- 2015 Disclosure Update
- March 13, 2015 | Authors: Colin Cameron-Vendrig; Jason M. Saltzman
- Law Firm: Borden Ladner Gervais LLP - Toronto Office
Each year the Securities and Capital Markets team at BLG is asked what has changed to the continuous disclosure requirements for Canadian public companies.
Significant developments for 2015 include:
- Updated voting guidelines from Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co., LLC (“Glass Lewis”) for the 2015 proxy season;
- Amendments to National Instrument 58-101 that impose comply or disclose rules regarding women on boards and in senior management roles; and
- The Toronto Stock Exchange (the “TSX”) mandating majority voting.
- Proposed amendments to current disclosure and governance obligations for venture issuers;
- The Canadian Securities Administrators (“CSA”) providing proposed guidelines, not rules, to “regulate” proxy advisory firms; and
- A national cooperative capital markets regulator becoming closer to a reality.
ISS and Glass Lewis released updated guidelines for the 2015 Canadian proxy season that provide as follows:
Former CEO Independence - Five Year Cooling Off Period
ISS will deem a former CEO to be independent for the purposes of serving on the board or any key committee, including the audit committee, after a five year cooling off period unless there is a relationship with the issuer, or an executive officer of the issuer, which could reasonably be perceived to interfere with the exercise of his/her independent judgment.
Advance Notice Policies
ISS clarified that it will generally recommend that investors withhold votes from directors in situations where an advance notice by-law has been adopted by the board but has not been placed on the voting agenda for the upcoming shareholders’ meeting.
ISS clarified that it will generally oppose any by-law amendment if the full by-law text is not either included in the meeting materials or referenced in an easily accessible location such as SEDAR.
ISS added several criteria to expand on their case-by- case approach to analyzing private placements. Some of the new factors include whether the rationale for the private placement is detailed; the dilutive effect on shareholders; any discount or premium to the share price prior to the announcement; and the market’s response following the announcement.
Glass Lewis has revised their approach on majority voting policies for TSX listed companies to reflect the new TSX majority voting requirement. Accordingly, Glass Lewis will now recommend that shareholders withhold votes from all members of the governance committee for an uncontrolled issuer that lacks such a policy.
Shareholder Rights Plans
Glass Lewis will consider supporting a rights plan with a trigger threshold that is not unreasonably low (i.e. lower than 20%) provided that it incorporates the following provisions in its qualifying offer clause: (i) there is no requirement that it be an all-cash offer; (ii) there is no requirement that the offer remain open for more than 90 business days; (iii) the offeror is allowed to amend, reduce and change the terms of the offer; (iv) no fairness opinion is required; (v) there is a low or no premium requirement; and (vi) the board does not have discretion to amend the material terms of the plan unilaterally.
Advance Notice Policies
Glass Lewis will generally support advance notice policies that are reasonable and not unduly restrictive for shareholders. Glass Lewis will generally recommend that shareholders vote for policies that require a nominating shareholder to provide notice not less than 30 days and not more than 70 days prior to the date of the annual meeting. If these notice periods are not provided, Glass Lewis may consider recommending that shareholders vote against such policies. In addition, Glass Lewis will also consider recommending voting against an advance notice policy if it does not allow for the commencement of a new time period for shareholder nominations in the event of an adjournment or postponement of the annual meeting.
Women on Boards and in Senior Management
All of the securities regulatory authorities in Canada, other than in Alberta and British Columbia, amended National Instrument 58-101 Disclosure of Corporate Governance Practices (the “NI 58-101 Amendments”) to require certain disclosure regarding the representation of women on boards and in senior management roles.
The NI 58-101 Amendments do not impose targets or quotas, but require all non-venture issuers to disclose each year in either their annual information forms or in their management information circulars:
- whether the issuer has adopted director term limits or other board renewal mechanisms, and if not, why not;
- whether the issuer has a written policy regarding the representation of women on the board, and if not, why not;
- whether the board or the nominating committee considered the level of representation of women in the director identification and selection process, and if not, why not;
- whether the issuer considers the representation of women in executive positions when making executive officer appointments, and if not, why not;
- whether the issuer has targets for the representation of women on its board and in executive officer positions, and the annual and cumulative progress in achieving such targets, and where there are no such targets, why not; and
- the number and proportion of women on the board and in executive officer positions of both the issuer and each of its “major” subsidiaries.
The TSX approved final rules which made majority voting for uncontested meetings mandatory, either through the adoption of a policy or amendment to articles or by- laws, for fiscal years ending on or after June 30, 2014.
The new rules provide as follows:
- Each director of a listed issuer must be elected by a majority of the votes cast with respect to his or her election.
- A listed issuer must adopt a majority voting policy which provides for the following:
- Any director must immediately tender his or her resignation to the board if he or she is not elected by at least a majority.
- The board shall determine whether or not to accept the resignation within 90 days after the meeting, provided that resignations should be accepted other than in exceptional circumstances.
- The listed issuer must promptly issue a news release with the board’s decision and must fully state the reasons if a resignation is not accepted.
The CSA is reviewing comments on proposed amendments to current disclosure and governance obligations intended to streamline and tailor disclosure requirements and to enhance the substantive governance requirements for venture issuers. The proposed amendments include:
- for venture issuers without significant revenue, allowing the requirement for management’s discussion and analysis for interim financial periods to be satisfied by a streamlined and focused report on quarterly highlights;
- implementing a new tailored form of executive compensation disclosure;
- reducing the instances in which a business acquisition report must be filed through changes to significance thresholds;
- requiring audit committees to have a majority of independent members; and
- amending the prospectus disclosure requirements to reduce the number of years of audited financial statements required for venture issuers becoming reporting issuers and to conform the disclosure requirements to the proposed amendments related to continuous disclosure.
In April 2014, the CSA published proposed National Policy 25-201 Guidance for Proxy Advisory Firms (the “Proposed Policy”) to address the regulation of proxy advisory firms. For the most part, the Proposed Policy merely provides guidance in the form of suggestions that proxy firms “may consider” rather than rules that must be followed.
Conflicts of Interest
To address conflicts of interest, the CSA suggests that proxy advisory firms may consider taking steps such as establishing policies and procedures, internal safeguards and controls and a code of conduct. The CSA notes that it expects such firms will disclose conflicts of interests to their clients and will publicly disclose the policies and procedures they set up though does not actually require that either of such disclosures be made.
Transparency and Accuracy of Vote Recommendations
The Proposed Policy requires that proxy advisory firms implement appropriate practices to promote transparency and accuracy of recommendations, but it merely suggests that such firms “may consider” establishing and disclosing policies and procedures that describe the approach used in its analysis, as well as safeguards to increase the accuracy and reliability of information relied on when making recommendations. The CSA does not require, or even recommend, that such firms consult with issuers before making recommendations to ensure that information relied upon is accurate.
Development of Proxy Voting Guidelines
Despite the influence that ISS and Glass proxy voting guidelines often have, the CSA did not require, but rather just “encourages”, proxy advisory firms to consult with market participants prior to setting such voting guidelines.
Corporate Governance Practices
Some market participants have raised concerns that given the influence that proxy advisory firms have, issuers often feel compelled to adhere to proxy voting guidelines set by proxy advisory firms. While the CSA recognized such concerns, it did not mandate how proxy advisory firms should address such concerns, but rather reminded issuers that they may engage with their own shareholders to explain why the issuer has or has not adopted certain policies.
Communications with Clients, Market Participants, the Media and the Public
While nothing is mandated, the CSA stated that when a proxy advisory firm issues its vote recommendations, such firms should communicate the following in their reports to clients:
- any actual or potential conflicts of interest;
- approach or methodology used, and factors considered;
- identification of factual information as well as information flowing from analytical models and assumptions;
- a description of the extent to which proxy voting guidelines are used and reasons for any deviation;
- the nature and outcome of any dialogue or contact with an issuer;
- limitations or conditions in the research and analysis used; and
- a statement that any vote recommendation and underlying research and analysis is intended solely as guidance.
The federal government and the governments of Ontario, British Columbia, Saskatchewan and New Brunswick announced in September 2014 that they signed a memorandum of agreement formalizing the terms of a Cooperative Capital Markets Regulatory System.
The Capital Markets Regulatory Authority (the “Authority”) will administer both the federal and provincial securities acts and will act in accordance with a single set of regulations. The Authority will be comprised of a Regulatory Division responsible for the policy, regulatory operations, advisory services and enforcement functions and an independent Tribunal which will adjudicate enforcement and administrative proceedings.
The uniform Provincial Capital Markets Act, which will be enacted by each participating province and which will replace existing provincial securities legislation, purports to harmonize the approaches taken by the various signatory provinces. The complementary federal Capital Markets Stability Act addresses those areas under federal jurisdiction, equipping the Authority with national data collection powers to monitor activity in capital markets and providing the Authority with the requisite tools to “manage systemic risk related to capital markets on a national basis”. The federal statute will also enact capital markets related offences currently included in the Canadian Criminal Code. Both the provincial and federal statutes empower the Authority to make regulations.
While the proposed Provincial Capital Markets Act is largely consistent with existing provincial securities laws, it adopts a “platform approach” to capital markets regulation. This involves setting out the broad strokes of capital market law in the Provincial Capital Markets Act, while reserving the detailed requirements (including some of those currently set out in provincial securities law) for the regulations to be adopted by the Authority.