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

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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."

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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. 

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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.

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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.

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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.

Download a copy here.

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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.

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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."

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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.

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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." 

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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."

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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.

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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.

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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.

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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.

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RiskMetrics Group has published its 2009 Postseason Report, which reviews the issues and trends of the 2009 proxy season, including proxy access, broker voting and executive compensation. While the report focuses more on the U.S. environment, Canadian issues are considered.

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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.

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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.

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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.

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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.

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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".

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The Canadian Coalition for Good Governance (CCGG) recently published new policies relating to Shareholder Engagement and "Say on Pay" and Board Engagement.

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.

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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.

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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.

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Ramandeep Grewal

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. 

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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 Bundestag, Germany's lower house of parliament, has passed a law restricting executive compensation.  According to Bloomberg, the measures go beyond U.S. and British proposals on the subject.

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Secretary Geithner Photo Courtesy of www.treasury.gov

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."

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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".

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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.

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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.

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Canadian Securities Administrators propose overhaul of corporate governance “best practices” and disclosure requirements and revisit how Canadian public companies assess director independence

Adam J. Kline and Ramandeep Grewal |  PDF Version | Version française

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. 

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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.

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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.

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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.

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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.

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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.

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John Lorito, Simon Romano, Jeffrey Singer and Joel Binder | Version française

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.

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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.  

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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.

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Simon Romano and Ramandeep Grewal | Version française

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...

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Simon Romano and Ramandeep Grewal | Version française

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.

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NI 81-107 aims at improving fund governance by requiring investment funds to establish Independent Review Committees.

Jennifer Northcote, Kathleen Ward and Simon Romano

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.

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Expanded internal control certification requirements to be added to existing Multilateral Instrument 52-109
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.

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Over the past few years, Canadian reporting issuers have been required to comply with gradually increasing disclosure requirements, changing their policies and practices along the way. As a result of securities law requirements enacted or amended in the summer of 2005, filings required to be made for the year ended December 31, 2005 are also subject to new disclosure requirements. These include: additional certifications in CEO and CFO certificates, along with corresponding disclosure in annual MD&A, as well as new disclosure relating to corporate governance practices in management information circulars and annual information forms.
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