Institutional Shareholder Services (ISS) released updates to its Canadian proxy voting guidelines for the upcoming 2015 proxy season. The ISS updates will apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2015.
Recommendations from proxy advisory firms such as ISS can have a significant impact on the outcome of business conducted at shareholder meetings, especially if institutional investors comprise a significant component of the shareholder base. Canadian public companies should review the updates with their legal counsel to determine the likely impact and take steps to mitigate any potential adverse voting recommendations from ISS.
Updated Definition of Independence
The existing ISS guidelines generally recommend a withhold vote from any "insider" or "affiliated outside director" where: (i) the board does not have a majority of independent directors; or (ii) the board lacks a separate compensation or nominating committee.
"A former CEO will be considered independent after a five year 'cooling-off' period provided that he or she otherwise is independent."
Pursuant to the definition of independence in the existing ISS guidelines, a director nominee is considered to be an "affiliated outside director" and therefore not independent, if he or she was the former CEO of the issuer or its affiliates at any time or an acquired company within the past three years. The 2015 ISS updates provide that a former CEO of the issuer, its affiliates or an acquired company will be considered independent after a five year "cooling-off" period unless the former CEO fails to meet any of the other criteria contained in the ISS definition of independence.
"A director nominee will not be considered independent if he or she has any material relationship with the issuer or any one or more members of management of the issuer."
The 2015 ISS updates have supplemented the definition of independence to include a provision that deems any director nominee that has any material relationship with the issuer or with any one or more members of management of the issuer not to be independent. A "material" relationship is a financial, personal or other relationship that a reasonable person might conclude could potentially influence one's objectivity in the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy his or her requisite fiduciary standards on behalf of shareholders.
"Generally vote withhold from any director who has served as the CEO of the issuer within the past five years and is a member of the audit or compensation committee."
The existing ISS guidelines generally recommend a withhold vote from any director on the audit or compensation committee if: (i) the director has served as the CEO of the issuer at any time; or (ii) the director has served as the CFO of the issuer within the past three years.
As a consequence of the updated definition of independence, ISS will recommend a withhold vote from any director who has served as the CEO of the issuer within the past five years and is a member of the audit or compensation committee.
Unilateral Adoption of an Advance Notice Provision
"Generally vote withhold from individual directors, committee members or the entire board, as appropriate, where an advanced notice policy has been adopted by the board but has not been included on the voting agenda at the next shareholders' meeting."
This new recommendation was introduced by ISS and arose from its view that a shareholder's ability to put forward director nominees is a fundamental right that should not be amended by management or the board without shareholders' approval or, at a minimum, with the intention of receiving shareholder approval at the next meeting of shareholders.
Advance Notice Requirement
"Vote case-by-case on proposals to adopt or amend an advance notice policy or bylaws containing or adding advance notice requirements, giving support to those proposals that support the stated purpose of advance notice requirements as described below."
Under the 2015 ISS updates, ISS continues to vote case-by-case on proposals to adopt or amend an advance notice policy or bylaws containing or adding advance notice requirements and now gives support to proposals that solely support the stated purpose of advance notice requirements, which is to prevent stealth proxy contests, provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations within a reasonable timeframe and provide all shareholders with sufficient information about potential nominees in order for them to make informed voting decisions on such nominees.
In addition, the specific features of advance notice requirements given support in the existing ISS guidelines have also been modified and supplemented by the 2015 ISS updates as follows:
| Existing ISS Guidelines | 2015 ISS Updates | |||
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Include a deadline for giving notice of shareholders' director nominations for an annual meeting which is: (i) not more than 65 days and not fewer than 30 days prior to the meeting date if the notice of annual meeting is given 50 days or more before the meeting date; and (ii) the close of business on the 10th day following first public announcement of the annual meeting, if notice of the annual meeting is given fewer than 50 days prior to the meeting date. Include a deadline for giving notice of shareholders' director nominations for a special meeting which is the close of business on the 15th day following first public announcement of the special meeting. |
Removes maximum upper limit for notification of director nominations for annual meetings.* * The 2015 Glass Lewis & Co. updated guidelines indicate that it may vote against advanced notice policies that deviate from a notice period of not less than 30 days and not more than 70 days prior to the date of the annual meeting. |
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Exclude provisions that the board may only waive a portion of the advance notice provisions in its sole discretion. |
Clarifies that the board should be empowered to waive all sections of the advance notice provision in its sole discretion. |
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Exclude provisions that require any proposed nominee to deliver a written agreement where the proposed nominee acknowledges and agrees that he or she will comply with all policies and guidelines of the issuer that are applicable to directors. |
Clarifies that a proposed nominee should not be required to deliver a written agreement where the proposed nominee acknowledges and agrees, in advance, to comply with all policies and guidelines of the issuer that are applicable to directors. |
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Supports full disclosure of a dissident shareholder's economic and voting position in the issuer so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review any proposed director nominees in a timely manner. |
Replaces the full disclosure feature with new parameters which provide that provisions should not include additional disclosure requests that: (i) exceed the disclosure required within a dissident proxy circular; or (ii) are necessary to determine director nominee qualifications, relevant experience, shareholding or voting interest in the issuer, or independence in the same manner as would be required and disclosed for management nominees. |
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New - Exclude provisions that restrict the notification deadline to the one established for the originally scheduled meeting if a meeting has been adjourned or postponed. |
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New – Exclude provisions which stipulate that an issuer will not be obligated to include information provided by dissident director nominees or nominating shareholders in shareholder communications, including the proxy statement. |
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New – Exclude provisions determined to have a negative impact on shareholders' interests and deemed to be outside the purview of the stated purpose of the advance notice requirement. |
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Article/Bylaw Amendments
"Generally vote against proposals to adopt or amend articles or bylaws with, inter alia, (i) an advance notice requirement that includes one or more provisions which could have a negative impact on shareholders' interests and which are deemed outside the purview of the stated purpose of the requirement, or (ii) any other provisions that may adversely impact shareholders' rights or diminish independent effective board oversight."
Under the existing ISS guidelines, ISS recommends voting for proposals to adopt or amend articles and bylaws unless the resulting document contains any of the following: (i) quorum for the meeting of shareholders is below two persons holding 25 percent of the eligible vote (this may be reduced to no less than 10 percent in the case of a small issuer without a controlling shareholder that is unable to achieve a higher quorum); (ii) quorum for a meeting of directors is less than 50 percent of the number of directors; (iii) the chair of the board has a casting vote in the event of a deadlock at a meeting of directors; (iv) an alternate director provision that permits a director to appoint another person to serve as an alternate director to attend board or committee meetings in place of the duly elected director; and (v) a provision that grants blanket authority to the board with regard to the future capital authorizations or alteration of capital structure without further shareholder approval.
The 2015 ISS updates expands the instances where ISS will not recommend voting for proposals to adopt or amend articles or bylaws to include the following: (i) an advance notice requirement that includes one or more provisions which could have a negative impact on shareholders' interests and which are deemed outside the purview of the stated purpose of the requirement; and (ii) any other provisions that may adversely impact shareholders' rights or diminish independent effective board oversight. In addition, proposals to adopt or amend articles or bylaws will generally be opposed, subject to certain exceptions, if the resulting document is not included in the meeting materials for review or referenced for ease of location on SEDAR.
Capital Structure
"To adopt a clearly defined case-by-case approach and indicate additional criteria that are considered when evaluating private placement issues."
Under the existing ISS guidelines, ISS recommends voting on a case-by-case basis on private placement issuances and generally voting for private placement proposals if: (i) the issuance represents no more than 30 percent of the issuer's outstanding shares; and (ii) the use of the proceeds from the issuance is disclosed.
The 2015 ISS updates retain the case-by-case approach to considering private placement issuances and propose to take into account the following additional criteria: (i) whether other resolutions are bundled with the issuance; (ii) whether the rational for the issuance is disclosed; (iii) dilution to existing shareholders' position (e.g., issuances representing no more than 30 percent of the issuer's outstanding shares on a non-diluted basis is generally acceptable); (iv) any discount or premium on the issuance price; and (v) market reaction to the proposed private placement since the announcement. In addition, ISS will recommend voting for private placement issuances if: (i) the issuer is expected to file for bankruptcy if the transaction is not approved; or (ii) the issuer's auditor or management has indicated that the issuer has going concern issues.
Bennett Jones is able to assist clients in reviewing the updated voting guidelines to determine the likely impact of the voting recommendations from ISS. The 2015 Benchmark Policy Recommendations may be downloaded in PDF format from www.issgovernance.com.
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