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

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.

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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.

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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.

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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.

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The Canadian Coalition for Good Governance (CCGG) submitted a brief to the House of Commons' Standing Committee on Industry, Science and Technology in February regarding the Committee's five-year review of the Canada Business Corporations Act (CBCA). The brief follows the CCGG's appearance before the Committee in November 2009.

According to the CCGG's brief, governance requirements for public companies in Canada have not kept pace with best practices. As such, the CCGG recommends enshrining basic democratic and governance norms for public companies into the CBCA. Specifically, the CCGG recommends that the CBCA be amended to: (i) prohibit slate voting; (ii) require a majority voting standard for director elections; (iii) require annual director elections for all CBCA public companies; (iv) require public companies to disclose the detailed results of shareholder votes for matters on the ballot; (v) give significant shareholders access to the proxy circular; (vi) require all shareholders to be treated equally in the proxy process, irrespective of whether they want to protect the privacy of their information; (vii) facilitate "notice and access", whereby shareholders would be able to access documents from companies' websites; (viii) generally require the separation of the roles of CEO and Chair of the Board; (ix) require shareholder approval for significantly dilutive acquisitions; and (x) give shareholders more meaningful ways to resolve claims under the oppression remedy.

It is unclear what steps the Committee will take at this point, however, as Parliament has only just resumed after prorogation and no activities are yet listed on its schedule.

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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.

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The U.S. Securities and Exchange Commission (SEC) announced on Monday that it is reopening the comment period for its proposals on shareholder director nominations. Originally published earlier this year, the proposal would change federal proxy rules to make it easier for shareholders to nominate and elect directors to company boards. The SEC decided to reopen the comment period to allow interested parties to comment on additional data and related analyses that were submitted during and after the initial comment period and included in the public comment file.

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The Canadian Coalition for Good Governance (CCGG) recently published its 2009 edition of Best Practices in Disclosure of Director Related Information, a guide intended to "improve disclosure about directors." According to the CCGG, the purpose of the document is to "recommend disclosure practices that exceed the minimum requirements set out in the regulations." The guide also states that the most effective disclosure is easy to find and understand, accurate and complete and given in a context that gives the information meaning. Specifically, the guide deals with disclosure of director-related information in five separate sections, as outlined below.

Section A – Shareholder voting

This section discusses the methods of voting for directors preferred by the CCGG. An example of a form of proxy considered to be a "best practice" is included as well a list of issuers who have adopted a majority voting policy for their director elections. As the CCGG has previously stated, it recommends individual director voting using a checkbox to indicate voting preference (vote “for” or “withhold”) along with adoption of a majority voting policy. The CCGG also recommends that a report of voting results should be posted on SEDAR within 10 business days of an AGM and should include the results based on the number of proxy votes cast for or withhold from the election of directors and auditors, along with those cast for or against any company or shareholder sponsored resolutions.  There is also a discussion on the results from the CCGG’s annual study on voting methods. Among other results highlighted from the study, the guide notes that 74% of companies in the S&P/TSX Composite Index now allow their shareholders to vote with respect to individual directors (contrasted with the 26% that still employ slate voting).  

Section B – Director information

Section B provides guidance for companies that want to adopt “exemplary” disclosure practices and provides examples of how certain issuers have chosen to communicate information on matters such as director selection and orientation, background, share ownership, compensation and performance assessment. The CCGG encourages issuers to either adopt or adapt these disclosure practices. 

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.

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On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."

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RiskMetrics Group announced yesterday that it has released for comment until November 11, 2009 its 2010 draft proxy voting policies. The comment period is part of RiskMetrics' annual policy development process and "offers institutional investors, corporate issuers, and industry constituents the opportunity to provide feedback on RiskMetrics' draft policies." Topics covered include director independence and elections, pay for performance and takeover defences. Specific to Canada, RiskMetrics published a policy respecting slate ballots, a process for elections that RiskMetrics described as "depriving shareholders of the opportunity to express approval or disapproval for individual directors." As described in our post of August 18, RiskMetrics criticized slate ballots in an open letter to TSX companies back in July.

The proposed policy would recommend a withhold vote for slate directors where RiskMetrics has identified: "(i) additional corporate governance practices that fall short of best practice for the Canadian market; or (ii) concerns about compensation practices and the alignment of pay with performance." According to RiskMetrics, the proposed policy "is expected to promote best practice in director elections in the Canadian market which alights with best practice in other markets." 

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In an open letter to TSX-listed companies released in July, RiskMetrics Group criticizes the slate ballot system for director elections and warns listed companies that beginning in 2010, "a vote recommendation to withhold from the entire slate of directors may be issued solely on the basis of the bundled election format." According to the letter, "[s]late ballots tend to insulate specific director nominees from focused shareholder action and work against director accountability." Further, RiskMetrics states that such elections "prevent institutional shareholders from effectively implementing corporate governance policies" through proxy votes.

While it does not appear from the letter that RiskMetrics has officially formalized a policy recommending that votes for slates be withheld as a general rule, it has made it clear that it is taking a definite step in that direction. The letter, thus, recommends that companies review their proxy for 2010 shareholder meetings and urges that they "present director election resolutions individually".

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The 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.

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Ramandeep Grewal

On July 16, 2009, the U.S. Department of the Treasury released draft legislation that includes proposed amendments relating to "say-on-pay" in the form of a required non-binding shareholder vote on compensation as well as proposals relating to the authority and composition of an issuer’s compensation committee.

With respect to “say-on-pay”, the draft legislation would require any proxy, consent or authorization for an annual meeting of shareholders (or special meeting in lieu thereof) to provide for a separate non-binding shareholder vote to approve the compensation of executives. In addition to including such a non-binding shareholder vote relating to annual compensation disclosure, the draft legislation would also require that a similar vote be provided to shareholders in any proxy or consent solicitation material for a meeting or special meeting of shareholders that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all of the assets of an issuer. In such circumstances, the person making the solicitation would be required to disclose any agreements or understanding that such person has with executive officers concerning any type of compensation that is based on, or otherwise relates to, the proposed transaction as well as the aggregate total of all such compensation that may be paid or become payable to, or on behalf of, such executive officer. The disclosure is to be set out in further regulations to be promulgated by the Securities and Exchange Commission and the SEC has been given one year to issue such further regulations or other rules that may be required. 

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.

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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.

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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.

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Secretary Geithner Photo Courtesy of www.treasury.gov

The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.

On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

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On May 20, the Securities and Exchange Commission proposed rule amendments "that would provide shareholders with a meaningful ability to...nominate the directors of the companies that they own." Under the proposals, shareholders that meet certain thresholds (including holding between 1% and 5% of the voting securities, depending on the circumstances) would be eligible to have their nominee included in proxy materials. The proposed amendments would also allow for shareholder proposals in proxy materials regarding a company's nomination procedures under certain circumstances.

Public comment on the proposed amendments will be accepted for 60 days after their publication.

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Earlier this week, the risk management and financial research company RiskMetrics Group (formerly Institutional Shareholder Services or "ISS"), published its voting policies for the 2009 proxy season. According to RiskMetrics Group, the policies are based on a broad consultative process, which included analysing corporate governance issues and soliciting investor input on identified issues through international surveys. The three main areas of focus of the published policies are executive compensation, board structure and audit practices. Of particular interest, RiskMetric’s Canadian policy update states that while it has previously taken a case-by-case approach to shareholder “say-on-pay” proposals, it will now generally recommend an advisory vote for shareholders on pay. The new policies will be effective for shareholder meetings held on or after February 1, 2009.

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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).

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