares, simultaneously short selling to hedge its position. In effect, while controlling close to 20% of the vote, Mason had very little net economic interest.Continue Reading...
The Canadian Securities Administrators today published for comment revised proposals to tailor and streamline the governance and disclosure requirements applying to venture issuers. As we discussed last year, the CSA originally published regulatory proposals concerning venture issuers in July 2011. According to the CSA, the version released today has been revised to take into account comments received from stakeholders in response to the earlier proposals.
As with the version released last year, today's proposal would see the adoption of National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers to replace, for venture issuers only, the continuous disclosure, governance and other obligations currently found in various other national instruments.
Among other things, the proposals would (i) consolidate the required disclosure for a venture issuer's governance practices, audited annual financial statements, associated MD&A and CEO/CFO certifications into an annual report; (ii) replace the interim MD&A requirements with a requirement for a short discussion of the venture issuer's operations and liquidity to accompany the 3, 6 and 9 month interim financial reports; (iii) replace the requirement for business acquisition reports in connection with acquisitions of significant businesses with enhanced continuous disclosure reporting; (iv) introduce substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading; (v) tailor and streamlining director and executive compensation disclosure; and (vi) allow for the delivery of disclosure documents, such as annual reports and interim reports on request in lieu of mandatory mailing.
Meanwhile, prospectus requirements applicable to venture issuers would also be relaxed to, among other things, require that only two years of audited financial statements be included in a long form prospectus instead of three, and permit a venture issuer to incorporate by reference the continuous disclosure documents prepared under the national instrument when preparing a short form prospectus, qualifying issuer offering memorandum or a TSX-V short form offering document.
According to the CSA, the new instrument would improve investors' access to key information by tailoring disclosure requirements for venture issuers, eliminating certain disclosure obligations that may be of less value and requiring supplemental disclosure relevant to venture issuer investors. The CSA is accepting comments on the revised proposals until December 12, 2012.
In a recent decision of the Supreme Court of British Columbia, the Honourable Mr. Justice R. Punnett dismissed an application brought by a dissident shareholder, Northern Minerals Investment Corp. (NMI), (i) to prevent Mundoro Capital Inc. from postponing its annual general meeting of shareholders and changing the record date for the meeting, and (ii) for a declaration that an advance notice policy previously approved and announced by Mundoro's board of directors was unenforceable. The Court dismissed NMI's application in its entirety.
NMI wanted to replace the board of directors of Mundoro by nominating a new slate from the floor at the AGM. The AGM was originally scheduled to take place on June 26, 2012. Mundoro, however, presumably suspected that a dissident shareholder was waiting in the shadows, because on June 11, it announced the adoption of the policy by the board, to be effective immediately.Continue Reading...
The CSA announced last week that it is extending the comment period associated with its consultation paper concerning the regulation of proxy advisory firms. As we discussed in a June post, the CSA's consultation paper, which identified concerns raised by market participants regarding the services provided by proxy advisory firms, requested comments from stakeholders by August 20. The comment period has now been extended to September 21, 2012. For more information, see CSA Staff Notice 11-319.
The Canadian Securities Administrators today released a consultation paper considering concerns raised by market participants regarding the services provided by proxy advisory firms. The concerns identified in the paper include those with respect to: (i) potential conflicts of interest; (ii) perceived lack of transparency; (iii) potential inaccuracies and limited engagement with issuers; (iv) potential corporate governance implications; and (v) the extent of reliance by institutional investors on recommendations.
Ultimately, the objectives of the consultation are to obtain information and views regarding the concerns raised, as well as to outline potential regulatory responses. The consultation paper specifically requests feedback on a number of possible regulatory responses to the concerns identified, including requiring that proxy advisory firms: (i) separate proxy voting services from advisory or consulting services in order to address potential conflicts; (ii) disclose the analysis concerning vote recommendations, as well as internal procedures, guidelines, assumptions and sources of information supporting recommendations; and (iii) implement fair and transparent procedures for developing corporate governance standards, and ensure that these procedures and standards are publicly disclosed, in light of the potential impact on issuers of the policies recommended by proxy advisory firms.
The paper also considers existing regulatory frameworks, such as those respecting adviser registration and proxy solicitation, and finds these existing regimes inappropriate for the regulation of proxy advisory firms. As such, the paper recommends that any proposed regulatory framework include the adoption of a new, stand-alone securities regulatory instrument.
Comments on the consultation paper are being accepted until August 20, 2012. For more information, see Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms.
Canada's proxy voting system has been criticized over the years by commentators complaining of such things as over-voting and empty voting. In a recent panel discussion on BNN, available by clicking the image below, Mihkel Voore (Partner, Stikeman Elliott), John Lute (President, Lute & Company) and Chris Makuch (VP National Sales & Marketing, Georgeson Shareholder Canada) discuss the proxy voting system and specifically, in Part 3 of the discussion, the potential for reform.
As we discussed earlier this year, one potential development may come from the Ontario Securities Commission. Specifically, the OSC's latest Statement of Priorities includes as one of its goals for 2012-2013 the improvement of the proxy voting system. According to the OSC, the process towards improving the proxy system will include (i) conducting an empirical analysis to review concerns about the accountability, transparency and efficiency of the voting system; (ii) facilitating discussions among market participants on improving the functions of the proxy system; and (iii) working with the CSA to review the role of proxy advisers in Canada's capital markets by soliciting feedback from issuers, investors and other market participants.
In a recent speech to the Trust Companies Association of Canada, OSFI Superintendent Julie Dickson outlined OSFI's work toward revising its 2003 Corporate Governance Guideline. Notably discussed were issues respecting independent control functions, board composition and the separation of audit committees and risk management committees.
The public offerings of two foreign asset income trusts (FAITs) have revived interest regarding income trusts in Canada, bringing to light a relatively untapped market. The key factor driving this renewed attention is that FAITs are not subject to traditional Specified Investment Flow-Through (SIFT) rules, as a result of their ownership of assets outside of Canada.
The royalty trust and income trust markets trace their origins to 1986 and 1995, respectively. As interest rates declined during the period and beyond these trusts became popular, since they provided lofty yields well in excess of the prevailing interest rate payable by corporations with similar credit ratings. The reason for the discrepancy was primarily due to the fact that royalty trusts and income trusts were flow-through vehicles that avoided the payment of corporate level tax. The yields payable by these trusts varied, but were typically in the 8 – 10% range.Continue Reading...
The Ontario Securities Commission today released its draft Statement of Priorities for the financial year ending March 31, 2013. Today's statement follows last month's publication of the OSC's three-year strategic plan. According to the OSC, the regulator has five regulatory goals for the upcoming fiscal year, namely:
- delivering responsive regulation, which includes improving the proxy voting system, developing a consultation paper addressing issues associated with market data in a multi-marketplace environment, and considering alternate capital raising exemptions in addition to the accredited investor and $150,000 exemption;
- delivering effective enforcement and compliance by, for example, conducting more targeted compliance reviews;
- delivering strong investor protection, which notably includes re-evaluating the client-adviser relationship to consider whether an explicit statutory fiduciary duty or other standards should apply in Ontario;
- running a modern, accountable and efficient organization; and
- supporting and promoting financial stability.
The OSC is accepting comments on its Statement of Priorities until May 29. For more information, see OSC Notice 11-766. For the OSC's 2011-2012 Statement of Priorities, see our blog post of June 17, 2011.
Last week, the OSC's Office of the Chief Accountant published a staff notice highlighting selected areas of interest with respect to financial reporting in the era of IFRS, and identifying areas for closer examination during 2012. Among other things, the notice considers: (i) the level of compliance with certain features of IFRS 3 Business Combinations; (ii) accounting for business combinations under common control; and (iii) the application of the requirements of IAS 36 Impairment of Assets. According to the OSC, the objective of the notice is to provide market participants with information that may assist in preparing financial reports during 2012.
As discussed in a post of December 21, 2011, Institutional Shareholder Services (ISS) released a white paper last year entitled “Evaluating Pay-for-Performance Alignment: ISS’ Quantitative and Qualitative Approach”. The Paper introduced ISS’ new approach to evaluating pay-for-performance and represents the most current and thorough description of the approach ISS utilizes to evaluate pay-for-performance. A subsequent post of January 10, 2012 provided a summary of the paper.
More recently, ISS has added a Frequently Asked Questions (FAQ) section to their website on the issue. Specifically, the FAQ is intended to provide high-level guidance regarding the way in which ISS will generally analyze certain issues in the context of preparing proxy analysis and vote recommendations for U.S. companies. ISS does, however, indicate that the responses should not be construed as a guarantee as to how it will apply its benchmark policy in any particular situation.
By way of example, answers to the following questions are provided in the FAQ:
- “For pay-for-performance alignment, how will ISS treat CEOs who have not been in the position for three years?”
- “For companies with meetings early in 2012, whose peer CEO 2011 pay has not yet been released, what pay data does ISS use?”
As indicated in our post of January 10th, while the paper is primarily focused on pay practices of companies in the United States, ISS has indicated that the new methodology is being considered for Canada. Further, given the influence that ISS can have on Canadian capital market participants, the content of the paper and the FAQ may be of interest to Canadian readers.
On January 25, NYSE Euronext announced that it would no longer permit broker voting of uninstructed shares in the case of certain corporate governance proposals previously categorized as "Broker May Vote". The change in policy follows the elimination of discretionary voting by brokers in director elections in 2010 and the prohibition introduced by the Dodd-Frank Act respecting discretionary voting by brokers on executive compensation.
Many features of the Canadian regulatory framework are friendly to shareholders and make it easier for activist investors to take action against management. Specifically, it is easier in Canada for shareholders to requisition meetings and nominate directors, the threshold for share disclosure is 10% in Canada as opposed to 5% in the U.S., and it is easier to dismiss directors with a single resolution. Watch Stikeman Elliott partner Mihkel Voore discuss the Canadian regulatory regime generally, and specifically with respect to the recently announced plans by a stakeholder in Canadian Pacific Railway to propose a minority slate of alternative directors, in this interview on BNN.
On December 20, 2011, Institutional Shareholder Services (ISS) released a white paper entitled “Evaluating Pay-for-Performance Alignment: ISS’ Quantitative and Qualitative Approach”. As we discussed in a post of December 21, the Paper introduces ISS’ new approach to evaluating pay-for-performance and is thus the most current and thorough description of the approach ISS’ will now use to evaluate pay-for-performance.
The new approach comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance or factors that mitigate the initial quantitative assessment. ISS has introduced this new approach because investor feedback received regarding pay-for-performance indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and to absolute shareholder returns.
While the Paper is primarily focussed on pay practices of companies in the United States, ISS has indicated that the new methodology is being considered for Canada. Further, given the influence ISS can have on Canadian capital market participants, the content of the Paper may be of interest to Canadian readers.Continue Reading...
AMF releases further details on the proposed regulatory framework under the Money-Services Businesses Act
In a news release published last week, the Autorité des marchés financiers (the AMF) stated that it anticipates that the Money-Services Businesses Act (the Act) will come into force on April 1, 2012, as will the Policy Statement to the Money-Services Businesses Act, the Regulation under the Money-Services Businesses Act and the related Regulation respecting Fees and Tariffs. The AMF also anticipates that all statutory and regulatory provisions dealing with the operation of automated teller machines will come into force on January 1, 2013.
The Act and regulations will require any person or entity who operates a money-services business for remuneration to hold a licence issued by the AMF and to disclose information about its directors, officers, partners, shareholders, branch managers, employees working in Quebec and certain types of lenders. The Act and regulations also set out the nature, form and content of the books, registers and records that a money-services business must maintain and preserve, as well as the requirements governing the identification of customers and co-contracting parties.Continue Reading...
On December 20, Institutional Shareholder Services released a paper outlining its new methodology for evaluating U.S. pay-for-performance in 2012. As we discussed in a November post, the new approach, which will consist of an initial quantitative assessment and, where appropriate, an in-depth qualitative assessment, was first introduced in ISS' updated proxy voting guidelines for the upcoming year.
The quantitative review will include a relative evaluation, which compares CEO pay and performance to peers and is designed to identify outlier companies that have demonstrated a significant misalignment between CEO pay and company performance, and an absolute evaluation that looks at CEO pay trends relative to shareholder return. Where a pay-performance disconnect is identified, a qualitative assessment will follow to determine either the likely cause or mitigating factors in the misalignment.
As we discussed in our blog post October 28, ISS has stated that the new methodology is being considered for Canada.
Institutional Shareholder Services will be hosting webinars next week concerning its policy updates for the 2012 proxy voting season. As we discussed last week, ISS released updates to its proxy voting guidelines on November 17th. While next week's webinars focus on European and U.S. policy updates, the discussion on U.S. updates may be especially interesting to Canadian issuers.
The Globe and Mail has recently published its annual report on corporate governance for 2011. The Globe report includes an article on the shift towards more independent boards in Canada as well rankings of corporate governance practices for corporations and income trusts. In compiling its rankings, the Globe looked at various factors respecting board composition, shareholding and compensation, shareholder rights and disclosure. The methodology used for its scores can be found here.
The U.S. Securities and Exchange Commission recently released its 2011 annual report on the whistleblower bounty program adopted earlier this year. The program was designed to award whistleblowers who voluntarily provide original information to the SEC regarding violations of securities laws where the enforcement action leads to monetary sanctions totalling more than $1 million.
According to the report, 334 whistleblower tips were received between August 12, 2011, when the final rules became effective, and September 30. The most common complaint categories were market manipulation, corporate disclosures and financial statements, and offering frauds. The SEC has yet to pay any whistleblower awards.
Canadian companies must embrace social reporting to remain competitive.
Analysts are giving more positive recommendations to firms that score higher and report on environmental, social and governance measures, recent research from the London Business School and Harvard Business School shows. And those that adopt mandatory sustainability reporting requirements have seen positive effects on corporate performance.
This makes sense: Disclosure of that kind of information creates incentives for companies to manage such issues more effectively, even if only to avoid having to disclose bad performance to their stakeholders.Continue Reading...
Earlier this week, the Canadian Coalition for Good Governance published its annual review of best practices for proxy circular disclosure, which includes its list of this year's "Governance Gavel Awards" winners. According to the CCGG, its annual review ultimately aims to demonstrate what shareholders expect from issuer disclosure. Award winners are highlighted as issuers whose practices substantially meet all of the CCGG's Building High Performance Boards and Executive Compensation Principles guidelines, and this year include CN Rail and the TD Bank Financial Group, as well as Manitoba Telecom Services in the small or mid-size issuer category.
The review analyzes a number of real-world examples of corporate governance disclosure provisions that the CCGG considers to be "excellent", including with respect to such topics as majority voting, director nominee profiles, director independence, say on pay, and oversight of strategic planning and risk management. Examples of "excellent" executive compensation disclosure is also provided, including with respect to the linkages between executive compensation and shareholder promise, the effectiveness of the compensation program over time, the use and limits of retirement benefits and perks and the use, policies and limits for discretion.
On October 18, Institutional Shareholder Services (ISS) published for comment draft updates to its benchmark proxy voting policies for 2012 . The draft policies cover topics relating to board governance, director and executive compensation and environmental and social issues.
Of particular interest, one of the proposed changes published by ISS would introduce a new methodology to evaluate the alignment between a company's shareholder return and executive pay. While currently focused on U.S. issuers, the proposal states that the new methodology is also being considered for Canada.
Specifically, the new approach would seek to identify companies that have demonstrated "strong", "satisfactory" or "weak" alignment between total shareholder return and CEO pay over an extended period. A quantitative analysis would be performed to measure relative alignment and absolute alignment between pay and company performance, with companies showing a weak alignment receiving a further qualitative review. According to ISS, the proposed approach is designed "to better address market needs for robust pay-for-performance evaluations."
ISS is accepting comments on the draft policies until October 31 and expects to release final versions of its policies during the week of November 14. ISS released the results of its annual policy survey, which informed its policy-making process, in September.
Earlier this week, the Canadian Coalition for Good Governance released new guidelines regarding the governance of equity controlled corporations. The guidelines, which apply only to corporations controlled through the ownership of common shares, are intended to supplement the CCGG's 2010 Building High Performance Boards to take into account the governance differences of equity controlled corporations.
Ultimately, the guidelines consider issues respecting (i) shareholder democracy; (ii) board composition; (iii) the independence of board Chair; (iv) related directors on board committees; (v) CEO assessment and plans for succession; (vi) shareholder engagement; and (vii) say on pay.
A draft version of the guidelines was initially published in April 2011.
The Canadian Securities Administrators (CSA) have introduced a new mandatory regulatory regime for venture issuers intended to provide a more tailored approach to the regulation of the venture market. As discussed in an earlier blog post, on July 29, the CSA published for comment proposed rules and rule amendments in the form of Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), which represents a comprehensive overhaul of the prospectus and private placement requirements, as well as continuous disclosure and governance obligations currently applicable to venture issuers.
The CSA’s proposals are ultimately intended to streamline venture issuer disclosure to reflect the needs of investors, while making disclosure requirements more suitable and manageable for issuers. The highlights of the proposals include replacing all current continuous disclosure and governance requirements (including audit committee and certification requirements) and modifying disclosure requirements in connection with long form prospectus offerings and rules for incorporation by reference in short form prospectuses and other documents. The proposals also introduce substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading and propose to require delivery of disclosure documents on request only in lieu of mandatory delivery. Some of these changes are discussed in detail below.Continue Reading...
The OSC today released a report prepared by its Compliance and Registrant Regulation Branch that summarized the new and proposed rules impacting registrants, provided information intended to assist firms and individuals applying for registration, and identified deficiencies found in compliance reviews of registrants. The report primarily covered the OSC's 2011 fiscal year.
Of particular interest, the deficiencies highlighted by the report include: (i) inaccurate calculations by firms of excess working capital on Form 31-103F1; (ii) inadequate insurance coverage by registered portfolio managers and investment fund managers; (iii) a lack of disclosure by portfolio managers regarding the use of client brokerage commissions; (iv) a delegation of "know your client" and suitability obligations by portfolio managers; (v) EMDs selling exempt securities in reliance on the accredited investor exemption to investors who do not meet the definition; (vi) individuals trading on behalf of EMDs without being registered as a dealing representative with the EMD; and (vii) EMDs inappropriately using investor funds.
The report also provides a number of suggested practices to assist registrants in addressing the various identified deficiencies. Guidance was also included concerning such issues as the use of social media, marketing practices and the provision of online advisory services. For more information, see OSC Staff Notice 33-736.
The SEC announced last week that it will not seek a rehearing of the recent decision of a U.S. Appeals Court to vacate its new proxy access rule. As we discussed last year, the new rule (Rule 14a-11 under the Securities Exchange Act of 1934) would have required companies to include shareholder nominees for director in the company's proxy materials where the shareholder held shares representing at least 3% of the voting power of the company’s stock for the previous three years.
The SEC's final proxy rule amendments released last year also contained changes to Rule 14a-8, which were intended to narrow an exemption that currently permits companies to exclude shareholder proposals that relate to elections. Rule 14a-8a was not subject to court challenge. As we discussed at the time, the amended rules would apply to foreign issuers that were otherwise subject to U.S. proxy rules unless foreign law prohibited shareholders from nominating director candidates.
In its release last week, the SEC also confirmed that the amendments to Rule 14a-8 will come into force shortly. The SEC had stayed implementation of Rule 14a-8 along with Rule 14a-11 pending resolution of the court challenge to the latter.
The Toronto Stock Exchange today published proposed amendments to section 461 of the TSX Company Manual regarding shareholders' meetings and proxy solicitation. Specifically, the proposed amendments would require issuers listed on the TSX to elect directors individually, hold annual elections for all directors, disclose annually whether they have adopted a majority voting policy and if not, explain why not, and advise the TSX if a director receives a majority of "withhold" votes.
As set out in the TSX notice, according to the Canadian Coalition for Good Governance, fifty-seven per cent of issuers in the S&P/TSX Composite Index have adopted majority voting policies, and Canada is one of the few major jurisdictions that still has plurality voting (which results in a director or slate being elected even if only one vote is cast "for" the director or slate, since securityholders are only entitled to vote for or withhold their votes).
The proposed amendments are open for comment until October 11, 2011.
As we discussed last month, our very own Sean Vanderpol and Ed Waitzer recently published an article in the Osgoode Hall Law Journal that questioned the emphasis on the primacy of shareholder choice in the case of Canadian take-over transactions. In today's Globe and Mail, Mr. Waitzer expounds on the argument that securities regulators should no longer scrutinize the actions of companies fending off hostile takeovers and, rather, leave the issue to the courts.
TSX Company Manual changes introduce new listing category for oil & gas development stage listing requirements, make other amendments
As we discussed in February, the TSX proposed various changes to its Company Manual earlier this year. The TSX has now announced that it is adopting the proposals, with non-material revisions, and that the OSC has provided its approval.
Changes effective July 29 include the creation of a new subcategory of minimum listing requirements for oil & gas development stage companies. Requirements under this new category include having contingent resources of $500 million and a minimum market value of the issued securities to be listed of $200 million. Effective on the same date, the TSX removed the requirement that a rights offering be unconditional.
Effective August 29, meanwhile, amendments have been made to three sections of the Company Manual to require aggregation of transactions over a six-month period for the purposes of determining whether certain prescribed thresholds have been met. The new six-month aggregation applies for the purposes of calculating whether consideration to be received by insiders or other related parties exceeds 2% or 10% of the market capitalization under s. 501 (relating to transactions involving insiders or related parties which to do not involve the issuance of securities but materially affect control of the issuer), and the 10% limit for consideration received by insiders in connection with a private placement under s. 604 or securities issuable to insiders in connection with an acquisition under s. 611.
Amendments have also been made to clarify that the 2% that applies to the exemption from securityholder approval for compensation arrangements that are used as employment inducements is to be calculated over a twelve month period.
OSC Corporate Finance Branch clarifies prospectus financial disclosure issues in connection with IFRS transition
On August 18, the OSC's Corporate Finance Branch released clarification on issues relating to financial disclosure required in a prospectus arising out of the transition to International Financial Reporting Standards (IFRS). As we have previously discussed, Canadian reporting issuers have generally been required to transition to IFRS effective as of January 1, 2011. Specifically, the Corporate Finance Branch release provides guidance on the presentation of IFRS transition information in prospectuses, as well as the use of GAAP for financial statement disclosure in prospectuses filed in and after the issuer’s transition year.
With respect to the presentation of transition information in prospectuses, the release outlines the difference in requirements between an IPO prospectus (which must include an opening statement of financial position at the date of transition to IFRS, as well as IFRS 1 reconciliations for the date of transition and the most recent annual period) and a short form prospectus or a non-IPO long form prospectus (which are not required to include the above information).
With respect to an IPO prospectus in the year of transition, the release clarifies that the annual financial statements required for the previous three years are not required to be converted into IFRS. However, the interim financial report for the most recent interim period, along with the comparative interim financial statements for the corresponding period in the previous year, would still have to be prepared in accordance with IFRS.
Finally, in cases where an IPO prospectus is filed in the first year after transition (2012), an issuer has three options with respect to the presentation of historical annual financial statements. Specifically, IFRS may be used for the three most recently completed years (2009, 2010 and 2011) or IFRS may be used for 2011 and 2010 and Canadian GAAP used for either 2009 and 2010, or 2008 and 2009. In either case, the issuer would be including financial disclosure above and beyond what would normally be required, in that financial statements for the 2010 financial year would be included twice or a fourth year back would have to be included.
This release follows three prior releases published by OSC staff on issues relating to the transition to IFRS. For more information, see OSC Corporate Finance - IFRS Release No. 4.
The Canadian Securities Administrators today published for comment proposals intended to "streamline and tailor venture issuer disclosure" to reflect the expectations of investors and to improve the manageability of disclosure requirements for issuers.
The CSA's proposals follow a consultation last year by various provincial regulators on tailoring venture issuer regulation, and would replace the governance, disclosure and certification obligations of venture issuers currently found in NI 51-102 Continuous Disclosure Obligations, NI 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, NI 52-110 Audit Committees and NI 58-101 Disclosure of Corporate Governance Practices with a new National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers.
Among other things, the CSA's proposals would (i) consolidate business, governance and executive compensation disclosure, audited annual financial statements, associated MD&A and CEO/CFO certifications into one document and make modifications to current governance and continuous disclosure requirements; (ii) modify the disclosure obligations of venture issuers in connection with a long form prospectus; and (iii) modify the documents required to be incorporated by reference in the case of a short form prospectus, qualifying issuer OM and the TSX short form offering document.
The CSA also provided a number of questions for commentators to consider in reviewing the proposal and is accepting submissions until October 27.
As we described last August, the U.S. SEC adopted a new proxy rule last year to, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. In a decision released last week, however, the United States Court of Appeals for the District of Columbia vacated the rule.
Specifically, the petitioners argued that the SEC had enacted the rule
in violation of the Administrative Procedure Act ... because, among other reasons, the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940.
Ultimately, the Court of Appeals agreed, finding that the SEC "acted arbitrarily and capriciously" in failing to adequately "assess the economic effects of a new rule."
Earlier this week, the Ontario Securities Commission announced that it is undertaking a targeted review of Ontario reporting issuers listed on Canadian exchanges that have "significant business operations" in emerging markets. According to the OSC, the review is intended to examine the disclosure of certain issuers, as well as the role of auditors and underwriters in assisting such issuers access to the Ontario market. The OSC's announcement follows the recent disclosure-related allegations made against Sino-Forest, which acquired a Canadian listing through a reverse takeover in the 1990s.
Fairness opinions are largely accepted as forming an essential component of the board’s review of a major business transaction. They are typically obtained from a financial adviser for the purpose of analysing the consideration that is being received or paid, in order to determine whether the transaction meets the requisite standards of fairness. In this respect, the fairness opinion can assist in demonstrating that the board has fulfilled its duties in considering a transaction, and provide objective evidence of its fairness. A fairness opinion often supports a board’s recommendation to the shareholders when a transaction requires the affirmative vote of the shareholders in order to proceed. Issues relating to fairness opinions and the proper board process surrounding such opinions have surfaced recently on a few occasions in Canada, the most recent being the high-profile dual class share declassification of Magna International Inc, a transaction where, ironically, no fairness opinion was given. What follows from the Magna transaction is a clear affirmation that the facts will be paramount in determining whether a fairness opinion fulfils its objectives. These facts include not only the nature of the transaction and consideration involved, but also the process followed by the board in retaining and working with its financial advisers.Continue Reading...
Last week, the Canadian Coalition for Good Governance released the results of a study focused on the adoption of corporate governance best practices related to shareholder democracy among Canadian issuers. Namely, the study considered such issues as the appointment of independent chairs and lead directors, annual individual director votes, majority voting policies, director election results disclosure and annual "say on pay" votes. Ultimately, the study found a "significant level of adoption" of such best practices since the CCGG's founding in 2003.
For example, as of 2010 the adoption of individual director elections rather than a slate voting system spread to 83% of S&P/TSX Composite Index issuers representing 95% of the Index by market capitalization. Meanwhile, majority voting policies are now in effect at 57% of Index issuers representing 81% of the Index by market cap. Ultimately, however, the CCGG states that more work is needed and that it intends to continue to its advocacy to ensure that adequate rights are available to investors.
The OSC today published a revised Statement of Priorities for the financial year to end March 31, 2012, thereby updating the version released earlier this year. The revisions to the Statement of Priorities include a number of initiatives to address points raised in public comments received by the OSC. The initiatives include:
- working with the Ontario Government to explore a mechanism by which the OSC could award compensation to Ontario investors suffering losses due to Securities Act violations;
- researching the pros and cons of imposing a fiduciary duty on financial advisors;
- working the with CSA, IIROC and MFDA to harmonize standards for cost disclosure and performance reporting to investors;
- continuing the implementation of the mutual fund point of sale initiative and expanding it to other types of investment fund products; and
- demonstrating the importance to the regulatory process of obtaining verifiable data.
The Canadian Securities Administrators published a notice yesterday providing an update on the project to modernize investment fund product regulation. As we discussed in June 2010, the first phase of the project involves amending NI 81-102 Mutual Funds and NI 81-106 Investment Fund Continuous Disclosure to codify exemptive relief that is frequently granted to mutual funds and other investment funds and replace the patchwork orders with uniform requirements. Amendments to that end were proposed last year and, according to yesterday's notice, the CSA intend to publish the amendments in final form by the end of the summer.
Meanwhile, Phase 2 of the modernization project involves identifying and addressing issues concerning market efficiency, investor protection and fairness that arise out of the differing regulatory regimes that apply to different types of publicly offered investment funds. A stated aim of this phase, which is to be implemented in two stages, is reducing the potential for regulatory arbitrage. The first stage would include adopting proposals for restrictions and operational requirements for non-redeemable investment funds analogous to those in NI 81-102 in order to address investor protection and fairness concerns. The CSA plan to publish such proposals for comment in early 2012. During the second stage of this phase of the project, the CSA intend to consider whether certain investment restrictions in NI 81-102 should be loosened in recognition of product and market developments.
Public comments on the proposals are being accepted until July 25, 2011.
On April 11, the Canadian Coalition of Good Governance (CCGG) released draft guidelines respecting the governance of controlled corporations. The document, which relates only to issuers controlled through the holding of common shares (guidelines for dual class share companies are expected in the future) modifies certain guidelines found in CCGG's 2010 Building High Performance Boards to "ensure that the legitimate ownership interests of a controlling shareholder are not in conflict with a guideline designed for widely held issuers."
Specifically, the guidelines address issues respecting: (i) shareholder democracy and the ability of minority shareholders to express their views even where a controlling shareholder holds 50% or more of the voting shares; (ii) board composition and the limitations on the number of related directors (directors that are significant owners of the controlling shareholder, directly or indirectly employed by the controlling shareholder or its significant shareholders, or immediate family members of the ultimate controlling shareholder); (iii) the independence of the Chair of the Board; (iv) related directors on board committees; (v) assessment of the CEO and plans for succession; (vi) and shareholder engagement. The CCGG is accepting comments on the draft guidelines until May 16 and intends to publish the final version in late June 2011.
Notably, the current version of National Policy 58-201 Corporate Governance Guidelines, enacted in 2005, discusses the CSA's intention to examine the governance of controlled companies and consider whether to change how NP 58-201 and NI 58-101 Disclosure of Corporate Governance Practices treat controlled companies. To that end, amendments to Canadian public company governance and independence requirements, which included, among other things, amendments intended to reflect the realities of controlled issuers, were published by the CSA in December 2008. The proposed changes to the corporate governance regime, however, were ultimately deferred.
On March 2, the U.S. Securities and Exchange Commission proposed a rule that would prohibit certain institutions with consolidated assets of $1 billion or more from establishing or maintaining incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation, or that encourage inappropriate risks that could lead to material financial loss. The proposals would apply to institutions with consolidated assets of $1 billion or more and include brokers and dealers registered under Section 15 of the Securities Exchange Act of 1934 and investment advisers as defined under section 202(a)(11) of the Investment Advisers Act of 1940.
The proposal, which responds to a requirement by Dodd-Frank to prohibit such compensation arrangements, would also require the covered institutions to disclose information about their incentive-based compensation arrangements. The proposal will be open for a 45-day comment period once it is published in the Federal Register.
On February 25, the OSC released for comment a draft of its 2011-2012 Statement of Priorities. According to the OSC, its planning for the year was influenced by developments in the overall investment marketplace, the regulatory arena domestically and internationally and stakeholder perceptions of regulatory effectiveness. Ultimately, the OSC identified five broad priorities, namely to:
- better demonstrate its commitment to investor protection by undertaking policy and rule development as well as compliance and enforcement programs;
- intensify operational, compliance and enforcement efforts;
- modernize its regulatory systems and approaches, including by focusing on risk oriented regulatory responses and implementing a robust framework for OTC derivatives;
- pursue a coordinated approach to securities regulation by supporting the development of a federal securities regulator and working to harmonize and modernize regulation through the CSA; and
- demonstrate accountability for its performance as a leading securities regulator in Canada.
Comments on the are being accepted by the OSC until April 27, 2011. For more information, see OSC Notice 11-765.
The Canadian Coalition for Good Governance recently released a a set of principles for director compensation "for boards to consider when structuring their own compensation plans to ensure that their interests are aligned with those of the equity owners of the company." According to the principles: (i) director compensation should not be so high as to potentially compromise the independence of directors; (ii) compensation should reflect expertise and a director's actual time commitment to the board; (iii) compensation should vary for different director roles; (iv) boards should consider requiring a minimum shareholding for directors and encourage investment beyond the minimum; (v) boards should minimize the complexity of director compensation structures; and (vi) directors should consider periodically seeking approval for directors' compensation from shareholders.
Yesterday, the SEC announced that it was adopting rule amendments that would require issuers to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three calendar years beginning with the first annual shareholders' meeting taking place on or after January 21, 2011; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six calendar years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The amendments to the Securities Exchange Act of 1934 would also impose various disclosure requirements. Smaller reporting companies, however, would not be subject to the first two requirements described above until their first annual or other meeting of shareholders occurring on or after January 21, 2013.
As we discussed in October of last year, the SEC released draft proposals in the fall and the final amendments take into account feedback received.
As published in Monday's Globe and Mail.
When Lehman Brothers failed, was it a failure of corporate risk management, or corporate crisis management, or both? Rigorous risk management is a crucial element of good governance, not a euphemism for guessing. As became painfully evident in the Lehman case and a slew of other recent crises, not having adequate risk-management systems and acting accordingly can lead to a downturn in public confidence, and can easily become viral.
Crises aren’t new. Why, then, has the management of risk attracted so much research and occupied so much time in corporate boardrooms? And why is it that, even as we’ve invested increasing resources in institutional risk management, we still too often encounter a profound lack of public trust?Continue Reading...
The Ontario Securities Commission yesterday published a staff notice advising on its review of issues relating to shareholder democracy. According to the notice, the OSC is considering the development of regulatory proposals relating to director elections, say-on-pay and the effectiveness of the proxy voting system. The purpose of the notice is to provide an update on its work in this area given the OSC’s stated commitment to reviewing protections for shareholders’ rights and corporate governance as stated in its 2010-2011 Statement of Priorities and in its submissions to the Standing Committee on Government Agencies.
With respect to slate voting and majority voting, the OSC is considering whether securities laws should be amended to facilitate individual director voting (as opposed to slate voting) and majority voting (as opposed to requiring a simple plurality) for director elections of reporting issuers. These issues have received increased attention in the last few years, with the Canadian Coalition for Good Governance recommending a majority voting standard and a prohibition on slate voting.
In the area of executive compensation, the OSC is considering whether to introduce mandatory shareholder advisory votes on executive compensation or “say-on-pay”. On this point, the OSC specifically cited the movement towards mandatory say-on-pay in Australia, the U.K. and parts of Europe and the expected implementation of say-on-pay in the U.S. as a result of Dodd-Frank. As we've discussed in the past, Canada's largest financial services companies have already begun allowing shareholders to vote on executive compensation resolutions.
Finally, the OSC will also look at the need for general reforms to the proxy voting system. Specifically, the OSC recognizes "the need for an effective proxy voting system that allows shareholders to make informed voting decisions and ensures that their votes are counted at shareholder meetings." This review will be in addition to proposals published earlier to amend National Instrument 54-101 Communication with Beneficial Owners. In the U.S., the SEC also initiated a comprehensive review of the proxy system in July 2010.
The OSC intends to coordinate its review with other CSA members and is accepting comments until March 31 on whether proposals on these issues should be developed and if so, the appropriate scope of such proposals. For more information, see OSC Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy Issues.
The Globe and Mail published an interesting article last week discussing the "jurisdiction-shopping" occurring among issuers looking to avoid director residency requirements. The article specifically considered the case of a mining company looking to reincorporate in Yukon so as to avoid the CBCA's requirement that at least 25% of the directors of a corporation be resident Canadians. According to Stikeman Elliott partner Jay Kellerman, who was quoted in the article, such jurisdiction-shopping is increasingly prevalent among mining companies.
On November 22, John Ruggie, the United Nations Secretary-General's Special Representative for Business and Human Rights, published draft guiding principles for the implementation of the U.N.'s "Protect, Respect and Remedy" Framework. The draft principles are intended to clarify how companies and states can operationalize the U.N. "Protect, Respect and Remedy" Framework "by taking practical steps to address business impacts on the human rights of individuals." Public comments are being accepted by way of an online consultation forum until January 31.
Stikeman Elliott provided pro bono assistance to the Special Representative in the development of the draft guiding principles. Stikeman Elliott partner Ed Waitzer recently considered the draft principles in an op-ed published in the Globe and Mail. According to Mr. Waitzer, the draft
brings together social ideals and operational practicalities. It helps to frame, and make operational, an emerging international consensus, starting with the need for states to adopt a more comprehensive approach to address business-related human rights impacts, and to encourage business enterprises to respect human rights.
A recent Financial Post article by Ed Waitzer, Director of the Hennick Centre for Business and Law at York University and partner at Stikeman Elliott and Marshall Cohen, chair of the Hennick Centre's Advisory Board and counsel at Cassels Brock & Blackwell, considers the difficulty in regulating corporate governance. Essentially, the authors argue that
Currency exchange and funds transfer businesses not otherwise regulated would be covered.
On December 10th, the Quebec government adopted Bill 128, An Act to enact the Money-Services Businesses Act and to amend various legislative provisions. As a result, the Money-Services Businesses Act (the MSB Act) will come into force on the date to be set by the government. The MSB Act requires that persons operating a "money-services business" for compensation obtain a license from Quebec’s financial markets authority, the Autorité des marchés financiers (the AMF), and disclose information about their directors, officers, partners, shareholders, branch managers and employees working in Quebec and certain types of lenders they deal with. Please refer to our post of November 12 for more details with respect to the MSB Act.
As noted in our post of November 12, the initial draft of the MSB Act provided that all license applications, together with the payment of prescribed fees, would need to be filed on behalf of the money-services business by a director, officer or partner that is either domiciled in Quebec or that has a place of business or a place of work in Quebec. As adopted, the MSB Act clarifies that money-services businesses that are not incorporated under Québec law and that do not have their head office or an establishment in Quebec can appoint a Quebec respondent for these purposes. The respondent does not need to be a director, officer or partner of the money-services business but must be in a position to adequately exercise its functions as a respondent vis-a-vis the AMF, and the money-services business must provide the respondent with the necessary information and documentation.
The detailed initial registration and ongoing compliance requirements applicable to "money services businesses", including the qualifications and responsibilities of persons who could serve as respondents for purposes of registration under the MSB Act, have yet to be spelled out by regulation.
The Canadian Coalition for Good Governance yesterday released its 2010 Proxy Circular Disclosure Best Practices, a report that considers the specific matters that corporate disclosure should address and analyzes examples of actual company disclosure. While the report considers director-related disclosure, much of it focuses on executive compensation. On the latter topic, the CCGG states that compensation plans should be aligned with the Coalition's executive compensation principles, namely, that:
- "pay for performance" should be a large component of executive compensation;
- performance should be based on measurable, risk-adjusted criteria and evaluated over an appropriate time horizon, to ensure the criteria have been met;
- compensation should be simplified to focus on key measures of corporate performance;
- executives should build equity in the company, to align their interests with shareholders;
- companies should put appropriate limits on pensions, benefits, severance and change of control entitlements;
- effective succession planning helps to mitigate the need to pay for retention.
According to the CCGG, compensation plan disclosure should "clearly describe" how the plan is linked to the company's strategy, objectives and risk management, and describe (among other things) the board's role in designing and determining executive compensation and key factors considered by the board. Numerous examples of executive compensation disclosure are also provided.
The Canadian Securities Administrators yesterday released the results of its compliance review of corporate governance disclosure, which ultimately characterized the level of non-compliance with National Instrument 58-101 Disclosure of Corporate Governance Practices as "unacceptable".
The CSA, which selected 72 reporting issuers for review, required 55% of issuers to make prospective enhancements to corporate governance disclosure, compared to 36% in the 2007 review. Specifically, the CSA found "significant and frequent disclosure deficiencies" with respect to such matters as issuers failing to: (i) specify the basis for determining that a director was not independent; (ii) disclose whether the board had an independent lead director; (iii) describe the measures taken by boards to orient new directors; and (iv) describe the process for identifying board candidates. For each of the identified deficiencies, the CSA provided guidance to assist reporting issuers in meeting disclosure requirements.
For more information, see CSA Staff Notice 58-306 - 2010 Corporate Governance Disclosure Compliance Review.
On November 3, the U.S. Securities and Exchange Commission released a proposal to reward individuals that provide information that leads to successful SEC enforcement action in which monetary sanctions total more than $1 million. The proposal, emanating from Dodd-Frank, also includes provisions to discourage whistleblowers from bypassing a company's compliance program. For more information on the implementation of Dodd-Frank, see the SEC's intended schedule for planned rule proposals.
The Globe and Mail today published Board Games 2010, its 9th annual review of corporate governance practices in Canada. Among other things, the section includes a story that considers the influence of proxy advisory firms as well as rankings of the governance practices of Canadian corporations and income trusts. The rankings are based on board composition, shareholding and compensation, shareholder rights and disclosure.
Institutional Shareholder Services Inc. today published the annual updates to its Canadian Corporate Governance Policy. The policy provides proxy voting recommendations, based on corporate governance factors, for securityholder meetings occurring on or after February 1, 2011. Changes to its policy for 2011 include: (i) extending to all TSX companies its recommendation to vote withhold from any insider or affiliated outside director where the board is less than majority independent or the board lacks a separate compensation or nominating committee; (ii) clarifying the circumstances that may lead to an against recommendation with respect to proposals to amend or replace articles/bylaws; and (iii) adding reference to two new unacceptable features in shareholder rights plans that would result in an against vote recommendation.
David Milstead of the Globe and Mail discusses the corporate governance concerns surrounding mergers and acquisitions in an article published in today's Globe. According to Stikeman Elliott partner Edward Waitzer, quoted in the article, "[t]akeovers, in a sense, are the ultimate discipline on management".
The Canadian Securities Administrators today published an update to CSA Staff Notice 52-306 Non-GAAP Financial Measures and Additional GAAP Measures in light of the upcoming changeover to IFRS. Specifically, the notice has been amended to include, among other things, specific guidance to issuers regarding additional GAAP measures required by IFRS. The CSA also published IFRS-related amendments today to National Policy 41-201 Income Trusts and Other Indirect Offerings. NP 41-201 provides guidance on measures of cash available for distribution and is being updated to reflect changes to NP 52-306.
The U.S. Securities and Exchange Commission (SEC) last week released a proposal that, among other things, would require issuers that are subject to federal proxy rules to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three years; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The SEC's proposal, which result from an amendment to the Securities Exchange Act of 1934 emanating from the recent Dodd-Frank Act, would also impose various disclosure requirements.
Meanwhile, further proposals would require institutional investment managers that manage certain equity securities having an aggregate fair market value of at least $100 million to annually report to the SEC on how they voted proxies relating to the matters described above, namely, executive compensation, the frequency of say-on-pay votes and "golden parachute" arrangements.
The SEC is accepting public comments on the proposals until November 18.
The Investment Industry Regulatory Organization of Canada (IIROC) also published proposed rules today regarding general dealer member financial standards, the protection of client assets, financing arrangements, operations and other internal control requirements. As part of IIROC's rules rewrite project, the proposals are intended to eliminate unnecessary rule provisions, clarify IIROC's expectations with respect to certain rules, ensure that the rules reflect current industry practices, ensure consistency with other rules and streamline the decision making and rule interpretation process.
Much like IIROC's other rule proposals published today, the new provisions contain numerous substantive changes to current rules, such as with respect to reporting of early warning situations and deadlines for certain financial filings. IIROC is accepting public comments on the proposals for 90 days from today's publication of its notice.
See: IIROC Notice 10-0267
The Basel Committee on Banking Supervision yesterday released guidance intended to assist banks in enhancing their corporate governance frameworks. Principles for enhancing corporate governance provides guidance with respect to such issues as the responsibilities of the board, board qualifications, risk management and internal controls and the board's oversight of a compensation system's design and operation. The document also provides guidance respecting the role of supervisors.
According to the Basel Committee, the principles "address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis." A consultative version of the document was published in March 2010.
The New York Stock Exchange's Commission on Corporate Governance released a report last week that identified core governance principles it believed could be widely accepted and supported by issuers, investors, directors and other market participants. The Commission, formed in response to the financial crisis of 2008 and 2009, considered numerous issues, including the proper role and scope of a director's authority, management's responsibility for governance and the relationship between a shareholder's trading activities, voting decisions and governance.
Ultimately, the Commission achieved a consensus on ten principles, namely:Continue Reading...
The Canadian Coalition for Good Governance recently released its 2009-2010 annual report, titled Improving Corporate Governance in Canada. Among other things, the report lists CCGG's accomplishments over the past year and sets out its operational plan for 2010-2011. According to the report, the CCGG intends to focus on such governance matters as expanding its engagement program, continuing to encourage boards to follow its Principles of Executive Compensation, encouraging issuers to adopt "say on pay", developing principles to assist boards in determining director compensation policies, releasing guidance to assist boards in applying its Building High Performance Boards to corporations controlled by a shareholder holding a majority or controlling equity stake in the company, updating its Statement of Principles Regarding Member Activism, urging the federal and provincial governments to create a national regulator with improved enforcement and eliminating barriers to shareholder democracy.
The Securities and Exchange Commission has published a timetable on its website outlining its schedule for implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The timetable, which extends to July 2011, suggests a busy year of rule-making at the SEC and would see, among other things, new rules regarding shareholder votes on executive compensation proposed by the end of the year.
As we wrote on August 26, the U.S. Securities and Exchange Commission recently released a proxy rule that will require companies, under certain circumstances, to include shareholder nominees for director in the company's proxy materials. While SEC Chairman Mary Schapiro outlined the the rule's benefits, SEC Commissioner Troy A. Paredes provides an alternative viewpoint. Mr. Paredes argues that the rule is flawed in that it "imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all." Further comments by the commissioners can be found here.
The U.S. Securities and Exchange Commission (SEC) yesterday announced that it is amending federal proxy rules in order to "facilitate the effective exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors." Specifically, a new proxy rule (Rule 14a-11 under the Securities Exchange Act of 1934) will, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. An ownership threshold of 3% of the voting power based on securities that are entitled to be voted, held for at least three years, will be required for a nominating shareholder or group to rely on Rule 14a-11. Further, amendments to Rule 14a-8 will narrow an exception that currently permits companies to exclude shareholder proposals that relate to elections. The final rules take into account public response to the draft proposals released by the SEC in July 2009 and will generally be effective 60 days after their publication in the Federal Register.
In describing the need for the new rules, SEC Chairman Mary Schapiro stated that
[a]s a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own...Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice.
Notable to Canadian companies, the amended rules will apply to foreign issuers that are otherwise subject to U.S. proxy rules unless the applicable foreign law prohibits shareholders from nominating director candidates.
The Canadian Securities Administrators (CSA) today released CSA Staff Notice 52-326 IFRS Transition Disclosure Review, which provides an assessment of IFRS transition disclosure made by issuers in 2009 annual MD&A. The review, which was completed in consideration of disclosure guidance provided in May 2008, ultimately found an improvement in the amount and quality of transition disclosure. Specifically, findings included:
- 95% of issuers reviewed disclosed their IFRS transition plans;
- 60% of issuers described milestones and anticipated timelines associated with key elements of their transition plans;
82% of issuers identified significant accounting policy differences between Canadian GAAP and IFRS; and
- 80% of issuers provided an update of transition information from 2008 disclosure.
The CSA did, however, identify various areas for improvement. For example, despite the fact that the vast majority of issuers disclosed their transition plans in their MD&A, many failed to discuss key elements of their plans. According to the CSA, "[f]or each key element of an IFRS changeover plan discussed in MD&A, issuers should have described the significant milestones and anticipated timelines." The CSA also stated that issuers should consider whether they can communicate quantified information in 2010 interim and annual MD&A prior to final approval of IFRS balances.
It is expected that the CSA will continue to review IFRS transition disclosure as part of their overall continuous disclosure review program and that issuers should expect requests to refile MD&A if disclosure obligations are not met. Thus, the movement towards the implementation of IFRS continues. As 2011 approaches, it is clear that, while issuers are making definite improvements in disclosing their IFRS transition plans, care must be taken to ensure that regulatory expectations are met.
On July 15, 2010, Quebec's financial services regulator, the Autorité des marchés financiers (the AMF), published two guidelines with respect to the investment management practices of financial institutions, including insurers, portfolio management companies controlled by an insurer, mutual insurance associations, financial services cooperatives and trust and savings companies governed by any of the following Quebec acts: An Act respecting insurance, An Act respecting financial services cooperatives and An Act respecting trust companies and savings companies.
Respectively, the "Investment Management Guideline" (at page 132) and the "Derivatives Risk Management Guideline" (at page 168) set out, in a principles-based approach, AMF guidelines with respect to the sound and prudent investment management practices that financial institutions are required to apply. A draft "Investment Management Guideline" (at page 137) had previously been circulated for public consultation by the AMF in November 2009, and the two recently circulated guidelines are a result of the consultation process. The AMF has stated that due to the complexity and risk-potential of derivatives, it has been decided to establish a separate guideline devoted specifically to derivatives risk management. The AMF has noted that its guidelines are based on core principles and guidance issued by international organizations, including the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.
The guidelines come into effect on August 1, 2010 and the AMF expects each financial institution to develop strategies, policies and procedures based on its nature, size, complexity and risk profile, to ensure the adoption of the principles underlying the guidelines by August 1, 2012. The AMF has also stated that where a financial institution has already implemented such a framework, the AMF may verify whether it enables the institution to satisfy the requirements of sound and prudent investment management practices prescribed by law.
On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39. The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.
The legislation, which was passed by House of Representatives on June 30, is now awaiting the President's signature. A brief summary of the legislation is provided by the House Financial Services Committee, while Steven M. Davidoff provides some thoughts in the New York Times' DealBook.
On June 27, the G-20 Toronto Summit concluded with the release of a Declaration by members outlining next steps "to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced growth." With respect to financial sector reform, the Declaration speaks of four pillars: (i) a strong regulatory framework, including improved transparency and regulatory oversight of hedge funds, credit rating agencies and OTC derivatives; (ii) effective supervision; (iii) the resolution and addressing of systemic institutions; and (iv) transparent international assessment and peer review.
The next G-20 Summit is scheduled for November 11-12 in Seoul.
The U.S. Federal Reserve, along with other banking regulators, issued final guidance yesterday "to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices." The guidance adopts three main principles, being that: (i) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) these arrangements should be compatible with effective controls and risk-management; and (iii) these arrangements should be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.
According to IIROC's Recognition Order, IIROC must review its corporate governance structure within two years of the date of recognition and periodically thereafter. Pursuant to this requirement, IIROC recently completed such a review and published a report assessing the success in meeting its governance principles and making recommendations to "further develop" its governance structure. The report, prepared by IIROC's Corporate Governance Committee has been adopted by its board of directors.
The Recognition Order provides that IIROC's governance structure and arrangements must ensure: (i) effective oversight of the entity; (ii) fair, meaningful and diverse representation on the board and any committees of the board, including a reasonable proportion of independent directors; (iii) a proper balance among the interests of the different persons or companies subject to regulation by IIROC; and (iv) that each director or officer is a fit and proper person. The report ultimately concluded that the present governance structure and arrangements ensure that each principle is being met.
That being said, the report recognized that "governance is a dynamic process" that must "evolve and change as circumstances and requirements change". Thus the report includes a number of recommendations, including increasing the maximum size of the board of directors, establishing the position of Vice-Chair, providing a principles-based exception to the definition of independence for board members, providing for a one-year cooling-off period before an individual connected with a dealer, marketplace or IIROC could be considered independent and enhancing the information provided to members in connection with director voting.
Osgoode Hall Associate Professor Richard W. Leblanc and Stikeman Elliott partner and Jarislowsky Dimma Mooney Chair in Corporate Governance Ed Waitzer consider potential structural reforms to the manner in which corporate boards are chosen and function in today's Financial Post. Specifically, Dr. Leblanc and Mr. Waitzer contemplate a framework where director nomination privileges would fall to "shareholder-trustees" that have owned more than a certain percentage of stock for a specific period or time and who are subject to duties of care and loyalty. According to the authors,
Such a nomination process might go a long way to achieving effective director independence. For one, directors would no longer be subject to what is essentially a self-selection process. Accountability to “shareholder-trustees” (rather than to management or each other) should tend to encourage the exercise of independent judgement.
The Canadian Financial Executives Research Foundation (CFERF) recently released the results of a survey suggesting that about half of public companies in Canada are less than 60% through their IFRS conversions. The state of readiness differs depending on company size, with larger companies reporting conversion processes that are further along.
The Ontario Securities Commission (OSC) today released OSC Staff Notice 81-710, setting out the views of OSC Staff regarding the circumstances in which staff may view a change of control of the manager of a mutual fund to effectively be a change in the manager requring securityholder approval. According to the OSC, this issue will generally arise if the transaction is structured in one of the following ways: (i) the manager of a mutual fund amalgamates with another investment fund manager; (ii) if, immediately following a change in control of the manager of the mutual fund, a change of manager will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity; or (iii) when it is contemplated that within a foreseeable period of time following a change in control of the manager of the mutual fund, a change of manager of the mutual fund will occur where the new manager will be the entity that acquired control of the original manager or an affiliate of such entity.
In March, the Canadian Coalition for Good Governance (CCGG) released the 2010 version of Building High Performance Boards, which provides governance guidelines for boards of public issuers. The guidelines were developed by the CCGG following industry consultation. The CCGG suggests reporting issuers "adopt these governance policies and procedures...over and above the minimum standards required by CSA regulations and corporate law."
Specifically, according to the CCGG, issuers should: (i) facilitate shareholder democracy; (ii) ensure that at least two-thirds of directors are independent of management; (iii) separate the roles of Chair and CEO; (iv) ensure that directors are competent and knowledgeable; (v) ensure that the goal of every director is to make integrity the hallmark of the company; (vi) establish mandates for board committees and ensure committee independence; (vii) establish reasonable compensation and share ownership guidelines for directors; (viii) evaluate board, committee and individual director performance; (ix) oversee strategic planning, risk management and the hiring and evaluation of management; (x) assess the CEO and plan for succession; (xi) develop and oversee executive compensation plans; (xii) report governance policies and initiatives to shareholders; and (xiii) engage with shareholders within and outside the annual meeting. Each guideline is accompanied by expected best practices.
The CCGG states that it expects that companies will develop and adopt new best practices over time and the document will be periodically revised to ensure it stays relevant.
The Canadian Securities Administrators (CSA) today released proposed amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer, its companion policy, forms and related consequential amendments. The amendments are intended to improve the beneficial owner communication procedures by, among other things, incorporating notice-and-access provisions for proxy-related materials for meetings that are not special meetings, simplifying the beneficial owner proxy appointment process and enhancing disclosure regarding the beneficial owner voting process.
In particular, the notice-and-access provisions would allow reporting issuers to post information circulars on a website (non-SEDAR) and send a notice to beneficial owners informing them that the proxy-related materials have been posted. An explanation of how to access the material and a voting instruction form would be included with the notice. The CSA also highlighted the differences between its proposals and the U.S. model for notice-and-access. Despite the differences, however, SEC issuers would be permitted to use the U.S. process to comply with CSA requirements.
The CSA are accepting comments on its proposals until August 31, 2010 and have specifically invited comments on a number of questions, primarily relating to notice-and-access.
The Canadian Coalition for Good Governance (CCGG) submitted a brief to the House of Commons' Standing Committee on Industry, Science and Technology in February regarding the Committee's five-year review of the Canada Business Corporations Act (CBCA). The brief follows the CCGG's appearance before the Committee in November 2009.
According to the CCGG's brief, governance requirements for public companies in Canada have not kept pace with best practices. As such, the CCGG recommends enshrining basic democratic and governance norms for public companies into the CBCA. Specifically, the CCGG recommends that the CBCA be amended to: (i) prohibit slate voting; (ii) require a majority voting standard for director elections; (iii) require annual director elections for all CBCA public companies; (iv) require public companies to disclose the detailed results of shareholder votes for matters on the ballot; (v) give significant shareholders access to the proxy circular; (vi) require all shareholders to be treated equally in the proxy process, irrespective of whether they want to protect the privacy of their information; (vii) facilitate "notice and access", whereby shareholders would be able to access documents from companies' websites; (viii) generally require the separation of the roles of CEO and Chair of the Board; (ix) require shareholder approval for significantly dilutive acquisitions; and (x) give shareholders more meaningful ways to resolve claims under the oppression remedy.
It is unclear what steps the Committee will take at this point, however, as Parliament has only just resumed after prorogation and no activities are yet listed on its schedule.
On February 22, the U.S. Securities and Exchange Commission (SEC) announced that it was amending its proxy rules to improve the "notice and access" model for furnishing proxy materials to shareholders. Under the model, issuers are permitted to post their proxy materials on the internet and send shareholders a "Notice of Internet Availability of Proxy Materials" (a Notice), directing shareholders to the website where the proxy materials may be found, in lieu of delivering a full set of proxy materials in paper accompanied by the above Notice. While the notice and access model, adopted in 2007, was intended to promote the use of the internet as a cost-efficient and reliable means of making proxy materials available to shareholders, the SEC has found lower shareholder response rates to proxy solicitations when the notice-only option is employed.
The SEC attributes the lower response rate in cases where the notice-only option is used to confusion among investors regarding the operation of the notice and access model. Thus, issuers and other soliciting persons will be provided additional flexibility under the amendments with respect to the format and content of the Notice, including being able to provide additional materials explaining the e-proxy rules, rather than being restricted to inclusion of the boilerplate-type language currently set out by the rules. Changes are also being made with respect to the time by which a soliciting person other than an issuer must send its Notice to shareholders. The effective date of the amendments, first proposed in October 2009, is March 29, 2010.
In addition to the introducing the above amendments, the SEC also published an Alert describing changes that went into effect in January 2010 eliminating discretionary voting by brokers in the election of directors and the effects of these changes on proxy voting. The SEC also launched a new website providing investors with general information respecting, among other things, proxy voting and e-proxy rules.
On February 25, CIBC shareholders voted in favour of executive pay in what is believed to be the first "say on pay" vote at a Canadian financial services company. As we wrote in October 2009, Canada's largest financial services companies agreed last year to allow shareholders to vote on the same executive compensation resolution across all participating firms. Similar shareholder votes are expected over the coming weeks at the other major financial services institutions.
The SEC issued a statement on Wednesday outlining its position with respect to global accounting standards. Specifically, the SEC stated that it supports "the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards." It recognizes, however, that incorporating IFRS into the U.S. financial reporting environment would be a large task and recognizes the need for deliberation as well as a sufficient transition time to prepare for such a change.
Thus, the SEC directed its staff to develop and execute a work plan to enhance the SEC's understanding and assist it in making a decision in 2011 regarding the incorporation of IFRS into the financial reporting system for U.S. issuers. Specifically, the work plan sets out the following areas of concern: (i) sufficient development and application of IFRS for the U.S. domestic reporting system; (ii) the independence of standard setting for the benefit of investors; (iii) investor understanding and education regarding IFRS; (iv) examination of the U.S. regulatory environment that would be affected by a change in accounting standards; (v) the impact on issuers; and (vi) human capital readiness.
Considering the time required to successfully implement a change in financial reporting, the SEC stated that should it make the decision in 2011 to incorporate IFRS, the earliest that U.S. companies would report under such a system would be approximately 2015 or 2016, although SEC staff have been asked to further evaluate this timeline as part of the work plan.
RiskMetrics Group recently announced the introduction of a successor tool to the Corporate Governance Quotient (CGQ), known as Governance Risk Indicators (GRId). GRId is intended "to help investors better assess the level of governance-related risk at portfolio companies."
The GRId methodology is based on 60 to 80 questions for each market pertaining to four governance categories: (i) board; (ii) audit; (iii) compensation/remuneration; and (iv) shareholder rights. The evaluations of risk will be derived from "the specific company answers, weighted according to each question's significance in the company's market and prevailing best practices in that market." The results will be used to create summary assessments, identifying the level of concern across the four categories of corporate governance described above.
Governance Risk Indicators will be published on proxy research reports beginning in March, with CGQ to be retired at the end of June 2010.
In January, the U.S. Securities and Exchange Commission (SEC) announced amendments to the proxy rules under the Securities Exchange Act of 1934 to require companies that have received TARP money to permit a shareholder advisory vote on executive compensation. The rules are effective February 18, 2010.
The Canadian Coalition for Good Governance (CCGG) recently published a model shareholder engagement and "say on pay" policy for boards of directors. The policy is intended to provide guidance on engagement with shareholders and on expected disclosure related to executive compensation. It also includes a recommended form of advisory “say on pay” resolution and addresses how the board should respond to such an advisory vote on compensation. While the CCGG stated that it recognizes that companies will want to customize a policy to address their specific circumstances, companies are urged to use the recommended form of resolution as closely as possible to ensure consistency among issuers.Continue Reading...
On February 5, the Ontario Securities Commission published OSC Staff Notice 52-718 IFRS Transition Disclosure Review (the Notice), which summarizes the results of a review conducted by the OSC of the "extent and quality of International Financial Reporting Standards (IFRS) transition disclosures made by issuers" in light of guidance previously provided by the CSA. The review focused on IFRS transition disclosure provided in 2008 annual, and 2009 interim, MD&A. Staff of the OSC provide additional guidance under the Notice regarding expectations for future MD&A filings.
In summarizing the results of the OSC's review, the Notice states that 40% of reporting issuers reviewed did not provide IFRS transition disclosure. Of the 60% of issuers that did discuss an IFRS changeover plan in MD&A disclosure, half provided a generic description without direct application to the issuer's own circumstances. Ultimately, the OSC found that "reporting issuers are not adequately discussing, in MD&A, the key elements of their IFRS changeover plan or their progress towards achieving this plan."Continue Reading...
Stikeman Elliott lawyer Simon Romano recently discussed the anticipated conversions of income trusts due to the impending tax changes on the Business News Network program Market Call. Once effective, the tax changes will essentially eliminate the comparative advantage of the income trust structure but for a narrow exemption for certain "qualifying" REITs. According to Mr. Romano, as the date for the upcoming tax changes approaches, "I think the pressure will mount to either sell yourself, convert, or decide, for all the reasons that make sense to you, to stay where you are in the status quo."
For more information on the options for income trust conversions and the upcoming tax changes, effective on January 1, 2011, see our 2010 Income Trust Conversion Guide.
Earlier this week, the Ontario Securities Commission (OSC) issued a report summarizing its compliance review of various types of investment funds. The review began in September 2008 in response to concerns respecting market turmoil and focused on assessing compliance by fund managers with Ontario securities laws. Funds were reviewed in three phases, beginning with money market funds, followed by non-conventional investment funds and finally focusing on hedge funds.
While the OSC noted "some instances of non-compliance" during site visits, the report states that no industry-wide compliance issues were observed. The report, however, makes a number of observations and includes suggested practices for fund managers.
A Harris/Decima survey of Canadian income trust executives was published today, revealing that 84% of trust executives expect that conversion to a corporation will trigger a reduction in distributions/dividends currently paid to investors. The survey, conducted on behalf of BarnesMcInerney Inc., Stikeman Elliott LLP and Computershare/Georgeson, surveyed 82 income fund executives during November/December 2009 in anticipation of legislation scheduled to come into effect on January 1, 2011 that will affect the tax advantage currently enjoyed by the approximately 165 income trusts currently operating in Canada. Andrew Willis discusses the survey and the hard decisions facing income trusts in today's Globe and Mail, stating that "[t]he overarching theme for trusts CEOs is that the coming year will mean walking a tightrope." According to Stikeman Elliott partner Simon Romano, quoted in Mr. Willis' article, "[i]n directing trust conversions, boards will have to select a dividend policy which will typically be based on a mix of factors, including expected free cash flow, tax pool availability, a balancing of where the company wants to fit on the growth vs. steady-state continuum, and the nature of the shareholder base."
For more information on conversions, see our Income Trust Conversion Guide, updated for 2010.
The Australian Government's Productivity Commission, an independent research and advisory body on economic, social and environmental issues, recently issued a report on the topic of executive compensation in Australia. The voluminous report considered such issues as the recent trends in Australia in executive pay, the effectiveness of existing regulatory oversight, the role of boards and the transparency of compensation disclosure. Ultimately, the report recommended reform in five areas: improving board capacities, reducing conflicts of interest, ensuring well-conceived compensation principles, improving relevant disclosure and facilitating shareholder engagement.
Specifically on the topic of shareholder engagement, the Commission recommended a "two strikes" mechanism to address an "unresponsive" board. Under the recommendation, where a company's compensation report received a "no" vote of 25% or more, the board would have to explain how shareholder concerns were addressed in the subsequent report. Where the subsequent report also received a "no" vote of 25% or more, a resolution would be put to shareholders that the elected directors who signed the directors' report for that meeting stand for re-election at an extraordinary general meeting. If this resolution was carried by more than 50% of the votes, the meeting would be held within 90 days.
Last month, the Canadian Coalition for Good Governance (CCGG) released the 2009 edition of its "Best Practices in Disclosure of Executive Compensation Related Information". The guide is intended to "improve the overall quality of executive compensation disclosure in annual proxy circulars" by reviewing best practices and providing examples of disclosure meeting the criteria set out in its guidelines. According to the CCGG, truly effective disclosure is easy to find, easy to understand, accurate and complete and given in context so that the information has meaning. Specifically, the CCGG considered executive compensation disclosure in five areas, discussed below.
1. Build an independent compensation committee
While the CCGG observed that many issuers have appointed a compensation committee of solely independent directors comprising of members with diverse backgrounds, opportunities for improvement were identified. Specifically, the CCGG suggests identifying the compensation expertise of the committee members and establishing and disclosing the committee's work plan.
2. Develop an independent point of view
On this point, the CCGG states that most issuers have retained the services of a compensation consultant, with some companies reporting the fees paid. Despite a CSA requirement to name the consultant, however, the CCGG notes that not all issuers did so and recommends disclosing the fees paid to the consultant for work performed on behalf of the compensation committee and management, as well as a breakdown of such fees.Continue Reading...
The Ontario Securities Commission (OSC) today released a notice regarding the disclosure of corporate governance and environmental matters by reporting issuers other than investment funds. Specifically, the OSC stated that it will conduct a review of issuers' compliance with NI 58-101 Disclosure of Corporate Governance Practices during 2010 in order to assess the adequacy of corporate governance disclosure in information circulars (and AIF and MD&A where applicable) filed in the spring of 2010.
With respect to environmental disclosure guidance, the OSC intends to issue guidance by December 2010 on compliance with environmental disclosure requirements under NI 51-102 Continuous Disclosure Obligations. For more information on issues surrounding environmental disclosure obligations, see Jeffrey Elliott's post of January 2009.
On December 11, the U.S. House of Representatives approved comprehensive legislation intended to "modernize America's financial rules" in response to last year's market meltdown. The Wall Street Reform and Consumer Protection Act of 2009, which passed by a vote of 223-202, combines a number of legislative initiatives announced in the past year into a single piece of legislation numbering almost 1300 pages in length.
The bill includes provisions respecting (i) shareholder approval of executive compensation and golden parachutes; (ii) enhanced compensation structure reporting; (iii) the regulation of OTC derivatives and specifically the requirement that all standardized swap transactions between dealers and "major swap participants" be cleared and traded on an exchange or electronic platform; and (iv) the registration and regulation of advisers to private pools of capital.
There is no guarantee, however, that the bill will become law, as it must now go to the Senate for consideration.
The U.S. Securities and Exchange Commission (SEC) announced on Monday that it is reopening the comment period for its proposals on shareholder director nominations. Originally published earlier this year, the proposal would change federal proxy rules to make it easier for shareholders to nominate and elect directors to company boards. The SEC decided to reopen the comment period to allow interested parties to comment on additional data and related analyses that were submitted during and after the initial comment period and included in the public comment file.
The Canadian Coalition for Good Governance (CCGG) recently published its 2009 edition of Best Practices in Disclosure of Director Related Information, a guide intended to "improve disclosure about directors." According to the CCGG, the purpose of the document is to "recommend disclosure practices that exceed the minimum requirements set out in the regulations." The guide also states that the most effective disclosure is easy to find and understand, accurate and complete and given in a context that gives the information meaning. Specifically, the guide deals with disclosure of director-related information in five separate sections, as outlined below.
Section A – Shareholder voting
This section discusses the methods of voting for directors preferred by the CCGG. An example of a form of proxy considered to be a "best practice" is included as well a list of issuers who have adopted a majority voting policy for their director elections. As the CCGG has previously stated, it recommends individual director voting using a checkbox to indicate voting preference (vote “for” or “withhold”) along with adoption of a majority voting policy. The CCGG also recommends that a report of voting results should be posted on SEDAR within 10 business days of an AGM and should include the results based on the number of proxy votes cast for or withhold from the election of directors and auditors, along with those cast for or against any company or shareholder sponsored resolutions. There is also a discussion on the results from the CCGG’s annual study on voting methods. Among other results highlighted from the study, the guide notes that 74% of companies in the S&P/TSX Composite Index now allow their shareholders to vote with respect to individual directors (contrasted with the 26% that still employ slate voting).
Section B – Director information
Section B provides guidance for companies that want to adopt “exemplary” disclosure practices and provides examples of how certain issuers have chosen to communicate information on matters such as director selection and orientation, background, share ownership, compensation and performance assessment. The CCGG encourages issuers to either adopt or adapt these disclosure practices.Continue Reading...
On November 20, RiskMetrics Group released its 2010 updates to its proxy voting guidelines. The publication of the guidelines follows a comment period on draft policies that ended on November 11. Notably, updates to its Canadian benchmark corporate governance policy were also released. Citing the recent attention in Canada on slate ballots and executive compensation, the updates focus particularly on these two issues.
With respect to slate ballots, RiskMetrics will now recommend a withold vote on directors with slate ballots where it has identified corporate governance practices falling short of best practice or where there exist concerns regarding compensation practices and the alignment of pay with performance. Such governance practices that, in addition to a slate ballot, could result in a withhold recommendation include: the participation of insiders on key committees, the lack of a separate nominating or compensation committee, a disconnect between pay and performance, disclosure concerns, or a board or key committee that has less than a majority of independent members. The policy, however, will not apply to contested director elections. Compelling reasons against the application of the policy are also provided, including a company's recent graduation to the TSX or a commitment to replace slate elections with individual director elections within a year. Meanwhile, RiskMetrics also stated that under "extraordinary circumstances", it may recommend a vote against or withhold in certain cases, including material failures of governance or certain egregious actions related to the director's service on other boards.
Respecting executive compensation, RiskMetrics will now recommend that management proposals for an advisory shareholder vote on compensation (say-on-pay) be considered on a case-by-case basis. RiskMetrics provides general principles regarding pay-for-performance and provides a list of factors to be considered in determining how to vote on managements' say-on-pay proposals. Such factors include: the evaluation of peer group benchmarking, an assessment of compensation components, the clarity of disclosure and the mix of fixed versus variable pay.Continue Reading...
TSX publishes proposals regarding security holder approval requirements and exemptions for investment fund acquisitions
On November 13, the TSX published for comment proposed changes to Part VI of its Company Manual proposing specific requirements and exemptions with respect to security holder approval in the case of investment fund acquisitions. These proposed amendments relate to the impact on investment fund acquisitions of recent changes to the TSX Company Manual requiring approval of security holders of an aquiror for the issuance of securities as consideration for an acquisition where the number of securities exceeds 25% of the issued and outstanding securities of the aquiror. The proposed amendments would exempt investment funds from this requirement provided certain conditions were satisfied. The proposed amendments would also require security holder approval by investment funds that are the subject of an acquisition unless certain conditions are satisfied.Continue Reading...
Stikeman Elliott has recently published the 2010 edition of the Income Trust Conversion Guide. From taxation and securities law to employment and corporate governance matters, this concise publication identifies key legal issues that an income trust will need to consider as it embarks on the process of converting to corporate form.
The Canadian Securities Administrators (CSA) published a status report today on the proposed changes to the corporate governance regime published in December 2008. Citing the numerous comments received questioning the timing of the proposed changes, the CSA have stated that it does not intend to implement the proposals as originally published and that it is reconsidering whether to recommend any changes to the corporate governance regime. Thus, any further proposals that the CSA may publish for comment would not be effective until the 2011 proxy season at the earliest.
On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."
On November 3rd, the International Organization of Securities Commissions (IOSCO) announced the publication of a consultation report regarding conflicts of interest within private equity firms. An IOSCO report on private equity risks of May 2008 recommended further work on the subject, leading to the immediate report.
Specifically, the report examines the potential conflicts of interest that may exist within a private equity firm or fund and proposes a number of principles to mitigate such risks. The principles discussed include establishing written policies to identify and mitigate conflicts of interest, the need to implement a process for investor consultation relating to such conflicts and ensuring the clarity of investor disclosure. IOSCO is accepting public comment on the report until February 1, 2010.
RiskMetrics Group announced yesterday that it has released for comment until November 11, 2009 its 2010 draft proxy voting policies. The comment period is part of RiskMetrics' annual policy development process and "offers institutional investors, corporate issuers, and industry constituents the opportunity to provide feedback on RiskMetrics' draft policies." Topics covered include director independence and elections, pay for performance and takeover defences. Specific to Canada, RiskMetrics published a policy respecting slate ballots, a process for elections that RiskMetrics described as "depriving shareholders of the opportunity to express approval or disapproval for individual directors." As described in our post of August 18, RiskMetrics criticized slate ballots in an open letter to TSX companies back in July.
The proposed policy would recommend a withhold vote for slate directors where RiskMetrics has identified: "(i) additional corporate governance practices that fall short of best practice for the Canadian market; or (ii) concerns about compensation practices and the alignment of pay with performance." According to RiskMetrics, the proposed policy "is expected to promote best practice in director elections in the Canadian market which alights with best practice in other markets."
The Canadian Coalition for Good Governance (CCGG) has recently released a model "say on pay" policy intended to provide guidance to boards of directors on the issue of executive compensation. While the CCGG acknowledges that companies will customize the model policy, it "urges companies to use the recommended form of resolution as closely as possible so that there is consistency among issuers." Specifically, the policy considers: (i) how to engage shareholders on the issue; (ii) the nature of compensation disclosure to shareholders; (iii) the purpose of an advisory vote on executive compensation; (iv) the form of the resolution to be contained in the management information circular; (v) how to respond to the results of the advisory vote; and (vi) the regular review of the policy. The CCGG is inviting comments on the model policy until November 25, 2009.
Canada's largest financial services companies, meanwhile, appear to be moving forward voluntarily on the issue. The Globe and Mail is reporting today that nine banks and insurers have agreed to allow shareholders to vote on the same "say on pay" resolution across all participating firms "in an effort to simplify the voting process for shareholders."
The Canadian Securities Administrators (CSA) published a notice today regarding proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions, its companion policy and National Instrument 33-109 Registration Information. The proposed changes relate to the impending transition to IFRS and follow proposals respecting IFRS-related changes to investment fund disclosure and prospectus and registration exemptions published last week. Specifically, the immediate amendments include replacing existing Canadian GAAP terms and phrases with IFRS terms, providing registered dealers and investment fund managers a 15-day extension for delivery of their first IFRS interim financial information for an interim period beginning on or after January 1, 2011 and providing registrants with an exemption from the requirement to provide comparative information for financial years beginning in 2011. The CSA are accepting comments on the proposals until January 21, 2010.
The U.K. Financial Services Authority (FSA) released a discussion paper today titled "A regulatory response to the global banking crisis: systemically important banks and assessing the cumulative impact". The paper focuses on two major issues: (i) the "dangers" posed by systemically important banks that are considered too big or interconnected to fail, or too big to rescue; and (ii) how the cumulative impact of various capital and liquidity regime changes should be assessed. U.K. and international policy developments are considered and of particular note, the migration of OTC derivatives to central counterparty clearing is cited as a risk-reducing policy initiative.
Responses to the discussion paper are being accepted until February 1, 2010.
The Financial Post recently published an article that considered the upcoming transition to IFRS and the decision for small businesses on whether to adopt the new standard. Simon Romano, a partner in Stikeman Elliott's Toronto office, was quoted in describing the potential benefits to small businesses electing to make the transition.
The Senior Supervisors Group, consisting of financial supervisors from nine different countries, including the U.S. Securities and Exchange Commission and the Office of the Superintendent of Financial Institutions (Canada), issued a report today (October 21) titled "Risk Management Lessons from the Global Banking Crisis of 2008". The report identifies deficiencies in the "governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008." The weaknesses identified in the report include the failure of some boards and managers to establish and adhere to acceptable levels of risk, as well as compensation programs that "conflicted with the control objectives of the firm". Despite recent progress in improving risk management practices at financial firms, the report concludes that weaknesses remain that still need to be addressed.
On October 2, the U.S. Securities and Exchange Commission (SEC) announced the upcoming expiration of the exemption from section 404 of the Sarbanes-Oxley Act currently enjoyed by public companies with a public float below $75 million. Section 404 of SOX requires public companies and their independent auditors to report on the effectiveness of internal controls. The extension for small public companies is scheduled to expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. The exemption had been set to expire for fiscal years ending on or after December 15, 2009, but was extended due to the recent publication of a study by the SEC's Office of Economic Analysis regarding whether post-2007 reforms were having the intended effect of "facilitating more cost-effective internal controls evaluations and audits." The study found a "significant reduction" in compliance costs following the 2007 reforms.
Certification of effectiveness of internal control over financial reporting is also required in Canada under NI 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings. In contrast to the U.S., however, NI 52-109 does not require auditor attestation and permits "venture issuers" to omit certain certifications relating to internal controls over financial reporting and disclosure controls and procedures.
At the recent Pittsburgh summit, leaders of the G-20 met to, according to the leaders' statement, "turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy." The leaders' statement released on September 25 specifically discussed strengthening the international financial regulatory system by reforming compensation policies and practices and improving over-the-counter derivatives markets.
With respect to executive compensation, the G-20 endorsed the implementation standards of the newly-created Financial Stability Board respecting compensation, including: (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation be deferred, tied to performance and tied to appropriate clawbacks; (iii) ensuring that compensation for those having a material impact on the firm's risk exposure align with performance and risk; (iv) making compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenue when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently. The Financial Stability Board is expected to complete a review of actions taken by national authorities to implement its compensation principles by March 2010. A progress report discussing actions taken and to be taken in the future was also released.
TSX Manual amended to require shareholder approval for changes to security-based compensation arrangements
The Toronto Stock Exchange (TSX) announced today that it has adopted and the Ontario Securities Commission (OSC) has approved amendments to the TSX Company Manual respecting, among other things, shareholder approval of changes to security-based compensation plans. Proposed amendments were originally published for comment on January 26, 2007. Those proposed amendments have been approved and adopted as of September 18, 2009 with only non-material changes having been made (in response to comments provided by the public and the OSC) to the original proposals.
Specifically, with respect to security-based compensation arrangements (such as stock option plans), the amendments clarify the circumstances in which shareholder approval will be required when such arrangements are amended (notwithstanding that a plan may contain provisions allowing the board to make changes without approval). These circumstances include changes that: (i) reduce the exercise price or extend the term of options held by insiders; (ii) remove or exceed the insider participation limit; (iii) increase the fixed maximum number or percentage of securities issuable pursuant to a plan; or (iv) change the amendment provisions of a plan. The amendments also clarify that with respect to an amendment to reduce the price or extend the term of options held by insiders or to remove or exceed the insider participation limit, votes held directly or indirectly by insiders benefiting from the amendment must be excluded. With respect to the remaining prescribed types of amendments, votes held directly or indirectly by insiders entitled to receive a benefit under the plan must only be excluded if the plan is not subject to an insider participation limit. The term extension restrictions, in particular, could create issues for companies that, as part of a package, wish to allow a departing officer a longer period of time in which to exercise stock options than the often short standard period provided for in plans, and may suggest that plan amendments in this regard may be desirable.
Section 602(g) of the TSX Company Manual, meanwhile, was also amended to add "acquisitions" (under section 611) to those circumstances under which the TSX will not apply its standards where at least 75% of trading occurs on another exchange.
The amendments become effective today, September 18, 2009.
The New York Stock Exchange announced earlier this month that it is forming an independent advisory commission to "take a comprehensive look at strengthening U.S. best practices for corporate governance and the proxy process." While committee members have yet to be announced, the NYSE stated in its release that the commission will work with policymakers and interested constituents "to foster a comprehensive and constructive approach" to corporate governance and proxy reform.
In an open letter to TSX-listed companies released in July, RiskMetrics Group criticizes the slate ballot system for director elections and warns listed companies that beginning in 2010, "a vote recommendation to withhold from the entire slate of directors may be issued solely on the basis of the bundled election format." According to the letter, "[s]late ballots tend to insulate specific director nominees from focused shareholder action and work against director accountability." Further, RiskMetrics states that such elections "prevent institutional shareholders from effectively implementing corporate governance policies" through proxy votes.
While it does not appear from the letter that RiskMetrics has officially formalized a policy recommending that votes for slates be withheld as a general rule, it has made it clear that it is taking a definite step in that direction. The letter, thus, recommends that companies review their proxy for 2010 shareholder meetings and urges that they "present director election resolutions individually".
The Canadian Coalition for Good Governance publishes Say on Pay and Board Engagement Policies and intends to commence annual meetings with public companies as part of its engagement on say on pay
The Shareholder Engagement and Say on Pay Policy is meant to provide guidance on the say on pay advisory vote process. The policy states that the CCGG regards the say on pay shareholder advisory resolution as an important part of an ongoing integrated engagement process between shareholders and boards that gives shareholders an opportunity to directly express their satisfaction with the prior year's compensation plans and actual awards. The CCGG therefore recommends that boards follow the "best practice" of voluntarily adopting an advisory (i.e. non-binding) say on pay shareholder resolution.
The Board Engagement Policy states that the CCGG, on behalf of its members, will be meeting with chairs of boards and of compensation committees of a number of Canadian public companies each year to foster discussion on a number of issues, including compensation practices and board performance. These meeting are also intended to create a forum for discussion between boards and their shareholders with a view to better understanding compensation strategy and to provide CCGG members with information to assist them in making investment decisions and in voting at the company's next annual meeting. In 2009-10 the CCGG intends to meet with approximately 25 companies to be chosen based on criteria set out in the Board Engagement Policy. Those chosen will be notified by a letter from the CCGG requesting a meeting. Following each meeting, CCGG staff will prepare a written summary of the results of the meeting for the benefit of CCGG members.
On July 31, the U.S. House of Representatives approved the "Corporate and Financial Institution Compensation Fairness Act of 2009", which deals with say-on-pay and compensation committee independence. The final version of the bill incorporates amendments subsequent to its approval by the House Financial Services Committee, with the final version clarifying that the section regarding enhanced compensation structure reporting to reduce "perverse incentives" shall not apply to covered financial institutions with assets of less than $1 billion. Whether the proposed legislation makes it through the Senate remains to be seen.
The U.S. House Financial Services Committee announced yesterday that it has approved legislation dealing with say-on-pay and compensation committee independence. While the legislation is similar to the proposals released earlier this month by the Department of the Treasury, the House legislation also includes a provision that would allow regulators to prescribe regulations that prohibit compensation structures that regulators determine encourage "inappropriate risks" by financial institutions that "could threaten the safety and soundness of covered financial institutions" or have "serious adverse effects on economic conditions or financial stability." It is expected that the House of Representatives will consider the bill on Friday.
U.S. Treasury Department releases proposed legislation dealing with say-on-pay and compensation committee independence
On July 16, 2009, the U.S. Department of the Treasury released draft legislation that includes proposed amendments relating to "say-on-pay" in the form of a required non-binding shareholder vote on compensation as well as proposals relating to the authority and composition of an issuer’s compensation committee.
With respect to “say-on-pay”, the draft legislation would require any proxy, consent or authorization for an annual meeting of shareholders (or special meeting in lieu thereof) to provide for a separate non-binding shareholder vote to approve the compensation of executives. In addition to including such a non-binding shareholder vote relating to annual compensation disclosure, the draft legislation would also require that a similar vote be provided to shareholders in any proxy or consent solicitation material for a meeting or special meeting of shareholders that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all of the assets of an issuer. In such circumstances, the person making the solicitation would be required to disclose any agreements or understanding that such person has with executive officers concerning any type of compensation that is based on, or otherwise relates to, the proposed transaction as well as the aggregate total of all such compensation that may be paid or become payable to, or on behalf of, such executive officer. The disclosure is to be set out in further regulations to be promulgated by the Securities and Exchange Commission and the SEC has been given one year to issue such further regulations or other rules that may be required.Continue Reading...
The Canadian Coalition for Good Governance (CCGG) today released Building High Performance Boards, a draft set of twelve guidelines for public boards to follow. The guidelines are categorized under four general qualities of "high performance boards", being that they: represent their shareholders; have experienced, knowledgeable and effective directors and committees; have clear roles and responsibilities and engage their shareholders. The CCGG is accepting comments on the draft guidelines until July 31, 2009.
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The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.
On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."
The Canadian Coalition for Good Governance recently released its 2009 Executive Compensation Principles, representing the CCGG's "most recent thinking" on the topic of compensation. The document considers specific principles, which are intended to "guide boards and help encourage compensation decisions that are aligned with long-term company and shareholder success".
On May 20, the Securities and Exchange Commission proposed rule amendments "that would provide shareholders with a meaningful ability to...nominate the directors of the companies that they own." Under the proposals, shareholders that meet certain thresholds (including holding between 1% and 5% of the voting securities, depending on the circumstances) would be eligible to have their nominee included in proxy materials. The proposed amendments would also allow for shareholder proposals in proxy materials regarding a company's nomination procedures under certain circumstances.
Public comment on the proposed amendments will be accepted for 60 days after their publication.
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.
Canadian Securities Administrators propose overhaul of corporate governance “best practices” and disclosure requirements and revisit how Canadian public companies assess director independence
On December 19, 2008 the Canadian Securities Administrators (the CSA) published a notice (the Notice) of the proposed repeal and replacement of National Policy 58-201 Corporate Governance Guidelines (the Governance Policy), National Instrument 58-101 Disclosure of Corporate Governance Practices (the Governance Rule) and National Instrument 52-110 Audit Committees (the Audit Committee Rule).
Under the proposed repeal and replacement, the governance “best practices” currently set out in the Governance Policy are to be replaced with nine principles of governance. Consequently, the disclosure to be provided under the Governance Rule would be replaced with more general and broad-based disclosure relating to these nine governance principles. The CSA also propose amending the Audit Committee Rule by replacing the bright-line tests for determining independence with a new principles-based definition of independence, arguably providing more discretion to the board of directors in determining independence.Continue Reading...
CSA publish proposed new corporate governance materials including proposed new approach to determination of independence
As originally promised at the time of implementing the current Canadian corporate governance rule and policy, and following their review of governance requirements and practices, the CSA have now released a Request for Comment with respect to National Policy 58-201 Corporate Governance Principles, NI 58-101 Disclosure of Corporate Governance Practices and NI 52-110 and Companion Policy 52-110CP Audit Committees.
The proposed materials introduce changes in three main areas of the current corporate governance regime. First, the proposed NP 58-201 is intended to be more principles-based and broader in scope than the existing policy. Second, disclosure requirements found in the current version of NI 58-101 are to be replaced with more general requirements. Finally, a more principles-based approach will replace the current prescriptive approach to independence in the existing NI 52-110.
The CSA state that the proposed materials are intended to "enhance the standard of governance and confidence in the Canadian capital markets" and has requested public comments until April 20, 2009.
Earlier this week, the risk management and financial research company RiskMetrics Group (formerly Institutional Shareholder Services or "ISS"), published its voting policies for the 2009 proxy season. According to RiskMetrics Group, the policies are based on a broad consultative process, which included analysing corporate governance issues and soliciting investor input on identified issues through international surveys. The three main areas of focus of the published policies are executive compensation, board structure and audit practices. Of particular interest, RiskMetric’s Canadian policy update states that while it has previously taken a case-by-case approach to shareholder “say-on-pay” proposals, it will now generally recommend an advisory vote for shareholders on pay. The new policies will be effective for shareholder meetings held on or after February 1, 2009.
Monday saw the launch of a non-profit, investor-rights organization known as the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada). Established with the support of IIROC, the Foundation "will seek to advance the interests of investors and the integrity and fairness of Canadian capital markets" by making policy submissions to regulators and other relevant bodies, identifying emerging issues affecting investors and identifying conduct by "market persons" that may be detrimental to investors.
Stikeman Elliott has published the Income Trust Conversion Guide, which carefully reviews the options open to Canada's income trusts, with special attention to the federal government's proposed Specified Investment Flow-Through (SIFT) rules, which may facilitate tax-free conversion and acquisitions.
Please note - The 2010 edition has now been published. Download a copy here.
The US SEC recently approved a rule change to amend NASDAQ's definition of "independent director". Previous to the change, NASDAQ Rule 4200(a)(15)(B) generally provided that a director who accepted or had a family member who accepted any compensation from the company in excess of $100,000 during a period of 12 months within the previous three years may not have been deemed an independent director. The approved change to the Rule raises this threshold to $120,000.
On July 14, 2008 the Minister of Finance released draft legislative proposals that implement certain measures from the 2008 federal Budget together with certain previously announced tax changes, including certain proposals to amend the rules relating to specified investment flow-through (SIFT) trusts and partnerships that were announced in December 2007.
In addition, the proposals contain the rules for allowing a SIFT trust to convert into a publicly traded corporation without adverse consequences for the trust or its unitholders. The SIFT conversion rules generally allow the unitholders of a SIFT trust to transfer their units of the trust to a corporation in exchange for shares of the corporation on a tax deferred basis. While such a transfer is possible under the current rules in the Income Tax Act, the new rules allow this tax deferred transfer to be effected without the need for a joint election to be filed by the unitholder and the corporation. In addition, the new rules will allow the trust and its subsidiary trusts to be subsequently wound up into the corporation without adverse tax consequences and will permit the flow-through of certain tax attributes of the trust and its subsidiary trusts to the corporation. Alternatively, a SIFT trust (or a subsidiary trust of a SIFT trust) whose only asset is shares of a taxable Canadian corporation may wind-up and distribute the shares of the corporation to its beneficiaries on a tax deferred basis.
The SIFT conversion rules will apply to conversions that are effected after July 14, 2008 and before 2013 and, on election, may also apply to conversions occurring after December 20, 2007 and prior to July 14, 2008.
Update: See our recent post regarding our Income Trust Conversion Guide.
CSA Staff Notice 52-322 - Status of Proposed Repeal and Replacement of Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings
The purpose of this staff notice is to provide the following update on the status of the proposed repeal and replacement of Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (the “Certification Rule”):
- based on comments received in response to the proposed repeal and replacement the CSA do not anticipate making any material amendments to the materials as proposed; and
- the restated Certification Rule is expected to come into force, as earlier indicated, on December 15, 2008.
The CSA have only issued this status notice at this time, indicating that the final restatement of the proposed Certification Rule is to follow. If the Certification Rule is revised as was proposed in April 2008, issuers will be required to add, among other things, certifications regarding the following matters to their existing certificates: (i) the design of internal control over financial reporting (ICFR) to a reasonable assurance standard, (ii) the control framework used to design the ICFR and (iii) any material weaknesses relating to design.
CSA Staff Notice 52-321 is an update to CSA Concept Paper 52-402 published in February 2008 and sets out conclusions that the CSA staff have reached on the following issues (which represent some but not all issues raised in the concept paper):
- Early adoption of IFRS: Staff are prepared to recommend exemptive relief for issuers wanting to transition to IFRS before January 1, 2011. However, if a domestic issuer has previously filed financial statements prepared in accordance with Canadian GAAP or US GAAP for interim periods in the first year that the issuer proposes to adopt IFRS the staff will recommend that the issuer file revised interim financial statements prepared in accordance with IFRS-IASB, revised interim management discussion and analysis, and new interim certificates.
- Staff are proposing to retain the exemption in NI 52-107 for a domestic issuer that is also an SEC issuer to continue to use US GAAP.
- Staff are proposing to retain references to IFRS-IASB (instead of referring to post 2011 principles as Canadian GAAP), however, issues relating to the availability of an appropriate French translation of IFRS and reference to both IFRS-IASB and Canadian GAAP are continuing to be considered.
The Canadian Securities Administrators (CSA) published Concept Paper 52-402 (Concept Paper) on February 15, 2008 to discuss ramifications for securities rules as a result of the impending transition from Canadian GAAP to International Financial Reporting Standards (IFRS, as issued by the International Accounting Standards Board (IASB)). As the Canadian Accounting Standards Board (AcSB) has adopted a transition plan to move to IFRS for years beginning on or after January 1, 2011, the CSA must now consider implications of this move on securities laws and regulations. Continue Reading...
Venture issuers get some early relief as Canadian Securities Administrators (CSA) work towards a final proposal to incorporate certifications as to effectiveness of internal controls.
Multilateral Instrument 52-109 Certification of Disclosure of Issuer's Annual and Interim Filings (Certification Rule) finds itself again subject to a further amendment proposal. As of the first year-end following June 30, 2006, most issuers have been required to file full interim and annual certificates. These certificates have required the CFO and CEO to provide certifications with respect to:
- annual filings (which means the AIF, annual financial statements and annual MD&A, and anything incorporated by reference into the AIF);
- the establishment, maintenance and design of disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR);
- evaluation of effectiveness of DCP; and
- disclosure of conclusions regarding effectiveness of DCP and any changes in ICFR in the MD&A.
NI 81-107 aims at improving fund governance by requiring investment funds to establish Independent Review Committees.
The Canadian Securities Administrators (CSA) have finalised NI 81-107 - Independent Review Committee (IRC) for Investment Funds (the Instrument), the first proposed version of which was released in January 2004. It was revised and subsequently republished for comment in May, 2005. Although this final version of the Instrument does not differ substantively from the May 2005 version, which was reported in our Funds Update of August 2005, it does address and clarify several issues that emerged during the comment period.Continue Reading...
Canadian Securities Regulators Abandon Proposal to Implement Separate Internal Control Certification Rule
The Canadian Securities Administrators (the CSA) recently announced that, after a protracted comment and review period, they will not continue with plans to implement proposed Multilateral Instrument 52-111 - Reporting on Internal Control over Financial Reporting, the Canadian equivalent of s. 404 of the U.S. Sarbanes Oxley Act. Instead, the CSA are proposing to expand existing Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109 or the Existing Certification Rule). This represents an important departure from the CSA's previously stated intentions and includes, among other significant changes, the decision to abandon mandated auditor attestation of an issuer's internal controls over financial reporting.
Pursuant to CSA Notice 52-313, the CSA intend to expand the Existing Certification Rule by requiring the CEO and CFO of a reporting issuer, or persons performing similar functions, to certify in their annual certificates that, as of the end of the financial year, they have:
evaluated the effectiveness of the issuer's internal control over financial reporting; and
caused the issuer to disclose in its annual MD&A their conclusions about the effectiveness of internal control over financial reporting.