Client Update: Outlook for the 2015 Proxy Season
In preparing for the 2015 proxy season, you should be aware of some regulatory changes that may impact disclosure to and interactions with your shareholders. This update highlights what is new in the 2015 proxy season.
WHAT’S NEW FROM CANADIAN EXCHANGES
The TSX Company Manual was amended on February 3, 2014 to institute a mandatory majority voting policy for election of directors, subject to certain exceptions. The majority voting rule came into effect on June 30, 2014 so issuers that have not had an annual general meeting since that date should be aware that this rule will apply for the 2015 proxy season. The new rules require the majority voting policy adopted by the issuer to provide for the following:
- Any director not elected by at least a majority of the votes cast with respect to his/her election must immediately tender his/her resignation.
- The board shall have 90 days from the date of the meeting to determine whether it will accept the director’s resignation, which it shall do absent exceptional circumstances.
- The resignation will be effective when it is accepted by the board.
- A director who tenders a resignation pursuant to the new rules will not participate in any meeting of the board or sub-committee of the board at which the resignation is considered.
- The issuer must promptly issue a news release regarding the board’s decision, a copy of which must be provided to the TSX. If the board does not accept the resignation of a director, the issuer must provide the board’s reasons in its news release.
It should be noted that an issuer which is majority controlled (50 per cent + one vote) is exempted from the majority voting requirements. However, an issuer that is relying on this exemption must disclose that it is relying on the exemption in the materials which it sends to security holders in connection with a meeting at which directors will be elected. The issuer must also disclose its reasons for not adopting majority voting in such materials. The majority voting requirement does not apply to issuers listed on the TSX Venture Exchange (TSXV).
Updated Security Screening Form for New Officers and Directors
The TSX/TSXV works with the Ontario Provincial Police to conduct a Security Screening Check regarding applicants’ suitability to act as officers, directors, or insiders of an issuer.
Issuers listed on the TSXV are required to submit a Personal Information Form (“PIF”) to the TSXV in a number of situations, such as before any person can be involved with the issuer in the capacity as an “Insider” or before any person can perform “Investor Relations Activities” for the issuer (as those terms are defined in the TSXV Corporate Finance Manual). Issuers which are already listed on the TSX are not generally required to submit a PIF for a new director or officer unless requested to do so by the TSX.
Effective February 1, 2015, the TSX and TSXV will only accept PIFs or Declarations submitted using the new “Exhibit 1”. The new Exhibit 1 contains additional mandatory fields for:
- Email address and telephone number
- Country of birth
- Residential addresses for the past five years
To assist you with the accurate completion of new Exhibit 1, the OPP and TSX have developed an information sheet. The document, Security Screening Check—Information for the Applicant is posted on TSX’s website, to download the form click here.
Other than the foregoing, there have been no changes to the TSX Company Manual, TSXV Corporate Finance Manual or CSE Policies which will impact disclosure in 2015 proxy materials which are circulated by issuers that are listed on these exchanges.
WHAT’S NEW FROM THE CANADIAN SECURITIES ADMINISTRATORS (CSA)
Rule amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices, and Form 58-101F1 Corporate Governance Disclosure are now in effect as of December 31, 2014. The rules now require non-venture issuers to provide annual disclosure regarding the following in their proxy circular or annual information forms:
- Director term limits and other mechanisms of renewal of the board – the amendment requires the issuer to disclose whether or not the issuer has adopted term limits for the directors on its board or other mechanisms of board renewal and, if so, to include a description of those director term limits or other mechanisms of board renewal. If the issuer has not adopted director term limits or other mechanisms of board renewal it must disclose why it has not done so.
- Policies regarding the representation of women on the board – the amendment requires the issuer to disclose whether the issuer has adopted a written policy relating to the identification and nomination of women directors. If the issuer has not adopted such a policy, it must disclose why it has not done so. If the issuer has adopted such a policy, it must disclose, among other things, a short summary of the policy’s objectives and provisions.
- The board’s or nominating committee’s consideration of the representation of women in the director identification and selection process – the amendment requires the issuer to disclose whether and, if so, how the board or nominating committee considers the level of representation of women on the board in identifying and nominating candidates for election or re-election to the board. If the issuer does not consider the level of representation of women on the board in identifying and nominating candidates for election or re-election to the board, it must disclose the issuer’s reasons for not doing so.
- The issuer’s consideration of the representation of women in executive officer positions when making executive officer appointments – the amendment requires the issuer to disclose whether and, if so, how the issuer considers the level of representation of women in executive officer positions when making executive officer appointments. If the issuer does not consider the level of representation of women in executive officer positions when making executive officer appointments, it must disclose the issuer’s reasons for not doing so.
- Targets regarding the representation of women on the board and in executive officer positions – the amendment requires the issuer to disclose whether the issuer has adopted a target regarding women on the issuer’s board or in executive officer positions of the issuer. If the issuer has not adopted such targets, it must disclose why it has not done so.
- The number of women on the board and in executive officer positions – the amendment requires the issuer to disclose the number and proportion (in percentage terms) of women that are directors on the issuer’s board or executive officers of the issuer (including all major subsidiaries of the issuer).
Guidance for Proxy Advisory Firms
On April 24, 2014, the CSA published for comment proposed National Policy 25-201 Guidance for Proxy Advisory Firms (Proposed Policy), building on its earlier Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms. This guidance from the CSA was prompted over concerns about advisory firms’ potential impact on the quality of the proxy voting process. The CSA is recommending practices and disclosure for proxy advisory firms to promote transparency in the services they provide to their clients and to foster an understanding among market participants about proxy advisory activities. The CSA is currently seeking feedback on the Proposed Policy.
WHAT’S NEW IN INSTITUTIONAL INVESTOR COMMENTARY
Glass Lewis & Co. (Glass Lewis) and Institutional Shareholder Services (ISS), two companies that advise institutional investors on how to vote at shareholder meetings, released Canadian guidelines for the 2015 proxy season. We provide the following highlights from these guidelines.
Advance Notice Policies
You may recall from the last yearly update, in the context of director elections, advanced notice bylaws require shareholders who intend to nominate directors for election to provide notice to the issuer of their intentions prior to the shareholders’ meeting. There has been a marked increase of issuer proposals to adopt advance notice provisions in response to “stealth proxy contests”.
Glass Lewis has stated its support for advance notice policies that require a shareholder to provide notice of not less than 30 days, but not more than 70 days prior to the date of the annual meeting. Otherwise, Glass Lewis may recommend that shareholders vote against policies brought forward for resolution. In addition, Glass Lewis may recommend voting against resolutions also if the advance notice policy does not allow for the commencement of a new time period for shareholder nominations in the case of postponement of the annual meeting.
ISS calls for voting on a case-by-case basis on advance notice policies, and supports a minimum of 30 days as a shareholder notice period. However, ISS has dropped its specific recommendation for a maximum threshold on shareholder notice, to support that shareholders have more time to give informed consideration to dissident concerns and director nominees.
ISS outlines several features of advance notice policies that it considers problematic and may recommend voting against, with highlights as follows:
- The board’s inability to waive all sections of the advance notice provision under the policy or bylaw at its sole discretion.
- Any provision that restricts the notification period to that established for the originally scheduled meeting in the event that the meeting has been adjourned or postponed.
- Any other feature or provision determined to have a negative impact on shareholders’ interests.
Finally, ISS will recommend withholding votes from individual directors, committee members or the entire board, if a board has adopted an advance notice policy or bylaw without shareholder approval.
Shareholder Rights Plans
Glass Lewis supports a “limited” poison pill, but indicates generally that poison pill plans are not in the best interests of shareholders. However, in the closing of an important merger, for example, Glass Lewis will support a poison pill plan if the trigger threshold is not lower than 20 per cent, and the provisions of the qualifying offer clause are reasonable, as follows:
- The offer is not required to be all cash transaction.
- The offer is not required to stay open for more than 90 business days.
- The offeror is permitted to amend the terms of the offer or reduce the offer.
- There is no fairness opinion requirement.
- There is a low to no premium requirement.
- Shareholder approval is required for directors to amend material provisions of the plan.
Finally, Glass Lewis emphasizes that poison pills must be approved by shareholders every three years.
Glass Lewis has provided further recommendations for voting based on director performance. In particular, Glass Lewis typically recommends voting against:
- A director who fails to attend a minimum of 75 per cent of board meetings and/or committee meetings in the absence of a reasonable explanation for their poor attendance record.
- A director who is also the CEO of the company where a serious and material restatement has occurred after the CEO had previously certified the pre-statement financial statements.
- A director who has received two against recommendations from Glass Lewis for identical reasons within the prior year at different companies.
- A director who exhibits a pattern of poor oversight in the areas of executive compensation, risk management or director recruitment/nomination.
As noted above, the TSX Company Manual now requires all TSX-listed issuers, with an exception for controlled companies, to adopt majority voting for the election of directors effective June 30, 2014. As such, Glass Lewis does not expect the failure to adopt a majority voting policy will be a significant issue going forward for uncontrolled companies.
For issuers that are majority controlled, Glass Lewis makes no recommendation for withholding votes from members of the governance committees that do not adopt a majority voting policy.
Recent changes, such as majority voting and separation of the positions of CEO and Chair have improved the power of shareholders. Given these improvements, ISS has stated its support for a five year cooling off period for former CEOs, unless that director was a founder of the company or former executive chairman of the board, or unless related party transactions, consulting agreements, and/or any other factors call into question the former CEO’s independence on the board.
Glass Lewis expects that TSX-listed companies’ boards should be at least two thirds independent to adequately protect the interests of shareholders. Although Glass Lewis does not apply a five year cooling off period to directors who have previously served as executives of the company on an interim basis for less than one year, it otherwise requires a five year cooling off period to establish the independence of any former executive of the company. Glass Lewis also requires a three year cooling off period for other relationships involving direct or indirect material or financial connections between the company and the individual.
The foregoing is a summary only intended for general information. If you are interested in any of these topics, a more complete analysis will be required. If you have any questions, comments or concerns respecting the 2015 proxy season please contact your firm lawyer, representative or one of the following members of our securities group: Andrew Burke, Gavin Stuttard, Tauna Staniland, and Eric MacRae.
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