A closer look at Orange Capital's unconventional tender offer for units of Partners REIT

Adam Kline and Alex Colangelo - 

On May 28, Orange Capital announced that it was launching a tender offer at a premium to market to purchase up to 10% of the outstanding units of Partners REIT. While it did not constitute a takeover bid, the tender offer was structured similar to a takeover bid, asking for willing shareholders to tender their securities to be potentially purchased by Orange Capital in accordance with the terms of the offer. Notably, the tender offer required that depositing unitholders be holders of record as of the record date in respect of the 2014 annual general meeting and appoint Orange Capital as their nominee and proxy for all deposited units in respect of the AGM.

In the event that more than the maximum number of units were delivered in accordance with the tender, the units purchased from each depositing unitholder were to be determined on a pro rata basis according to the number of units delivered by each unitholder. Orange Capital pledged to vote all proxies solicited in favour of a new slate of independent trustees to be nominated by Orange at the AGM.

Lead up to Tender Offer

On May 1, Orange Capital issued a press release identifying a number of concerns in regards to recent transactions and announcements by Partners. Specifically, Orange Capital stated that Partners’ purchase of retail centres from Holyrood Holdings, first announced in December 2013, was a related party transaction that prejudiced the interests of minority unitholders. Orange Capital also made a financing proposal whereby it offered to purchase $15 million of convertible securities, subject to the appointment of three new trustees, including one Orange Capital nominee.

Pursuant to an investigation of Orange Capital’s concerns, Partners’ board announced on May 4 that it had received material new information suggesting that the REIT’s CEO and the owner of Holyrood should be considered as acting together, and that it had thus asked Holyrood to unwind the transaction. Partners’ CEO also resigned, and the REIT ultimately announced the rescission of the transaction on June 6.

Meanwhile, on May 6, Partners announced that it had initiated a strategic review process to consider strategic alternatives to maximize value for unitholders.

The Tender Offer

Orange Capital’s tender offer was made to purchase up to 10% of the outstanding units of Partners (prior to the closing of the purchase of Holyrood deal), represented a 7.1% premium to the closing price of the units on the previous trading day and a 15% premium over the volume-weighted average trading price over the previous 30 trading days. As stated above, in order for units to be eligible for take up and payment, depositing unitholders were required to be holders of record as of the record date and appoint Orange Capital as nominee and proxy for Partners’ upcoming AGM.

Notably, pursuant to the offer, a tendering unitholder would be required to appoint Orange Capital as the unitholder’s nominee and proxy for all deposited units, regardless of the number of deposited units actually taken up and paid for under the tender. According to Orange Capital, all proxies would be voted in favour of a new slate of independent trustees to be nominated by Orange at the upcoming AGM. Orange Capital cited issues with Partners’ performance and governance, notably in respect of the Holyrood transaction, as reasons for initiating the tender offer.

The Fallout

On June 6, Partners announced that it had filed a complaint with the Ontario Securities Commission regarding Orange Capital’s “highly coercive offer”. In outlining its complaint to the OSC, Partners emphasized a number of concerns, stating that, among other things:

  1. Orange Capital did not make “any real offer”, as the offer could be withdrawn, varied or extended by Orange Capital for any reason at any time. Partners thus characterized the offer as a “free option” for Orange Capital to acquire the units that were deposited;
     
  2. the tender offer would transfer control of the REIT to Orange Capital (characterized as a small minority unitholder) for no compensation, as the offer allowed Orange Capital to acquire all of the voting rights of unitholders who tendered under the offer, even if it only purchased 10% (or less) of Partners’ units. The REIT characterized Orange Capital’s ability to secure proxy control without taking up or paying for all of the units tendered as a “bait and switch” tactic;
     
  3. even if Orange Capital elected to purchase units, unitholders would likely face “massive pro-ration”, as unitholders would only be able to sell 10% of their tendered units, but Orange Capital would be able to vote 100% of the tendered units; and
     
  4. Orange Capital was not filing a proxy circular and had not provided information regarding a proposed slate of nominees.

Pursuant to the REIT’s complaint to the OSC, Orange Capital and the regulator engaged in discussions that ultimately led to a further explanatory release being issued by Orange Capital. Among other things, Orange Capital clarified that:

  1. in the event that greater than 10% of the number of outstanding units of Partners were tendered and the conditions of the offer were otherwise met, Orange Capital would not be able to take up less than the full 10% of the units;
     
  2. if the tender offer was withdrawn by Orange Capital, all units would be immediately returned to unitholders and all associated proxies would be deemed to be revoked;
     
  3. deposited units could be withdrawn by unitholders from the tender offer at any time prior to take-up by Orange Capital. In such a case, all associated proxies would be deemed to be revoked; and
     
  4. any proxies solicited by Orange Capital, other than those in respect of units taken up and paid for, could be revoked at any time by unitholders.

Orange Capital also extended its offer to ensure that its proxy circular would be disseminated and received by unitholders in advance of the expiry of its offer and further released a list of board nominees in advance of the unitholder meeting scheduled for July 15.

As we will discuss in our second post on the subject, Partners REIT subsequently applied to the Ontario Superior Court of Justice for a declaration that Orange Capital had breached the REIT’s advance notice policy. While Orange Capital was successful in court, it later withdrew its nominees from consideration for election to the board, while leaving the tender offer open.

At the expiry of Orange Capital’s tender offer, however, the 10% minimum tender condition had not been satisfied. As such, Orange Capital announced that it would not be taking up any of the REIT’s units and that all tendered units would be returned to tendering unitholders.

Conclusion

Orange Capital employed a relatively unorthodox means of attempting to acquire control of a company, and it is unclear whether others will follow in attempting to gain control of an issuer by offering a premium for shares or units rather than simply soliciting proxies. Prior to its offer, Orange Capital held only a nominal number of Partners’ units and, thus, had no preexisting economic interest in the REIT.

Regardless of whether Orange Capital would have succeeded in this case, acceptance by the OSC of its methods pursuant to the above mentioned clarifications demonstrates the importance of full disclosure.

This article is the first of a two-part series on the recent Orange Capital Tender offer for Partners REIT units

SEC releases guidance in respect of proxy advisory firms

On June 30, the U.S. Securities and Exchange Commission released a staff legal bulletin intended to provide guidance for investment advisers that retain proxy advisory firms to assist with proxy voting duties.

According to the guidance, the SEC expects that investment advisers retaining a proxy advisory firm will adopt policies and procedures designed to provide sufficient ongoing oversight of the proxy advisory firm in order to ensure that proxies continue to be voted in the best interests of clients. Investment advisers should also establish and implement measures to identify and address a proxy advisory firm's conflicts that can arise on an ongoing basis.

As we discussed earlier this year, the Canadian Securities Administrators published a national policy in April setting out proposed recommendations for proxy advisory firms in relation to their activities and the services provided to their clients. The comment period on the proposal has been extended to July 23.

Comment period extended on proposed proxy advisory firm guidance

The CSA have extended the comment period in respect of their proposed proxy advisory firm guidance published in April. As we previously discussed, the proposed guidance sets out recommendations for proxy advisory firms in relation to their activities and the services they provide to their clients.

Comments are now being accepted until July 23. For more information, see CSA Staff Notice 11-327.

CSA proposed proxy advisory firm guidance

Martin Langlois and Donald G. Belovich -

On April 24, the Canadian Securities Administrators published for comment National Policy 25-201 Guidance for Proxy Advisory Firms (the Proposed Policy) setting out proposed recommendations for proxy advisory firms in relation to their activities and the services they provide to their clients. The recommendations are primarily designed to (i) promote transparency in the processes leading to a vote recommendation and the development of proxy guidelines and (ii) foster understanding among market participants about the activities of proxy advisory firms. The Proposed Policy recognizes that certain market participants have raised concerns about proxy advisory firms and the services they provide, including the potential for conflicts of interest and concerns in respect of proxy voting recommendations. While applicable to all such firms, the Proposed Policy is not intended to be prescriptive or exhaustive but rather should be considered by proxy advisory firms in developing and implementing their own practices.

As we previously discussed, the proposed guidance addresses comments received from stakeholders in response to the CSA’s Consultation Paper 25-401, published in June 2012, including comments in respect of inaccuracies in advisory reports, the inability of issuers to identify and correct such errors and the lack of consultation between proxy advisors and issuers. Specifically, the Proposed Policy addresses four main issues:

  1. Conflicts of interest: Under the Proposed Policy, proxy advisory firms are expected to, among other things, identify, mitigate and manage actual or potential conflicts of interest. In addition, they are also recommended to disclose to their clients any actual or potential conflicts of interest and to provide sufficient information so that the client may understand the nature of the conflict. Conflicts identified in the Proposed Policy include where:
    • a proxy advisory firm provides vote recommendations to an investor client on corporate governance matters of an issuer to which the proxy advisory firm provided consulting services;
    • an investor client of a proxy advisory firm submits a shareholder proposal to be put to a vote at a shareholders’ meeting that could be the subject of a favourable vote recommendation by the proxy advisory firm; and
    • a proxy advisory firm is owned, in whole or in part, by an investor client who invests in issuers in relation to which the proxy advisory firm is or has been mandated to make vote recommendations. 
  2. Transparency and accuracy of vote recommendations: In calling for greater transparency and accuracy in vote recommendations, the Proposed Policy provides that the CSA expect proxy advisory firms to ensure consistency in vote recommendations in accordance with their specific proxy voting guidelines, use up-to-date information in making such determinations, and prepare recommendations with the goal of reducing the risk of factual errors and inaccuracies. Proxy advisory firms may also consider disclosing their policies and procedures as well as internal safeguards and controls leading to vote recommendations.
     
  3. Development of proxy voting guidelines: The Proposed Policy expresses that it is good practice for proxy advisory firms to develop their proxy voting guidelines in a consultative and comprehensive manner, acknowledging that such guidelines have been seen to have an influence on issuers’ corporate governance practices. Among the considerations suggested for proxy advisory firms in the development of proxy voting guidelines are the local market or regulatory conditions and regular consultation with and consideration of the preferences and views of their clients, market participants and the public.
     
  4. Communications with clients, market participants, the media and the public: The CSA expect proxy advisory firms to communicate certain information with their clients, including, actual or potential conflicts of interest, identification of factual information versus information resulting from analytical models and assumptions and any known or potential limitations or conditions in the research and analysis used to prepare the recommendation. In addition, the CSA expect proxy advisory firms to correct any factual error or inaccuracy found in a report and to duly inform their clients in a timely manner. While the CSA leave it to the proxy advisory firm to determine whether to engage issuers, they do expect firms to publicly disclose their approach to contacting issuers.

More generally, and in connection with a number of the issues addressed above, proxy advisory firms are encouraged to have sufficient resources, knowledge and expertise, including hiring, training and retaining competent and skilled individuals with the necessary experience and competencies to perform their duties. In addition, proxy advisory firms will be expected to post or describe on their websites the nature of their policies and procedures, internal safeguards and controls, code of conduct and compliance program respecting conflicts of interest, vote recommendations and dialogue or contact with issuers.

The CSA are not alone in their proposal, citing other international publications and initiatives, including ones from the SEC, NYSE, European Commission (here and here) and ESMA (here and here), as generating a renewed focus on the activities of proxy advisory firms.

The CSA is accepting comments, including responses to a number of specific questions set out in the proposal, until June 23, 2014.

Ontario Court finds press release responding to dissident's allegations not a proxy solicitation

Kevin Smyth and Marshall Eidinger -

The Ontario Superior Court of Justice recently issued its decision in Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc. The decision deals with the interplay between the issuance of a press release by a company to address allegations levelled by a dissident shareholder and the proxy solicitation rules, which prohibit the solicitation of proxies without sending a proxy circular. The court affirmed that the existence of a proxy solicitation is a question of fact depending on the nature of the communication and the circumstances of the transmission. In the case at hand, the court concluded that the company did not violate the proxy solicitation rules as the “principal purpose” of the company’s press release was to provide certain explanations and defend its historical position, not to solicit proxies.

Background

In November 2013, Smoothwater Capital Partners (“Smoothwater”) commenced a proxy battle seeking to replace seven of nine incumbent board members and appoint three new directors in order to form a board of five directors of Equity Financial Holdings (“Equity” or the “Company”).

Smoothwater proceeded to requisition a shareholders’ meeting and issued a series of press releases reflecting its intention. Smoothwater’s press release dated December 5, 2013 contained a lengthy and detailed criticism of Equity’s corporate governance practices as well as its management and board of directors. Equity responded on December 10, 2013 with its own press release, criticizing Smoothwater’s motives and qualifications while defending the Company’s record and touting past successes. At this time, neither party had sent a proxy circular to Equity’s shareholders.

An application to the Court was filed by Smoothwater alleging a breach of the proxy solicitation rules by Equity. Smoothwater took the position that Equity’s press release of December 10, 2013 was “calculated to result in the procurement or withholding of a proxy” and therefore constituted a “solicitation” as defined in s. 147 of the Canada Business Corporations Act (the Act). As Equity had not sent shareholders a  management proxy circular in connection with the alleged solicitation, Smoothwater argued that Equity breached the provisions of s. 150 of the Act. Equity, on the other hand, argued that its press release was not a proxy solicitation but (i) disclosure intended to address inaccurate statements made by a dissident shareholder in its own press release and (ii) an attempt to keep its shareholders informed at a critical time.  

The Decision

The Court held that Equity’s press release was not a proxy solicitation and dismissed Smoothwater’s application. In coming to this conclusion, the Court accepted Smoothwater’s submission that “solicitation” is to be defined broadly and inclusively, and that the determination of the existence of a solicitation depends on the nature of the communication and the circumstances. However, the Court found that given the nature and circumstances of Equity's press release, it did not fall within this interpretation.

The Court also distinguished a number of prior decisions relied on by Smoothwater on the basis that the communications at issue in those decisions were all issued by shareholders and not the company, and in certain cases expressly referenced an intent to solicit proxies or involved the issuance of numerous press releases in contrast to the one press release in question issued by Equity.

The Court indicated that “it is inevitable that, when involved in a proxy fight, anything said by Equity could be characterized as a solicitation but the principal purpose of the document cannot be ignored.” Taking all of the factual circumstances into consideration, the Court found that the principal purpose of Equity’s press release was to defend, among other things, its history and leadership and take issue with Smoothwater’s track record given the criticisms levelled by Smoothwater, and that the press release stopped short of requesting proxies from shareholders.  The Court also noted the Equity press release must be looked at on its own, and does not constitute a solicitation by the mere fact that Smoothwater had commenced a solicitation.

While target companies engaged in a proxy contest may applaud this decision for providing greater leeway to fight back against dissident shareholders without breaching the proxy solicitation rules, it will be interesting to see if the ruling can be equally relied upon by dissidents for their own benefit.  

The proxy fight between Smoothwater and Equity remains ongoing. Equity’s annual and special meeting of security holders is currently scheduled for March 28, 2014.

Glass Lewis publishes 2014 proxy season guidelines

Paul Rakowski -

Proxy advisory firm Glass Lewis recently released its Proxy Paper Guidelines for the 2014 proxy season in Canada. These guidelines, which contain a number of updates to Glass Lewis’ proxy voting policies on director and executive compensation, shareholder rights and defences, and other similar governance matters, are applicable to all shareholder meetings to be held in the 2014 proxy season. The key updates to the proxy voting guidelines are summarized below.

Director and Executive Compensation

Pay-for-Performance Analysis

Glass Lewis’ previous pay-for-performance analysis was based on comparing a company’s pay and performance to a peer group of similarly-sized companies in the same sector. For the 2014 proxy season, Glass Lewis has developed a proprietary quantitative pay-for-performance model, which is intended to evaluate the link between the pay of the top five executives at Canadian companies against company performance. This model will benchmark these executives’ pay and company performance against peers across five performance metrics. Companies will then be given a letter grade of “A” to “F”, which will be used to evaluate compensation committee effectiveness. Glass Lewis may recommend voting against the compensation committee of companies with a pattern of receiving a failing grade of “F” under this pay-for-performance analysis. This analysis will also inform Glass Lewis’ decisions on say-on-pay proposals; if a company receives a failing grade on the pay-for-performance model, Glass Lewis will likely recommend that shareholders vote against the say-on-pay proposal. In this respect, Glass Lewis also continues its support for an annual say-one-pay vote as an effective mechanism for enhancing transparency in setting executive pay, improving accountability to shareholders and providing for a more effective link between pay and performance.

Clawback Provisions

Related to its focus on pay-for-performance, Glass Lewis now acknowledges that emerging best practice is to promote “clawback” or “malus” provisions which allow for some or all of an executive’s incentive compensation to be recouped or forfeited in certain circumstances, usually relating to a material misstatement of financial results and related conduct.  

Director Compensation

With respect to director compensation, Glass Lewis has also further bolstered its position that non-employee director option grants should not be tied to performance, explaining that it prefers instead a compensation structure that provides directors with the option of receiving some or all of their fees in deferred share units or common shares that are restricted until the director leaves the board.

Corporate Governance

Advance Notice Policies

Glass Lewis’ previous acceptable time frame for advance notice provisions was between 30 and 65 days. Glass Lewis will now generally recommend that shareholders vote for advance notice provisions that require a shareholder to provide notice of between 30 and 70 days prior to the date of the annual meeting. In cases where the notice period deviates from this time frame, Glass Lewis will consider recommending that shareholders vote against such resolutions. 

Majority Voting for Controlled Companies

Glass Lewis previously recommended that shareholders withhold votes from all members of a company’s governance committee for companies in the S&P/TSX composite index that elected to “explain” rather than adopt a majority voting policy. Glass Lewis has now changed its requirements to exempt controlled companies from adopting a majority voting policy (i.e. companies where a single individual or entity owns more than 50% of the voting shares). For companies that have adopted a majority voting policy, Glass Lewis will also now recommend that votes be withheld from the nominating committee chair when a director who did not receive support from a majority of voting shares in the previous election was allowed to remain on the board.

Term and Age Limits

Glass Lewis has also added a very robust discussion on the propriety of director age and term limits, explaining why it supports periodic director rotation to ensure a fresh perspective on the board as opposed to arbitrary term or age limits. However, if a term or age limit has been adopted, Glass Lewis will consider recommending shareholders withhold votes from the nominating and/or governance committees if the limit is waived, unless the rule was waived with a reasonable explanation, such as the consummation of a major corporate transaction.

Other Proxy Related Matters

On more technical issues, Glass Lewis also recommends that shareholders not give their proxy to management to vote on other business items that may properly come before the meeting as, in its view, granting such unfettered discretion is unwise and that it will recommend withholding votes against the governance committee chair when the board has failed to disclose detailed voting results from the previous annual meeting.

Integrity in Financial Reporting

Auditor Rotation

Glass Lewis will now typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years), particularly at companies with a history of accounting problems. Glass Lewis believes that auditor rotation within this timeframe ensures both the independence of the auditor and the integrity of the audit.

Five developments to follow in 2014 - Shareholder proposals and director election

Stéphane Rousseau and Benoît C. Dubord -

Shareholder proposals are a staple of annual shareholders meetings. In the U.S. and Canada, proposals are mainly made by labour-affiliated investors, individual activists, and social-, policy- or religious- oriented investors. They cover a wide range of topics from corporate governance to corporate social responsibility.

In 2013, in the U.S., the most common topics dealt with political contributions and lobbying, board declassification and independent chairs. In Canada, compensation issues, such as say-on-pay or limiting CEO compensation, consisted of more than half the proposals in 2013.

According to U.S. and Canadian corporate law, the board of directors manages the business and affairs of a corporation. Shareholder proposals can only be presented as recommendations. Thus, a board of directors is not legally compelled to implement a proposal that is approved by a majority of shareholders.

For the 2014 U.S. proxy season, however, ISS will apply a policy of potentially recommending that shareholders vote against directors where the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. The recommendations will be made on “a fact-specific case-by-case basis” and consider the following factors:

  • disclosed outreach efforts by the board to shareholders in the wake of the vote;
  • rationale provided in the proxy statement for the level of implementation;
  • the subject matter of the proposal;
  • the level of support for and opposition to the resolution in past meetings;
  • actions taken by the board in response to the majority vote and its engagement with shareholders; and
  • the continuation of the underlying issue as a voting item on the ballot

Similarly, in Canada, the 2014 proxy season will be the first where ISS applies its policy of recommending that shareholders withhold from continuing individual directors, committee members, or the continuing members of the entire board of directors if the board failed to act on a shareholder proposal that received majority support from shareholders. While the Canadian policy is not as detailed as in the U.S., ISS will apply it on a case-by-case basis. In doing so, it will give consideration to the board response and rationale.

With its updated policies on the subject, ISS seeks to strike a balance between the directors’ duties to act in the best interest of the company and their responsiveness to shareholders. It will be interesting to watch the influence of this new policy on director elections, if any, over the course of the coming proxy season.

This is the last in a series of five posts intended to consider securities regulatory developments to watch in 2014.

Five developments to follow in 2014 - Shareholder activism and engagement: what direction?

Stéphane Rousseau and Benoît C. Dubord -

According to a number of commentators, shareholder activism has become the new normal, with activist investors focusing on a broad range of issues, from governance to operations. Interventions have targeted, for example, board composition, executive compensation, dividend policy and proposed mergers. Activists typically employ a variety of tools to advance their goals, such as behind-the-scene diplomacy, letters to management or the board, proxy fights and shareholder proposals for board nomination. Further, shareholder activism is not a phenomenon confined to the U.S. Indeed, throughout 2013, activist investors have targeted Canadian corporations, benefiting from some of the unique features of corporate and securities law that facilitate their interventions.

Shareholder activism has translated into an increase in board-shareholder engagement initiatives over the last years. This trend shows no sign of abating in the current environment. Boards of directors of companies around the world are thus undertaking various initiatives to engage with shareholders. Engagement practices can take many forms, such as private meetings with the board of directors, letters to shareholders and online communications aimed at a large group of investors. Engagement with shareholders can improve mutual understanding while allowing companies to develop investor trust. Such engagement can also help companies to avoid unexpected shareholder contests.

Still, shareholder engagement does raise a number of challenges. Boards of directors must identify the shareholders with whom engagement will be meaningful. They must communicate a consistent message and avoid any misunderstandings. Engagement practices also take time and need to be undertaken by directors and officers with the relevant communications skills. Given these challenges, there remain a core number of directors who believe that the board “does not and should not” communicate directly with shareholders.

There is no reason to think that shareholder activism will dissipate in 2014. Certainly, pending regulatory reforms in Canada with respect to defensive tactics, early-warning disclosure and proxy-voting advisors will influence such activism. But, as this phenomenon matures, it will be interesting to watch the direction taken by activists, and the resulting response from companies including in terms of shareholder engagement, over the next year.

In a paper published in the Business Lawyer in 2010, Chancellor Leo Strine of the Delaware Chancery Court aptly summarized the two potential paths. On the one hand, corporate managers will be pushed “to be highly responsive to the immediate pressures and incentives of capital markets”. On the other hand, if activists shareholders do not “push an agenda that appropriately focuses on the long term, the responsiveness of managers to the incentives they face can result in business strategies that involve excessive risk and, perhaps most worrying, underinvestment in future growth”.

This is the fourth in a series of five posts intended to consider securities regulatory developments to watch in 2014. Watch for the remaining post over the course of the next week.

OSC holding roundtable discussion of proxy voting infrastructure

On January 29, the Ontario Securities Commission is hosting a roundtable discussion to consider issues regarding the integrity and reliability of proxy voting in Canada. As we discussed last year, the CSA published a consultation paper on the subject in August 2013, and topics to be considered later this month will include improving vote reconciliation and implementing end-to-end vote confirmation.

A look ahead to the 2014 proxy season

Stéphane Rousseau and Benoît C. Dubord -

Key Shareholder Proposals

The 2014 Proxy Season is quickly approaching. In 2013, U.S. trends have emerged with respect to the proposals filed by shareholders with S&P 500 and Russell 2000 corporations. Four main themes of interest stand out.

First, shareholder proposals have again been filed to implement proxy access. The proposals seek to allow a shareholder or a group of shareholders under certain conditions to have their own director candidates included in the proxy form. Such proxy access would be conditional on the shareholders holding a certain threshold of the corporation’s shares (e.g. 3%) for a certain period of time (e.g. 3 years).

Second, U.S. corporations continue to be targeted with majority voting proposals introduced for the stated purpose of improving shareholder democracy. While majority voting is becoming standard in large U.S. corporations, with 84% of S&P 500 corporations having now adopted such a policy, majority voting is not as prevalent among small and medium-sized public corporations.

Third, proposals seeking to eliminate staggered boards in favor of a system of annual election of directors have again attracted attention this year.

Finally, while the value of separating the roles of chair and CEO in the U.S. remains the subject of debate, a number of proposals on the subject have been received. The proposals tend to target financial institutions whose governance practices have been criticized in the wake of the financial crisis.

From a Canadian perspective, we note that some of those proposals have been addressed by new rules of the Toronto Stock Exchange. The TSX mandated the annual election of directors on an individual basis. Although true classified boards were not permissible under Canadian corporate law, directors can no longer be elected by slate or for terms of more than one year. Moreover, listed issuers must either adopt a majority voting policy or disclose in their annual proxy circular the reasons why they have not done so (comply or explain). And, where the listed issuer does not have a majority voting policy, it must notify the TSX where one director receives more withheld votes than votes in favour.

It is also worth emphasizing two differences between Canada and the U.S. in respect of shareholder democracy. The first is that Canadian corporate law already provides a form of proxy access through the shareholder proposal mechanism. However, shareholder proposals are seldom used to nominate candidates. Second, the separation of the roles of chairman and CEO is an accepted practice of governance with the majority of Canadian public corporations.

Say on Pay

In the U.S., 2013 marks the third year since Say-on-Pay became mandatory for public corporations. Even though the Dodd-Frank Act leaves the choice to shareholders to decide whether they opt for an annual, biennial or triennial advisory vote, the vast majority of public corporations (80% of companies in the Russell 3000 index) hold annual say-on-pay votes.

For the first half of 2013, the average support for say-on-pay proposals was 92%, up from 90% in 2012. Proxy voting advisory firm ISS continued to exercise an influence on say-on-pay results. ISS recommended voting against management compensation packages in 10% of the 473 recommendations issued hitherto, in contrast with 13.3% negative recommendations in last year’s proxy season. Where ISS issued a negative recommendation, half of the companies targeted received less than 70% support for their say-on-pay proposal. Although compensation assessments involve a number of quantitative and qualitative factors, pay for performance remains a central determinant of ISS recommendations.

For a pdf version of this post, see Legal Trends Fall 2013.

Delaware case provides guidance to directors in the context of a debt proxy put

Stéphane Rousseau and Benoît C. Dubord -

In Kallick v. Sandridge Energy, the Delaware Chancery Court addressed the duties of directors in the context of a proxy put contained in a notes indenture. A group of dissident shareholders of Sandridge had advised the board of directors of their willingness to launch a consent solicitation whereby shareholders would be asked to consent to de-stagger the board, and to support their slate of candidates to the board. The board argued that the proposed candidates were not as qualified as the incumbent directors to manage the company. The board also notified shareholders that following the proxy put, the election of the dissidents’ candidates would be a change of control triggering the obligation for the company to buyback the notes at 101% of par value. According to the board, the notes buyback would put financial stress on the company.  The proxy put provided that the buyback obligation was not triggered if the board approved the list of nominees. However, the board refused to take position.

The dissidents petitioned the Chancery Court for an injunction to force the board of directors to approve the list of nominees. They argued that the directors were effectively breaching their fiduciary duties by failing to do so. The directors replied by stating that their decision was protected by the “business judgment rule”.

Chancellor Strine qualified the change-of-control provision as a form of defensive measure. By doing so, the Chancellor remarked that “because of management’s special interest in retaining office, the independent directors of the board should police aspects of agreement like this, to ensure that the company itself is not offering up these terms lightly precisely because of their entrenchment utility”.

Most importantly, qualifying the change-of-control provision as a form of defensive measure meant that the board’s decision was subject to the enhanced scrutiny test formulated in the Unocal decision, and not the “business judgement rule”. With respect to the first prong of the Unocal test, Chancellor Strine remarked that the rival slate did not represent a material threat of harm to the corporation. In fact, the incumbent board had admitted that it had no basis to doubt the integrity or the basic qualifications of the dissident’s slate. With respect to the second prong of the Unocal test, the board’s decision not to approve the slate was not proportionate to the threat posed. Indeed, the board could neutralize the effect of the Proxy Put by approving the dissent’s nominees without endorsing the slate, thereby maintaining its ability to run its own campaign. To summarize, to comply with their duty of loyalty, the directors were required to approve the dissident’s slate.

To conclude, the Chancery Court enjoined the board of directors from: 1) soliciting any further consent revocations; 2) relying upon or otherwise giving effect to any consent revocations they have received to date; 3) impeding the consent solicitation in any way, unless the board approves the slate for purposes of the Proxy Put.

For a pdf version of this post, see Legal Trends Fall 2013.

Notice-and-access provisions effective this week

The Ontario Securities Commission confirmed today that it has received Ministerial approval of amendments to NI 54-101 that give reporting issuers and others the option to use "notice-and-access" for proxy-related materials. As we discussed last month, the amendments, which came into force on February 11, are intended to help simplify the shareholder communication process and reduce costs.

Implementing new Canadian "notice-and-access" rules for electronic posting of proxy and other materials

Ramandeep K. Grewal and Jonathan Moncrieff -

The Canadian Securities Administrators (CSA) recently published final amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) that give reporting issuers and others the option to use the “notice-and-access” method to post proxy-related materials on a website (in addition to SEDAR) instead of having to mail materials to registered holders (under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) and to beneficial owners (under NI 54-101). Under NI 51-102, notice-and-access may also be used to post annual financial statements and management discussion & analysis (MD&A ) in lieu of sending such documents to all securityholders.

As we discussed in November of last year, these amendments are intended to help simplify the shareholder communication process and reduce costs. However, some aspects of the amendments are technical in nature and will require certain changes to the processes that reporting issuers may currently use, including the timing and content of various notices and other documents.

In this, the first part of our two-part series on implementing notice-and-access, we provide a summary of how notice-and-access will work, highlighting items that reporting issuers need to prepare for in advance. In the second part we will examine some of the issues and considerations involved with such implementation.

What is notice-and-access?

Notice-and-access refers to the “delivery procedures” set out under NI 54-101 and NI 51-102, which allow for proxy-related and other materials to be “sent” by posting a copy of those materials on a non-SEDAR website.

NI 54-101 governs how materials are to be sent to beneficial owners of securities, including with respect to non-objecting beneficial owners (NOBOs), who may be sent materials directly, and objecting beneficial owners (OBOs), who may receive materials through an intermediary. NI 51-102 governs how materials are to be sent to registered holders by both reporting issuers and others who solicit proxies from registered holders of voting securities of a reporting issuer.

Notice-and-access will be available to reporting issuers in relation to all meetings, including special meetings, other than reporting issuers who are investment funds. The method used by the reporting issuer must also comply with the corporate law governing such reporting issuer, in terms of whether electronic delivery of such materials is permitted.

Content of, and timelines related to sending the "Notice"

To rely on notice-and-access, an issuer’s registered holders and/or beneficial owners must be sent a “Notice” that contains only certain prescribed information.  This Notice must be sent by prepaid mail, courier or equivalent, or electronically if prior consent has been obtained, along with the applicable voting instruction form (Form 54-101F6, if sending directly to NOBOs, and 54-101F7, if sending indirectly).  This Notice must be sent at least 30 days before the date of the meeting, if directly sending to NOBOs,  or at least three or four business days before the 30th day if sending indirectly to beneficial owners of securities (i.e. via Broadridge or other proximate intermediary), depending on how the Notice is to be delivered. In addition, the reporting issuer must comply with, among other things, each of the following requirements:

  • Provide public electronic access to the information circular and the Notice on or before the day the Notice is sent (i.e., on or before the 30 or 30 plus three or four day deadline above) by filing the documents on SEDAR and posting the documents on a non- SEDAR website (such as the reporting issuer’s website or a service provider’s website). Each document must remain posted for a period of one year from the date on which the applicable document is originally posted.
     
  • Post on that website, any disclosure material regarding the meeting that the reporting issuer sends to registered holders or beneficial owners of it securities, and any written communications the reporting issuer has made available to the public, (such as press releases) regarding matters to be voted on at the meeting, regardless of whether or not they were sent to registered holders or beneficial owners.
     
  • Provide in the notice package, a plain-language explanation of notice-and-access, including, among other things, how a beneficial owner is to return voting instructions or a registered holder is to return a proxy, and the sections of the information circular where disclosure regarding each matter identified in the Notice can be found.
     
  • Provide a toll-free number for use by beneficial owners to request paper copies of the information circular and the financial statements and related MD&A to be approved at the meeting.
     
  • Ensure that materials are posted in a manner and format that permits a person with a reasonable level of computer skill and knowledge to access, read, search, download and print the documents. 

Impact on notification and setting of record dates

In order to use notice-and-access, reporting issuers are required to set their “Record Date for Notice of the Meeting” no fewer than 40 days prior to the date of the meeting. This date is otherwise required to be set between 30 and 60 days prior to the date of the meeting under NI 54-101.

The “Notification of Meeting and Record Dates”, which is required to be sent to intermediaries and others at least 25 days before the Record Date for Notice of the Meeting under NI 54-101, must be filed on SEDAR at the same time that it is sent (i.e. at least 65 days before the meeting). For the first time that an issuer uses notice-and-access this 25 day period cannot be abridged. For subsequent meetings such period can be abridged to three days before the Record Date.

Responding to requests for paper copies

Where a securityholder requests paper copies of an information circular, financial statements and/or MD&A, the reporting issuer must send, free of charge, the items requested within three business days for requests received prior to the date of the meeting, and within 10 calendar days for requests received on or after the date of the meeting but within one year of the information circular being filed. When responding to such requests, reporting issuers are prohibited from asking for any other information about the requestor, other than the name and address to which the requested materials are to be sent. They also cannot disclose that information for any purpose other than sending the requested materials. Similarly, a reporting issuer cannot collect information that may be used to identify a person who accesses proxy-related materials that are posted using notice-and-access.

Additional Disclosure

Under the amendments, management of reporting issuers must include additional disclosure in their information circulars. This includes information as to whether the reporting issuer is sending proxy-related material to registered holders or beneficial owners using notice-and-access, and, if so, whether stratification will be used and the types of registered holders or beneficial owners who will receive paper copies (under the amendments, notice-and-access may be used selectively to send materials to some but not registered holders or beneficial owners and this is referred to as “stratification”). Management must also disclose whether proxy-related materials are being sent directly to NOBOs and whether the issuer intends to pay for an intermediary to deliver materials to OBOs and, if it does not, a statement that OBOs will not receive the materials unless their intermediary assumes those costs.   This additional disclosure, other than the statement regarding OBOs not receiving materials, must also be included in the Notification of Meeting and Record Dates. The text of the applicable voting instructions forms has also been amended and will need to be updated.

In addition to providing a new mechanism for sending proxy-related and other materials to registered holders and beneficial owners of securities, the amendments are also intended to simplify the process by which beneficial owners are appointed as proxy holders in order to attend and vote at shareholder meetings.

The amendments result in consequential amendments to NI 51-102 and Form 51-102F5 Information Circular, as well as National Policy 11-201 Delivery of Documents by Electronic Means (NP 11-201) and will generally come into force on February 11, 2013. The notice-and-access provisions, however, can only be used in respect of meetings occurring on or after March 1, 2013, while certain other provisions apply as of February 15, 2013.

CSA adopt "notice-and-access" allowing electronic posting of proxy and other materials

Ramandeep Grewal -

The Canadian Securities Administrators yesterday announced the adoption of regulatory changes to improve the communications process between reporting issuers and shareholders. Specifically, the amendments would introduce a notice-and-access mechanism for reporting issuers to send proxy-related and other materials to shareholders, simplify the process of appointing beneficial owners as proxy holders and require reporting issuers to provide enhanced disclosure regarding the beneficial owner voting process.

The amendments, which include changes to NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuers, NI 51-102 Continuous Disclosure Obligations, and related forms and companion policies, were initially proposed in 2010 and republished in 2011. While the final amendments announced yesterday include changes to the 2011 proposals, the CSA have deemed the changes immaterial and are, thus, not republishing the amendments for further comment.

Notice-and-access

Under the notice-and-access provisions, reporting issuers will now be permitted to deliver proxy-related materials by (i) posting the relevant information circular and other materials on a non-SEDAR website and (ii) sending a notice advising shareholders that proxy-related materials have been posted and explaining how to access the material. The “notice package” sent to shareholders must contain certain basic information about the meeting and matters to be voted on, explain how to obtain paper copies of the information circular (and if applicable, financial statements and MD&A) and explain the notice-and-access process in plain language. The notice package may be sent by mail or electronic delivery, provided prior consent has been obtained, and the method used complies with securities legislation.

If using notice-and-access, a reporting issuer must set a record date (“record date”) for notice of the meeting date at least 40 days before the date of the meeting (the 2011 proposals required the record date to be set between 30 and 60 days before the meeting date). Where notice-and-access is being used for the first time by an issuer, a notification of the meeting and record dates must also be filed on SEDAR at least 25 days before the record date and, in all other cases, at least three business days before the record date.

Other technical requirements for using the notice-and-access method are set out in NI 54-101 in respect of beneficial owners and NI 51-102 in respect of registered holders. The CSA have also clarified that this method may be used to deliver proxy-related materials in connection with a solicitation of proxies that is not a management solicitation. As we discussed in June of 2011, while notice-and-access will be available for both annual and special meetings, it will not be available for investment funds, which is a matter the CSA say is subject to further study.

Financial Statements and MD&A

Through amendments to NI 51-102, notice-and-access will also be an acceptable method for sending annual financial statements and annual MD&A, such that reporting issuers will now be able to choose between sending these documents pursuant to the annual request mechanism currently available under NI 51-102, or by sending to all securityholders within 140 days after the issuer’s financial-year end, which will now include via notice-and-access.

Beneficial owner appointment process

Under the amendments, the beneficial owner proxy appointment process would be simplified by giving intermediaries and issuers greater flexibility to determine the specific arrangements pursuant to which appointments may be made. Changes to the 2011 proposal include clarifying that the required grant of authority is subject to any prohibitions under corporate law, as well as removing the part of the proposal that would have permitted beneficial owners to instruct the intermediary or reporting issuer management to limit voting authority.

Enhanced disclosure of voting process

Under current rules, proxy-related materials for a meeting must explain in plain language how a beneficial owner may exercise voting rights. Under the amendments, management of reporting issuers must now also disclose certain additional information in the information circular including whether the reporting issuer is sending proxy-related materials to registered holders or beneficial owners using notice-and-access, whether the reporting issuer is sending proxy-related materials directly to non-objecting beneficial owners, and whether the reporting issuer intends to pay for an intermediary to deliver to objecting beneficial owners the proxy-related materials and voting instruction form.

 

While these amendments will ease delivery requirements for securities law purposes, issuers still need to comply with relevant corporate law requirements which may or may not be consistent with these changes. The amendments will generally come into force on February 11, 2013. The notice-and-access provisions, however, can only be used in respect of meetings occurring on or after March 1, 2013, while certain other provisions apply as of February 15, 2013.

Further thoughts on TSX changes to director elections and majority voting

Andrew Bozzato and David Weinberger -

The Toronto Stock Exchange recently announced proposed amendments to the TSX Company Manual that would require all TSX-listed issuers to elect directors by majority vote (the “Proposed Amendments”). If the Proposed Amendments are adopted, security holders will effectively be required to vote “for” or “against” each individual board nominee, in contrast to the default plurality voting under Canadian corporate law whereby security holders voting by proxy either vote “for” or “withhold” when electing directors.

Under the Proposed Amendments, the TSX would require that all listed issuers adopt majority voting for uncontested director elections.1 This could be implemented by the board’s adoption of a majority voting policy, as opposed to formally amending an issuer’s constating documents. Where a majority voting policy is adopted, security holders voting by proxy would still vote “for” or “withhold” for each individual board nominee, as required by corporate law. However, “withhold” votes would be considered “against” votes and counted as part of the total votes cast. The type of majority voting policy described in the Proposed Amendments would require that (i) a director who received a majority of “withhold” votes tender his/her resignation immediately following the meeting, to be effective upon acceptance by the board; and (ii) the board consider whether to accept the resignation and disclose its decision within 90 days of the receipt of such resignation. Under the existing voting regime, even if a director receives a majority of “withhold” votes in an uncontested election, the director is still elected under corporate law for the ensuing term.

Why the Need to Mandate Majority Voting?

Shareholders of Canadian public companies who vote by proxy have no automatic right under corporate law to vote "against" individual directors nominated for election to the board. Instead, shareholders who vote by proxy have only two options: to vote “for” nominees or to effectively abstain from voting by withholding their vote. In practice, since most shareholders of Canadian public companies vote by proxy, directors are elected so long as any affirmative votes are received, regardless of the number of votes withheld. This has two implications: i) a minority of shareholders voting “for” director nominees has the power to elect those directors; and ii) even an overwhelming majority of votes withheld will not block the election.

Some Concerns with Majority Voting

Corporate laws allowing shareholders to vote proxies “for” or “withhold” were adopted largely to avoid complications arising from a failure to elect the requisite number of directors. Critics of majority voting proposals often cite, among other concerns, the minimum number of total director nominees or qualified members of certain board committees not being elected (putting the issuer offside corporate and securities laws), the added resources and time required to have subsequent shareholder meetings to elect new directors to replace those forced to resign, disruptions and a general destabilizing effect caused by a failure to re-elect key directors, difficulties in fulfilling the board’s mandate absent a full board, the negative impact on potential candidates, and potential increased influence by special-interest shareholders, who may be able to defeat a nominee in a situation where, due to low shareholder participation, withheld votes constitute a majority of the votes cast at a meeting but significantly less than a majority of the total outstanding shares.

Recognizing some of these concerns, the TSX is proposing that its listed issuers adopt a non-binding policy which would functionally allow directors to resign at a later time, giving the board adequate time to reconstitute and reorganize if necessary, without being offside corporate or securities laws or requirements. While it is open for an issuer to adopt a stricter policy that requires that the board accept the director’s resignation immediately without affording the board any discretion to determine whether the resignation should or should not be accepted, these are generally less common due to the lack of flexibility to address the types of complications discussed above. Regardless of the type of policy adopted, a director who receives a majority of “withhold” votes would still be elected as a matter of corporate law. The purpose of the majority voting policy is to ensure that only those directors who receive a majority of votes in their favour remain on the board, with the differences among majority voting policies determining if, how and when a defeated director is replaced. In the Canadian Coalition for Good Governance’s suggested form of majority voting policy, for example, boards choosing to accept the resignation of a director who received a majority of “withhold” votes generally have three options: i) leave the seat unfilled until the next annual meeting; ii) appoint a new director the board considers to “merit the confidence of the shareholders”; or iii) call a special meeting to elect a new director.

Practically, our experience has been that a majority of “withhold” votes is not a common occurrence among companies that have adopted voluntary majority voting policies. In fact, directors may opt to withdraw from the election process in advance of the meeting in order to avoid potential embarrassment or negative publicity if the preliminary proxy voting results indicate an unfavourable outcome. In cases where a majority of “withhold” votes has been received, the response by company boards varies. Often, director resignations pursuant to majority voting policies are not accepted or, if accepted, clear reasons as to why the board came to that decision are often not provided. Evidence from the U.S. suggests that defeated directors may often not resign, but will not have their names put forward for election the following year. In this respect, the TSX has asked for comments on whether it would be useful for the TSX to provide specific guidance stating that it expects that the board of directors will typically accept the resignation of a director that receives a majority of “withhold” votes, absent exceptional circumstances.

Conclusion

As shareholders of public entities and regulators continue to take a growing interest in matters of corporate governance, one issue of rising prominence is the process by which those in charge of governance, directors and officers, are elected or appointed. Shareholder participation in the election of directors has gained significant attention in recent years. Although this is a significant issue for Canadian shareholders, as evidenced by recent shareholder proposals and initiatives of institutional investors and shareholder interest groups, such as the Canadian Coalition for Good Governance, the Proposed Amendments represent the first time a Canadian regulator has undertaken any formal initiatives to address these issues. (It should be noted that the Ontario Securities Commission indicated in Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy Issues, in January of 2011, that it was considering a number of related issues, including amending securities laws to require individual voting and majority voting for directors).

While the importance or relative impact of the concerns raised by critics of majority voting can be debated, they are not without merit and should be considered alongside the competing interest of providing shareholders with greater access to director elections. Despite the potential concerns, a number of TSX-listed issuers have already voluntarily adopted majority voting policies. The experience of these issuers is indicative of the fact that most, if not all, of these concerns appear manageable with a well-drafted majority voting policy that takes into account the specific circumstances of a particular issuer.

The Proposed Amendments are open for public comment until November 5, 2012. If adopted, they are not expected to be implemented before the 2014 proxy voting season. As we discussed in our post earlier this month, these amendments complement recent changes to the TSX Company Manual requiring annual director elections, individual voting (as opposed to slate voting) and requirements to disclose votes received for director elections and whether or not a majority voting policy has been adopted, which are scheduled to go into effect on December 31, 2012.

1While the Proposed Amendments do not define the term “uncontested”, it is generally understood to refer to a director election where the number of nominees for election is equal to the number of directors to be elected. Majority voting policies adopted by issuers can express this in different ways, including by having the policy apply only to elections where all of the nominees for election to the board are supported by the current board of directors and disclosed in the company’s management proxy circular.

OSC revisits shareholder democracy issues in its 2012 Annual Report

Ramandeep Grewal -

The Ontario Securities Commission (OSC) yesterday announced the publication of its 2012 Annual Report. The report reviews the OSC's activities in 2011-12, including with respect to policy initiatives and enforcement.

Our readers will recall that, as we discussed in January of 2011, the OSC published a staff notice earlier this year advising of its review of shareholder democracy issues, including director elections, say-on-pay and the effectiveness of the process voting system. This was followed by the TSX’s publication of proposed amendments its rules to, among other things, 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.

The OSC revisits these issues in its Annual Report, highlighting that shareholders “want the OSC to facilitate shareholder empowerment concerning significant decisions about governance, compensation and transactional matters involving reporting issuers” and that the OSC is considering specific policy initiatives that would strengthen the role of shareholders in uncontested director elections. Stating that reporting issuers are “encouraged to adopt majority-voting polices” and that it supports the TSX’s initiatives, the report notes that the OSC and TSX are discussing further steps to ensure that all TSX-listed issuers adopt majority-voting polices within a reasonable time frame.

The report also notes that the OSC is currently investigating concerns about the transparency, efficiency and accountability of the proxy-voting system and believes that there is a need for “greater regulatory involvement” so as to identify specific concerns and potential solutions that may require regulatory action.

With respect to other policy initiatives, the report discusses the creation of a new Research and Analysis Group whose aim is to increase the OSC’s understanding of activities, trends and risks in the market and issues facing investors. Projects currently in progress under the mandate of this group include:

  • Research on how many Canadians qualify for the current accredited investor thresholds;
  • A review of exempt market activity to better understand how the exempt market is used to raise capital; and
  • A project to gauge the extent of broker internalization of order flows in Canada

Other activities reviewed include the OSC’s Emerging Markets Issuers Review and the Maple Group Acquisition of the TMX Group. The report also includes useful statistics on the financial wealth of Ontario investors, comparative volumes and activities represented by securities marketplaces generally and specifically the derivatives market in Ontario, and the concentration of TSX-listed exchange-traded funds or ETFs.

Specifically on the topic of enforcement, the OSC notes that its staff have made it a priority to pursue cases in court where appropriate and that during the last year, staff secured ten jail sentences for breaches of OSC orders or violations of the Securities Act. Meanwhile, staff commenced 24 proceedings before OSC administrative tribunals in 2011-12 and concluded 39 settlements and contested hearings, imposing a total of $39 million in administrative penalties, disgorgement orders and settlement amounts. To assist parties appearing before adjudicative panels, the report reminds market participants of the OSC’s Guide to Enforcement Proceedings and Frequently Asked Questions Regarding Hearings that were published in 2011-2012.

Court upholds board's last-minute advance notice policy

Lisa Trienis and Denise Duifhuis -

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.

The policy included a provision that would require advance notice to Mundoro for shareholder nominations of directors other than pursuant to a requisition of a meeting or a shareholder proposal. In the case of an annual meeting, notice would have to be made not less than 30 days or more than 65 days prior to the date of the meeting. NMI was forced to seek a court order that the policy was unenforceable in order to propose its own nominees for election at the Meeting.

On June 14, Mundoro announced that the AGM would be postponed to August 27, 2012 and that a new record date would be set.

On the issue of whether the policy was unenforceable, NMI argued that British Columbia's Business Corporations Act expressly provides that the election and removal of directors must occur in accordance with the articles. According to NMI, Mundoro was using the policy to try to prevent what is expressly permitted by corporate and securities laws applicable to proxy contests, resulting in the entrenchment of its board members. NMI argued that a change to the articles of Mundoro required approval of a special resolution of shareholders and, thus, in order to implement the policy, a special resolution would be required.

Ultimately, however, the Court found that "neither the Act nor the articles expressly preclude directors from creating such a Policy. Nor has [NMI] provided any authority for the proposition that only the shareholders can create an advance notice policy."

It appears that the decision to uphold the enforceability of the policy was predicated on the concepts of full disclosure and orderly conduct in the context of a proxy contest. As Justice R. Punnett noted:

In this case it has not been established that the Policy is one that infringes shareholder rights. Rather, the Policy in fact ensures an orderly nomination process and that the shareholders are informed in advance of an AGM what is in issue. In doing so the Policy prevents a group of shareholders from taking advantage of a poorly attended shareholders meeting to impose their slate of directors on what could be a majority of shareholders unaware of such a possibility arising.

The way in which the policy was adopted at the last minute by the board in the face of a potential challenge seems to go against British Columbia's Business Corporations Act and Mundoro's articles. We support that the proper approach would be to seek the approval of shareholders at the meeting. As the articles are essentially a contract between the company and the shareholders, allowing the directors to materially alter the effect of the articles would seem to breach that contract. 

Interestingly, Justice R. Punnett noted that the fact that Mundoro intended to seek shareholder approval and confirmation of the policy at the AGM evidenced good faith and the reasonableness of the policy. He did not, however, state that shareholder approval or confirmation was required. The decision does not address whether the policy could be applied to the AGM if not approved by the shareholders of Mundoro at the meeting.

Based on this decision, in the face of a potential ambush, an issuer may postpone its meeting, set a new record date for the meeting (if necessary) and promptly have its board adopt an advance notice policy. In doing so, the issuer is effectively able to extinguish the possibility of an alternate slate being proposed by a dissident at the meeting.  It remains to be seen whether the decision on the enforceability of the policy will be overturned in a subsequent case or on appeal.

As such, we recommend that issuers planning to implement advance notice provisions for a British Columbia company follow the conservative approach of seeking shareholder approval for an amendment to their articles. If an issuer is concerned that a dissident is lurking in the weeds or it does not believe it can obtain the requisite level of shareholder approval for the amendments, it may wish to consider adopting an advance notice policy and hope that Mundoro would be upheld if it were challenged. 

CSA extend comment period regarding proxy advisory firm regulation

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.

SEC prohibits listings of issuers not in compliance with compensation requirements

On June 20, the U.S. Securities and Exchange Commission announced the adoption of new rules and amendments to its proxy disclosure rules that would generally prohibit national securities exchanges from listing the equity securities of an issuer that is not in compliance with compensation committee independence requirements. Publication of the rule and amendments follow an initial proposal published in March 2011, and the final version addresses comments received by the SEC.

As we discussed in our earlier blog post, foreign private issuers that disclose in their annual report the reasons for not having an independent compensation committeee would be exempt from the relevant independence requirements. Those subject to U.S. proxy rules, however, would also be subject to certain disclosure related to compensation consultants.

Securities regulators consider regulation of proxy advisory firms

Mihkel Voore -

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.

Reforming Canada's proxy system

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.

 

OSC releases statement of priorities for 2012-2013 fiscal year

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:

  1. 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;
     
  2. delivering effective enforcement and compliance by, for example, conducting more targeted compliance reviews;
     
  3. 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;
     
  4. running a modern, accountable and efficient organization; and
     
  5. 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.

Canadian companies easier targets for activist investors than U.S. companies

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.

CCGG publishes 2011 Best Practices for proxy disclosure and governance awards winners

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.

ISS publishes draft 2012 proxy voting updates

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.

SEC will not challenge court decision on proxy access

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.

US Appeals Court vacates proxy access rule

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."  

OSC publishes procedural directives regarding PIF and other prospectus filing matters

The Ontario Securities Commission published a staff notice today to advise of procedural changes relating to the review of personal information forms (PIFs) in connection with prospectus offerings. The notice also gives guidance on dealing with common deficiencies found by OSC Staff in preliminary prospectus filings and on timing issues related to issuances of prospectus receipts. As part of the procedural changes relating to PIFs, the OSC is asking that prescribed information be set out in cover letters accompanying the materials filed with a preliminary prospectus in order to facilitate its review of PIFs. The notice also reminds issuers that where an issuer has reason to believe that information contained in a previously filed PIF has materially changed, the issuer should deliver a new PIF for that individual concurrent with filing its preliminary prospectus. For more information, see OSC Staff Notice 41-702.

Continuous Disclosure Guide - 2011

Over the past year, regulators have issued a number of notices providing guidance and suggested best practices relevant to continuous disclosure, most notably relating to the transition to IFRS effective January 1, 2011. Meanwhile, groups such as the Canadian Coalition for Good Governance and ISS have also released model policies and guidance on such topics as executive and director compensation, proxy disclosure, "say on pay" and majority voting. We have created this 2011 Canadian Public Company Disclosure Reference Guide to assist you in preparing your 2010 annual disclosure, including financial statements, MD&A, AIFs and information circulars. This guide sets out the main sources of the disclosure requirements along with relevant guidance, best practices and policies, as applicable.

Type of Filing

Principal Form / Source of Disclosure Requirement

Current Issues / Guidance

Financial Statements

NI 51-102 Continuous Disclosure Obligations for financial years beginning before January 1, 2011 (pre-IFRS)

NI 51-102 Continuous Disclosure Obligations for financial years beginning on or after January 1, 2011 (IFRS)

NI 52-107 Acceptable Accounting Principles and Auditing Standards(Part 3 – IFRS, Part 4 – pre-IFRS)

Transition to IFRS

Other subject-specific guidance

General guidance and best practices

Upcoming proposals and amendments

MD&A

51-102F1 (pre-IFRS) | 51-102F1 (IFRS)

AIF

51-102F2 (pre-IFRS) | 51-102F2 (IFRS)

CEO and CFO Certifications

NI 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (pre-IFRS)

Certificates (pre-IFRS)

NI 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (IFRS)

Certificates (IFRS)

Information / Proxy Circular

51-102F5 (pre-IFRS) | 51-102F5 (IFRS)

  • include disclosure required by NI 58-101
     
  • include cross-reference to issuer’s AIF as per NI 52-110 in cases of management information circular to elect directors

NI 54-101 Communications with Beneficial Owners of Securities of a Reporting Issuer

Upcoming proposals and amendments

Statement of Executive Compensation

 

51-102F6 (pre-IFRS) | 51-102F6 (IFRS)

Upcoming proposals and amendments

Corporate Governance Disclosure

NI 58-101 Disclosure of Corporate Governance Practices

NI 58-101F1

NI 58-101F2 (Venture Issuers)

NP 58-201 Corporate Governance Guidelines

Upcoming proposals and amendments

Oil and Gas and Resource Issuers

National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities

NI 43-101 Standards of Disclosure for Mineral Projects

Continuous Disclosure Reviews

 

CCGG publishes 2010 proxy circular disclosure best practices

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:

  1. "pay for performance" should be a large component of executive compensation;
  2. performance should be based on measurable, risk-adjusted criteria and evaluated over an appropriate time horizon, to ensure the criteria have been met;
  3. compensation should be simplified to focus on key measures of corporate performance;
  4. executives should build equity in the company, to align their interests with shareholders;
  5. companies should put appropriate limits on pensions, benefits, severance and change of control entitlements;
  6. 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.

Globe and Mail publishes review of corporate governance practices

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.

ISS publishes 2011 updates to corporate governance policy

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.

SEC releases executive compensation proposals

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.

SEC commissioner dissents on proxy rule

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.

SEC releases final rule regarding shareholder director nominations

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.

Financial regulatory reform approved by US Congress

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.

SEC issues concept release on proxy system

The Securities and Exchange Commission yesterday announced that it was issuing a concept release to seek public comment on the U.S. proxy system. Specifically, the comprehensive review focuses on the accuracy, transparency and efficiency of the voting process, communications and shareholder participation and the relationship between voting power and economic interest. The SEC is accepting public comment for a 90-day period.

CSA propose "notice and access" shareholder communication model

Mihkel E. Voore and Ramandeep Grewal

As we discussed in our post of April 9, the Canadian Securities Administrators (CSA) have recently published much-anticipated proposals to amend National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101), which would give issuers the option to post proxy-related materials on a non-SEDAR website under a “notice-and-access” model. The proposed amendments aim not only to facilitate communication with shareholders, but also include amendments intended to increase the overall efficiency and equity among key players involved in the securityholder communication process.

Notice-and-access

Specifically, the proposed amendments would allow a reporting issuer to distribute proxy related materials to shareholders in one of three ways: (a) by sending paper copies by prepaid mail, courier or the equivalent; (b) by providing notice-and-access for any meeting that is not a special meeting; or (c) any other delivery method to which the beneficial owner consents. To rely on the notice-and-access option, which is proposed to be available only for non-special meetings, the issuer would be required to send a “notice” informing beneficial owners that proxy-related materials have been posted and explaining how to access them. If the issuer is also seeking voting instructions, the notice must be sent together with a voting instruction form by prepaid mail, courier or the equivalent method, or by any other method previously consented to by the beneficial owner as required under NI 54-101, at least 30 days prior to the meeting date. The issuer would also be required to send a news release at the same time containing the same information as the notice and, if notice-and-access is being used for some but not all beneficial shareholders, an explanation of why. Public electronic access to the information circular and other proxy-related materials must be provided on the same day as the reporting issuer sends the notice to beneficial owners by filing the proxy-related materials on SEDAR and by posting them on a non-SEDAR website. Once posted, the materials must remain posted until the next annual meeting for that issuer. The issuer must also provide a toll-free telephone number that shareholders can call to request a paper copy of the information circular and must fulfill any requests so received within three business days. It should be noted that the responsibility to fulfill requests for paper copies rests with the issuer and not the intermediary. While the notice-and-access option would seem to result in greater efficiency with respect to sending meeting materials and may be employed selectively to communicate with some but not all beneficial owners, it is only proposed in respect of meetings that are not special meetings. The proposed process may also affect the timing of meetings given the requirement to send the notice at least 30 days in advance of the meeting date. 

The proposed amendments also contain certain protective provisions, including prohibitions restricting issuers that are contacted for paper copies from obtaining information other than the name and address to which the material is to be sent and from disclosing or using the name or address for any purpose other than sending the requested material. The issuer must also not use any means to post proxy-related materials that would enable the issuer to identify a person or company that has accessed the website address where the proxy-related materials are located. The proposed amendments make it clear that a beneficial owner may consent to the use of other delivery methods for receiving proxy-related materials. Issuers are reminded, however, that in such cases National Policy 11-201 Delivery of Documents by Electronic Means would apply to such consents being obtained from beneficial owners.

The US Securities and Exchange Commission (SEC) introduced its own notice-and-access process effective January 2009, which, while similar to the CSA process, has some notable differences. Among others, (i) notice-and-access would not be mandatory for reporting issuers under the CSA proposal; (ii) the relevant voting instruction form (Form 54-101F6 or Form 54-101F7) must be sent with the initial notice; and (iii) the reporting issuer is responsible for fulfilling requests for paper copies of information circulars, not the intermediary. The CSA proposal also maintains certain basic differences in beneficial owner communication procedures, including the option for reporting issuers to send proxy-related materials and solicit voting instructions directly from non-objecting beneficial owners (NOBOs) and to choose not to pay for intermediaries to forward proxy-related materials and voting instruction forms to objecting beneficial owners (OBOs). Given these differences, SEC issuers would be able to satisfy their NI 54-101 obligations with respect to beneficial owners by complying with the US notice-and-access process.

Appointment of proxy holders by beneficial owners

In addition to providing a notice-and-access option for distribution of materials, the proposed amendments also aim to simplify the process for appointing proxy holders on behalf of beneficial owners. While intermediaries and reporting issuers would still be required to arrange to appoint the beneficial owner as proxy holder at the beneficial owner’s request, intermediaries and issuers would be given greater flexibility to determine the specific arrangements pursuant to which the appointment may be made. For example, the currently used “appointee system” option would be expressly permitted, allowing the beneficial owner to print the beneficial owner’s name, or the name of its appointee, on the voting instruction form, which would in turn be recorded on a cumulative proxy to be provided to the meeting scrutineer.

New information circular disclosure requirements

The proposed amendments also require additional disclosure to be included in management information circulars in specified circumstances. For example, if the issuer chooses not to pay for intermediaries to send proxy-related materials and a voting instruction form for use by intermediaries to OBOs, the proposed amendments require management of the reporting issuer to disclose this fact in the circular and to disclose that it is the OBO’s responsibility to make arrangements with his or her intermediary to exercise his or her voting rights. This leaves open the possibility of differential treatment of shareholders and, in the absence of payment by the issuer, that OBOs will not receive proxy-related materials. The proposed amendments also require management of the reporting issuer to disclose and discuss why, if applicable, the reporting issuer is using notice-and-access selectively in respect of some but not all beneficial owners.

In addition to the above changes, the proposed amendments also include new prohibitions on the use of NOBO information by third-parties as well as certain technical amendments and, if approved, will result in consequential amendments to National Instrument 51-102 Continuous Disclosure Obligations, Form 51-102F5 Information Circular and National Policy 11-201 Delivery of Documents by Electronic Means. According to the CSA, the proposed amendments are intended to improve the beneficial owner communication procedures, keeping in mind principles of equal treatment among registered and beneficial securityholders, efficiency and equality and clarity of the obligations of all parties involved in the securityholder communication process. The proposals have been published for a 144-day comment period expiring on August 31, 2010.

CSA publish proposed amendments to beneficial owner communication procedures

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.

CCGG makes submission as part of Parliamentary CBCA review

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.

SEC proxy disclosure enhancements to soon take effect

In December 2009, the U.S. Securities and Exchange Commission (SEC) published final amendments to its rules to enhance proxy disclosure. Proposed amendments were first released in July 2009 and the final rules reflect changes made in response to many of the comments received by the SEC in response to the proposed amendments.

Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.

The amendments are effective as of February 28, 2010.

SEC reopens comment period on shareholder director nomination proposal

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.

CCGG publishes 2009 Best Practices in Disclosure of Director Related Information

 PDF Version

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. 

Section C – Proxy circular layout

Section C includes examples of enhanced proxy circular layout. Best practices include one page summaries for each section of the proxy, section summaries within the discussion on corporate governance and the use of summary tables for committee reports.

Section D – Innovations  

In the 2009 guide, innovative disclosure practices have been incorporated into the guide as best practices where feasible. Section D provides examples of innovations in disclosure practices adopted by various companies, including disclosure regarding the year-over-year changes in share holdings for the board as a whole. 

Section E – Guide to providing “best practice” disclosure checklist

Section E consists of a checklist that issuers can use to compare their disclosure practices against the CCGG’s "best practices" and is a meant as a tool for drafting 2010 proxy disclosure.

SEC Chairman discusses proxy voting

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."

RiskMetrics Group releases draft proxy voting policies for comment

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." 

RiskMetrics publishes open letter to TSX companies regarding director elections

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".

SEC Investor Advisory Committee agrees on wide-ranging agenda

The Securities and Exchange Commission's Investor Advisory Committee, having held its first meeting on Monday, announced today that it has agreed on a broad agenda. Identified topics for discussion moving forward include: the fiduciary duties of financial intermediaries, disclosures to investors, whether majority voting for directors should be mandatory for all U.S. companies and whether investors have the information necessary to make informed proxy voting decisions.

U.S. Treasury Department releases proposed legislation dealing with say-on-pay and compensation committee independence

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. 

Such a non-binding vote would be required in any shareholders meeting occurring on of after December 15, 2009. While the draft legislation further provides that the vote is mandatory, it would not be binding on the corporation or the board, nor would it be construed as overruling a decision by the board, creating or implying any additional fiduciary duty, or as restricting the ability of shareholders to make shareholder proposals.

The proposed legislation also includes governance-related proposals that would require each member of the compensation committee to be independent. The compensation committee would have the authority, in its sole discretion, to retain and obtain independent compensation consultants and would be directly responsible for their appointment and compensation as well as the oversight of the consultants’ work. The proposal would also require that any compensation consultants, legal counsel or other adviser to the compensation committee meet independence standards to be promulgated by the SEC and that the issuer include prescribed proxy disclosure relating to retention of, and reliance upon, compensation consultants. The SEC is also given a two-year deadline to study and report back to Congress on the effects of reliance upon independent consultants.

The Treasury Department's release on the proposals is available here.

SEC publishes proposed amendments regarding proxy disclosure and solicitation

The U.S. Securities and Exchange Commission has now published proposed amendments to its rules in order to "improve the disclosure shareholders of public companies receive regarding compensation and corporate governance, and facilitate communications relating to voting decisions." The proposals, announced earlier this month, would expand the scope of compensation disclosure and analysis to require disclosure of a company's overall compensation program as it related to risk management. Disclosure requirements regarding the qualifications of directors and nominees would also be extended and certain issues relating to the solicitation of proxies and the granting of proxy authority would be clarified. Comments on the proposals are being accepted by the SEC until September 15, 2009.

SEC proposes enhanced disclosure requirements respecting proxy statements

On July 1, the U.S. Securities and Exchange Commission (SEC) proposed rule revisions "intended to improve the disclosure provided to shareholders of public companies" with respect to executive compensation and corporate governance matters in proxy and information statements. The proposals would require information regarding: the relationship of a company's overall compensation policies to risk; the qualifications of executive officers, directors and nominees; company leadership structure; and potential conflicts of interest of compensation consultants. Amendments to proxy rules intended to clarify how they operate were also proposed. The proposals follow a speech by SEC Chairman Mary Schapiro on the subject on June 10. Comments on the amendments, yet to be published on the SEC website, are being accepted until 60 days after their publication in the Federal Register.

The SEC also approved a proposal of the New York Stock Exchange (NYSE) to eliminate discretionary voting by brokers in the election of directors. Currently, NYSE Rule 452 permits voting by brokers without instructions in certain situations. The changes will apply to shareholder meetings held on or after January 1, 2010.

Further U.S. regulation of executive compensation expected

Secretary Geithner
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."

SEC proposes amendments to facilitate rights of shareholders to nominate directors

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.

RiskMetrics Group releases 2009 proxy voting policies

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.

Notice of Ministerial Approval of Amendments

The CSA have approved amendments to NI 51-102, 51-102F3 Material Change Report, NI 52-108 Auditor Oversight and NI 81-106 Investment Fund Continuous Disclosure. The changes are primarily of a technical nature required in order to conform these rules to the recent harmonization of securities laws among passport jurisdictions, and are effective July 4, 2008.

Additional amendments have also been made to section 9 of NI 51-102 with respect to proxy solicitation in order to exempt certain types of public solicitations from the requirement to send a proxy circular (to conform with what is currently required under the CBCA).