Legal Updates

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Monday, March 12, 2018

Read online or download the full update here.

In the past year, there have been significant developments in a number of areas of corporate governance and securities law that both issuers and investors should be aware of leading up to the 2018 proxy season. Certain of these developments have been initiated by the Toronto Stock Exchange (“TSX”), the Ontario Securities Commission (the “OSC”) or the Canadian Securities Administrators (the “CSA”), while others are reflected in proxy voting guidelines issued by proxy advisory firms Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”). Below is a summary of the most significant developments to keep in mind for the 2018 proxy season.

Board Gender Diversity

Gender diversity in corporate boardrooms continues to be one of the most heavily discussed areas in corporate governance. In 2014, National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”) was amended by the CSA to require that all TSX-listed issuers make certain disclosures with respect to their gender diversity policy. In addition, proposed amendments to the Canada Business Corporations Act (the “CBCA”) and the Business Corporations Act (Ontario) with respect to gender diversity disclosure were introduced in Bill C-25 and Bill 101, respectively. For further details on the amendments to NI 58-101 and proposed amendments to Bill C-25 and Bill 101, please refer to our prior update on these topics. As of the date of this article, Bill C-25 has undergone a third reading in the Senate, and Bill 101 has been referred to the Standing Committee on Finance and Economic Affairs for further study following its second reading in the Ontario Legislature.

Despite the mandatory disclosure requirements under NI 58-101, changes in boardroom composition have been incremental at best. On October 5, 2017, the CSA published Multilateral Staff Notice 58-309 – Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices (the “Gender Diversity Review”), which reviewed TSX-listed issuers’ compliance with the gender diversity disclosure requirements under NI 58-101. This was the third annual review conducted by the CSA on this issue. The results from the Gender Diversity Review indicated that although there had been a steady increase in the percentage of women on corporate boards in the past three years, such increase has been relatively modest and has evolved at a leisurely pace. Of the 660 TSX-listed issuers reviewed by the CSA, only 61% had at least one woman on their board, compared to 49% three years ago. In total, women only occupied 14% of all board seats of these issuers.

Glass Lewis has indicated that it will keep a close eye on board composition. Beginning in 2019, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female directors or that has not adopted a formal gender diversity policy. However, this recommendation may be limited to issuers in the S&P/TSX Composite Index and may not apply if boards have provided a sufficient rationale for not having any female directors or have disclosed a plan to address this issue.

Proxy Access

Proxy access provides shareholders with significant rights to participate in the management of an issuer. It allows shareholders to not only nominate directors, but also to have these nominees included on the ballot that management provides to shareholders. Last year, shareholder proposals were made requesting that certain Canadian companies adopt proxy access. In particular, both the Toronto-Dominion Bank and the Royal Bank of Canada received shareholder proposals for proxy access in 2017 and both now have proxy access policies in place. Both ISS and Glass Lewis stated that they would take a case-by-case approach when examining proposals on proxy access. Glass Lewis also indicated that it would closely review the existing legal framework on proxy access. In the event that existing laws provide shareholders sufficient proxy access rights and protections, Glass Lewis has stated that it would recommend voting against proxy access proposals.

Advance Notice

The main purpose of an advance notice policy is to strike a balance between preventing a “stealth proxy contest,” in which shareholders nominate directors for election at the issuer’s annual shareholder meeting without prior notice to the issuer or other shareholders, and supporting the rights of shareholders to exercise director nomination rights. Both Glass Lewis and ISS recommend an advance notice policy that is reasonable and limited in scope. Such a policy should have a reasonable notification period, generally not more than 30 days, and should allow for an extension for shareholder nominations in the event the annual meeting is postponed. In addition, it should not be cumbersome or otherwise onerous for shareholders to exercise their right to nominate directors. Furthermore, ISS noted that the advance notice policy should not be unilaterally adopted or amended by management without shareholder approval. Management should also make timely and appropriate disclosure of such policy to the shareholders, as it constitutes substantial changes to shareholder rights.

In TSX Staff Notice 2017-0001 issued on March 9, 2017, the TSX published the results of its review on advance notice policies adopted by 25 of its listed issuers (the “TSX Review”). In general, the guidance provided in the TSX Review is consistent with the guidelines published by Glass Lewis and ISS. However, the TSX Review also noted that certain requirements contained in the advance notice policies, such as requiring the nominating securityholder to be present at the meeting at which his or her nominee will be elected, or the requirement to provide burdensome disclosure regarding the nominee, were inconsistent with the policy objectives of TSX requirements applicable to the election of directors.

Pay for Performance

Since its introduction in Canada in 2010, the practice of “say-on-pay” or granting shareholders advisory votes on executive compensation programs has been adopted by approximately 160 companies. Such a mechanism is said to enhance board accountability and transparency by linking executive compensation to issuer performance and by more closely aligning the interests of executives to the issuers’ interests. It also motivates executives to focus more on the long-term growth in shareholder value and is therefore supported by both ISS and Glass Lewis.

In order to support the “say-on-pay” mechanism, it is critical that issuers provide shareholders with timely, comprehensive and transparent disclosure on executive compensation packages. Pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-201”), issuers are required to disclose details on their compensation policies and each of their compensation plans, which provides a uniform way of reporting executive compensation across Canada. Furthermore, effective for fiscal years ending on or after October 31, 2017, TSX-listed issuers are required to disclose additional information in their proxy circulars with respect to security-based compensation arrangements, including the annual “burn rate” of each arrangement for the past three fiscal years, the vesting and terms of the securities issuable under each plan, and any multiples used.

Although it is generally accepted that shareholders should have a say in executive compensation, Glass Lewis believes that the “say-on-pay” mechanism should only apply to the election of compensation committee members, rather than direct involvement in setting executives’ pay. In addition, Glass Lewis noted that it had become an emerging best practice to include a “clawback” provision when setting executive compensation. In cases where there is material misconduct, this provision allows issuers to cancel or rescind some or all of the awards given to executives.

Majority Voting

The TSX Company Manual requires that all TSX-listed issuers adopt a majority voting policy with respect to the election of directors and that all directors must be elected by a majority of the votes cast with respect to his or her election other than at contested meetings (the “Majority Voting Requirement”). The TSX Review, which also examined issuers’ compliance with the Majority Voting Requirement, found that certain provisions contained in the majority voting policies selected for review were inconsistent with the requirements contained in the TSX Company Manual. Most notably, the TSX Review identified certain policies that did not contain provisions to ensure that directors who were not elected would tender their resignation in a timely manner and that such resignation must be accepted by the board absent exceptional circumstances. In addition, in cases where the resignation of a director was not accepted by the board, the rationale provided by the board in the circumstances did not meet TSX policy objectives. The TSX Review noted that the “exceptional circumstance,” if relied upon, must meet a high standard, such as where the acceptance of the resignation would result in the issuer’s failure to comply with applicable laws.

In some cases, directors whose resignation is being considered by the board are allowed to continue to serve on the board before a decision whether to accept it is made. The TSX Review clarifies that the director cannot speak or otherwise participate in meetings where his or her resignation is discussed or considered or a related resolution is voted upon, but may attend the meeting in order to satisfy quorum requirements.

On this issue, Glass Lewis has gone further than the current requirements contained in the TSX Company Manual. Glass Lewis believes that once a nominee for director fails to obtain the majority of votes cast at a meeting, there should be no further actions needed by the board or committees to have the nominee removed from the board.

Changes to the CBCA with respect to majority voting were also proposed in Bill C-25. For further details on these proposed amendments, please refer to our prior update on this topic.

Board Responsiveness

Both ISS and Glass Lewis consider it critical for a board to be responsive to the wishes of shareholders expressed through their votes. ISS recommends withholding votes where the board fails to act on shareholder proposals that receive a majority of the votes cast or where a director who receives more than 50% withhold votes remains on the board.

Glass Lewis recommends that the board engage with dissenting shareholders where 20% or more of the shareholders vote against the recommendations of management.

Both Glass Lewis and ISS oppose dual-class voting structures, as they are generally considered not in the best interests of shareholders to have the voting power concentrated in the hands of a few shareholders unless it reflects their economic interest in the issuer. In addition, both agree that the board should demonstrate a level of responsiveness where a majority of the minority or unaffiliated shareholders have voted for or against a proposal.

Director Commitments

Serving as a director on the board is a significant commitment and directors who serve on the boards of multiple issuers may not be able to devote sufficient time and energy to the affairs of each of those issuers, which can pose material risks to the issuer and its shareholders. Glass Lewis recommends that shareholders vote against directors who serve on the boards of more than five issuers and directors who serve as an executive officer of an issuer and a board member of more than two issuers. However, this recommendation may be withheld in certain situations, such as when the issuer provides sufficient rationale for such arrangement or where the director serves on the boards of multiple issuers within the same group of companies.

ISS’ recommendation on this issue is similar to that of Glass Lewis for meetings to be held on or after February 1, 2019. Before that date, the general recommendation by ISS was to withhold votes for directors who served on the board of more than four issuers and directors who served as an executive officer of an issuer and a board member of more than one outside issuer, and who had attended less than 75% of the board meetings in the past year without sufficient reason.

Director and Committee Independence

The independence of a board is critical for the board to perform its obligations effectively and objectively and to protect the interests of shareholders. Glass Lewis recommends that issuers in the S&P/TSX Composite Index have at least two-thirds of their board be comprised of independent members whereas issuers on the TSX Venture Exchange should have at least two independent directors representing no less than one-third of the board. With respect to the audit, compensation, nomination and governance committees, Glass Lewis recommends that all directors on these committees be independent.

This is consistent with the best practices set out in National Policy 58-201 – Corporate Governance Guidelines, which recommends that a majority of the directors on the board should be independent and that all members of the nominating committee and the compensation committee should be independent. The best practice for the audit committee as set out in National Instrument 52-110 – Audit Committees, recommends that there must be a minimum of three members on the audit committee and that all must be independent.

On October 26, 2017, the CSA published a Consultation Paper on their approach to director and audit committee member independence. The comment period ended on January 25, 2018. Depending on the comments received regarding the appropriateness of their approach and suggested changes, the CSA may consider changing their approach to determining director and audit committee member independence in the future.

Virtual Shareholder Meetings

There had been a small but increasing number of issuers that have elected to hold virtual shareholder meetings. While technology can enable more shareholders to participate in shareholder meetings, many take the view that it should be used as a complementary tool to traditional in-person meetings, rather than a complete replacement for such meetings. Glass Lewis found that virtual-only shareholder meetings actually inhibit shareholders’ ability to communicate meaningfully with the management of the issuer and do not have the same effect as in-person meetings. If issuers are considering replacing in-person meetings completely with virtual-only meetings, they must provide robust disclosure in their proxy materials assuring shareholders that their rights and opportunities to participate in the meeting would be equivalent to those in an in-person meeting.

Beginning in 2019, Glass Lewis will recommend voting against using virtual-only shareholder meetings without necessary disclosures.

New TSX Website Disclosure Requirements

Effective April 1, 2018, all TSX-listed issuers, other than certain inter-listed issuers and Non-Corporate Issuers (as defined in the TSX Company Manual), must maintain a publicly accessible website with the following documents posted and maintained:

  • the articles, bylaws and other constating documents of the issuer; and
  • majority voting policy, advance notice policy, board mandate, board committee charters and the position description for the chairman of the board and the lead director, if applicable.

The website should be easily identifiable and accessible from the issuer’s home page or investor relations page.

For further details on the new TSX website disclosure requirements, please refer to our prior update on this topic.

Environmental, Social and Governance Disclosure

Issuers are facing increasing risks with respect to their financial performance and reputation for environmental and social practices. At the same time, investors are demanding more timely, comprehensive and integrated disclosure of environmental issues faced by issuers. Regulators have recognized such demand.

In its Statement of Priorities for 2017-2018, the OSC acknowledged the continued importance to investors of disclosure of environmental, social and governance issues by issuers, and indicated that it would continue to monitor developments in these areas to assess the need for additional or new forms of disclosure.

Glass Lewis recommends management conduct a complete risk analysis on the issuer’s operations to assess the environmental and social risks it is facing. In addition, it recommends that directors engage in the management of these risks to minimize and mitigate their impacts on the issuer’s performances and reputation.

Social Media Disclosures

An increasing number of issuers are now using social media as a means to connect and communicate with their existing and potential shareholders and stakeholders. On March 9, 2017, the CSA published Staff Notice 51-348 – Staff’s Review of Social Media Used by Reporting Issuers (the “Social Media Review”) on the use of social media by issuers and their compliance with applicable disclosure standards in National Policy 51-201 – Disclosure Standards (“NI 51-102”) and continuous disclosure requirements in NI 51-102. The Social Media Review highlighted issues such as misleading and unbalanced disclosure, selective disclosure and insufficient social media governance policies. The CSA noted that the requirements and expectations with respect to disclosure would remain the same for disclosure using social media and that it would continue to monitor the quality of disclosure made through social media. For further details on the Social Media Review, please refer to our prior update on this topic.

In the OSC Corporate Finance Branch Annual Report for 2016-2017 published on September 21, 2017, the OSC noted that information provided by issuers through social media platforms should be balanced and consistent with their disclosure on SEDAR. The OSC also encouraged issuers to adopt a social media governance policy.

If you have any questions with respect to this update, please contact Troy Pocaluyko  at, Al Wiens  at, Mark Wilson at, Davia Wang  at or any other member of our Corporate Governance practice group.