Each year we are asked what has changed to the continuous disclosure requirements for Canadian public companies.
Significant developments for 2013 include:
- amendments to the TSX Company Manual requirements for director elections;
- the adoption of the notice-and-access concept for the materials for meetings of security holders;
- changes in the voting policies of proxy advisors.
In addition, the Canadian Securities Administrators (the CSA) have provided guidance regarding the results of their continuous disclosure reviews. Although this guidance does not change the continuous disclosure requirements, it does elaborate on the expectations of the regulators and/or the interpretation of the requirements. A summary of the common deficiencies identified is included below.
TSX Director Election Requirements
Amendments to the TSX Company Manual, which came into force on December 31, 2012, require all TSX-listed issuers to:
- elect directors individually and not as part of a slate;
- hold annual elections for all directors, which precludes the use of staggered terms1;
- disclose annually in its management information circular:
- whether they have adopted a majority voting policy2 for uncontested meetings, which requires a director who receives a majority of withhold votes to tender his or her resignation; and
- if not, to explain:
- its practices for electing directors; and
- why it has not adopted a majority voting policy;
- advise the TSX if a director receives a majority of "withhold" votes (if a majority voting policy has not been adopted); and
- promptly issue a news release providing detailed disclosure of the voting results for the election of directors.A majority voting policy addresses the fact that corporate law in a number of jurisdictions allows issuers to use plurality voting, where security holders may only vote "for" or "withhold" for each director or a slate of directors, which may result in the election of directors with minimal favourable votes. Such a policy would require any nominee for director who received more "withhold" votes then "for" votes to submit his or her resignation.
The requirement to elect directors individually is consistent with the rules of the TSX Venture Exchange (TSXV), which prohibit mechanisms that may entrench current management, such as slate voting, unless the issuer's security holders are permitted to choose whether to elect the board as a slate or to elect directors individually.
On November 29, 2012, the CSA published the final form of amendments to National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) and National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102). The major focus of these amendments is to enable reporting issuers, other than investment funds, to use notice-and-access for meetings of security holders after March 1, 2013. Under notice-and-access, a reporting issuer can deliver proxy-related materials by posting the relevant information circular and proxy-related materials on a website (other than SEDAR) and sending a notice informing shareholders that the proxy-related materials have been posted and explaining how to access them.
The major advantage of notice-and-access is the reduction in the size of the package that must be mailed to the issuer's security holders, which is expected to reduce the costs of the meeting. However, security holders are still entitled to receive a paper copy of the materials on request.
Notice-and-access could potentially affect the level of security holder participation in meetings, since additional action on the part of the security holder will be required to obtain a copy of the information circular.
The amendments to NI 54-101 and NI 51-102 allow for the use of notice-and-access for both beneficial and registered security holders under securities legislation. However, issuers may also be subject to requirements under corporate or other legislation that may affect their ability to take advantage of these amendments, particularly for registered security holders.
Issuers that are regulated by the Securities and Exchange Commission may be able to rely on an exemption to use the US version of notice-and-access, depending on the extent of their connection to Canada.
Content of the Notice
Issuers that elect to use notice-and-access must include the following in the package that is mailed to shareholders:
- the date, time and location of the meeting;
- a description of the matters to be voted on at the meeting;
- the website address for SEDAR and a non-SEDAR website where the information circular and other proxy-related materials are available;
- a reminder to review the information circular before voting;
- a plain language explanation of the notice-and-access process;
- a form of proxy or voting instruction form;
- a toll-free telephone number for the security holder to request a paper copy of the information circular; and
- if the issuer is sending paper copies of the information circular to certain shareholders, a list of the types of security holders receiving paper copies.
Timing Implications of Notice-and-Access
The use of notice-and-access is subject to different timing requirements from a traditional mailing:
- Record date – the record date is required to be at least 40 (instead of 30) days prior to the meeting date.
- Notice of first time adoption – the first time that an issuer uses notice-and-access, it must file on SEDAR the notification of the meeting and record dates at least 25 days prior to the record date;
- Mailing – the notice must be sent at least 30 days prior to the meeting.
As a result of these requirements, at least 65 days' notice prior to the meeting date is required for the initial implementation of notice-and-access by an issuer.
Other Changes to NI 54-101
NI 54-101 will also be amended in other respects, including a simplified process regarding the appointment of the beneficial owner of securities as the proxy holder of the securities and enhanced disclosure requirements regarding the voting process. This may affect the disclosure in a reporting issuer's information circular relating to the process for voting by beneficial shareholders.
The requirements and forms for requesting information regarding an issuer's beneficial ownership will also be modified.
Updates to Proxy Advisor Policies
In mid-November 2012, both Institutional Shareholder Services Inc. (ISS) and Glass Lewis, & Co., LLC (Glass Lewis), two of the leading proxy advisory firms in Canada, published their updated guidelines for the 2013 proxy season. Generally speaking, these new guidelines are in effect for shareholder meetings taking place on or after February 1, 2013. The following is a list of the material updates to the ISS and Glass Lewis guidelines:
Advance Notice Policies (ISS and Glass Lewis)
Both ISS and Glass Lewis support issuers adopting, either as a corporate policy or as part of the issuer's constating documents, a policy which would require shareholders to notify the issuer a reasonable amount of time before a shareholder meeting (being between 30-65 days prior to the meeting) if they intend to nominate any new directors to the board. ISS and Glass Lewis support these advance notice policies in order to ensure that all shareholders receive sufficient notice of director nominations.
Slate Voting (ISS and Glass Lewis)
While nominating and voting on directors has generally been heading in this direction in recent years, both ISS and Glass Lewis have come out again against slate voting. ISS will not support a slate for nomination in any case, for any issuer (they had previously taken a more lenient approach for TSXV-listed issuers). Glass Lewis will continue to review TSXV slates on a case-by-case basis, but will recommend against the entire slate if they have concerns with respect to one nominee. For other issuers, Glass Lewis will recommend voting against the slate of directors.
Each of ISS and Glass Lewis will take a case-by-case approach with respect to slate voting for an issuer which has a majority shareholder.
Board Responsiveness to Significant Shareholder Vote (Glass Lewis)
Glass Lewis believes there is a concern that certain issuers may not be properly addressing concerns raised by their shareholders at shareholder meetings. Where any matter at a meeting receives less than 75% approval, Glass Lewis believes that shareholders are sending a message to the issuer, and expects the issuer to respond. While receiving below this level of shareholder support on a matter will not automatically result in Glass Lewis issuing a negative recommendation for matters put forward by management in future years, it will be taken into consideration for all future matters put forward by management (including director nominations, amendments to constating documents and votes on executive compensation). Glass Lewis will be less inclined to provide a negative recommendation on a future management proposal if they feel that the board has taken steps to address the concern made apparent by the lack of shareholder support on an earlier vote.
Majority Voting Policy (Glass Lewis)
As a result of the amendments to the TSX Company Manual described above, certain TSX-listed issuers will be required to either adopt a majority voting policy or explain in their meeting materials why the issuer has not adopted a majority voting policy. Glass Lewis is in favour of issuers adopting majority voting policies, and has been suggesting this for a few years. Accordingly, for issuers in the S&P/TSX composite index that do not adopt a majority voting party but rather elect to explain the lack of one, Glass Lewis will recommend that shareholders withhold their votes with respect to the election of all members of the issuer's governance committee.
New Executive Compensation Calculation (ISS)
Say-on-pay votes, while not required in Canada, have been voluntarily introduced by many issuers over the past five years. As a result of these votes having been established for a number of years, ISS has reviewed its formula for analyzing executive compensation and determined that its previous formula was not as effective as it should be. ISS therefore has adopted a new formula, which is based on making recommendations to vote against any say-on-pay resolution where there is a significant long-term misalignment between CEO compensation and company performance. The formula involves a two-step process. The first step is quantitative, and is in three parts: (i) a comparison of the total shareholder return rank of the issuer against the CEO compensation rank, over a one and three year period, against a peer group determined by ISS; (ii) a comparison of the CEO's compensation in the last reported fiscal year to the median CEO compensation within the peer group; and (iii) a comparison between the CEO's compensation and the issuer's total shareholder return over the previous five years. If there is a potential long-term misalignment based on the quantitative analysis, ISS will then conduct the second step, a qualitative assessment based on its own internal criteria. If after the qualitative assessment ISS determines a long-term misalignment is present, ISS will recommend voting against the say-on-pay resolution.
Alternate Directors (ISS)
ISS believes that all directors, and each person taking on the role of a director, should be elected and accountable to the shareholders of an issuer. Where a director is permitted to appoint an alternate director to fill their position on the board, that alternate director may not have been elected by the shareholders and their appointment will not have been ratified by the shareholders. Accordingly, ISS will recommend voting against any proposal to adopt or amend an issuer's constating documents where those constating documents include the ability for a director to appoint an alternate director.
CONTINUOUS DISCLOSURE REVIEWS
CSA Staff Notice 51–337 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2012 (the CSA Notice3 ) includes guidance on common deficiencies identified through the CSA's continuous disclosure reviews. Separate reports by the Alberta Securities Commission4 (the Alberta Report) and the Autorité des Marché Financiers5 (the AMF Report) provide additional guidance.
- First-time adoption of IFRS – omitting the required reconciliations♦♣, failing to adequately explain material adjustments and the application of judgment♦♠, providing insufficient or unclear descriptions of the effect of the transition and note disclosure♠♣, failing to change all of accounting policies♦, providing boilerplate accounting policy disclosure♦♠, and failing to develop and apply accounting policies where applicable IFRS standards do not exist.♠
- Statement of changes in equity – failing to include a statement of changes of equity for comparative interim periods.♦
- Current liabilities – failing to classify obligations as current under IFRS, such as obligations for which the issuer does not have the unconditional right to defer settlement of liability for at least 12 months after the reporting period.♦
- Business combinations – failing to disclose required information separately for each significant business combination or on an aggregate basis for individually immaterial business combinations that are collectively material and omitting required disclosure♦, such as:
- the amounts of revenue or profit or loss of the acquired entity since the acquisition date included in the consolidated statement of comprehensive income,
- the revenue and profit or loss of the combined entity as though the acquisition dates had been as of the beginning of the annual reporting period,
- required information for business combinations completed after the end of the financial period but before the date of the financial statements,
- the primary reasons for the business combination and a description of how the issuer obtained control,
- a qualitative description of the factors that make up goodwill,
- required information for contingent liabilities recognized,
- the reasons why the transaction resulted in a gain for bargain purchases, and
- the gross contractual amounts receivable and an estimate of contractual cash flows not expected to be collected for acquired receivables.
- Flow-through shares – failing to identify the IFRS transition impact for flow-through shares despite the fact that IFRS does not specifically address accounting for flow-through shares and that the accounting under pre-changeover Canadian GAAP can no longer be used. Omitting adjustments resulting from the recognition of deferred tax in respect of the issuance of flow through shares in the comparable period.♣
- Going concern disclosure – providing boilerplate risk disclosure that does not clearly identify the material uncertainties related to events or conditions that may cast significant doubt on an issuer's ability to continue as a going concern.♠
- Decommissioning liability disclosure – weak disclosure, including failing to disclose material assumptions used in measuring liabilities and failing to adequately explain material variances from period to period.♠
- Segment disclosure – inconsistent or inappropriate identification of reportable segments.♠
- Additional GAAP measures – use of unnamed or inappropriately named subtotals in financial statements.♠
- Financial covenants – failure to disclose debt covenants or for issuers nearing or anticipating a covenant breach not providing sufficient disclosure to enable readers to appreciate the associated liquidity risks.♠
- Financial instruments – failing to provide quantitative data regarding exposure to liquidity risks from financial instruments that enables users to evaluate the extent of risks.♠
- Cash flow statement – inappropriate classification of cash flow items between operating, investing and financing activities.♠
- Interim reporting – failing to include sufficient explanation in interim statements to allow an understanding of the events and transactions that have resulted in changes in financial position since the end of the last annual reporting period.♠
- Impairment – inappropriate measurement and timing of impairment analysis, including failing to recognize impairments in interim periods despite indicators of impairment.♠
Management's Discussion & Analysis
- Boilerplate disclosure – providing boilerplate disclosure that does not change from period to period and failing to provide entity specific disclosure that complements the financial statements, such as: the factors underlying operational changes, known or expected fluctuations in trends in liquidity (particularly for issuers with negative cash flow), and adequate descriptions of operations for issuers in specialized industries.♦♣
- Accounting principles – failing to clearly identify the accounting principles used when presenting a mix of financial information in accordance with pre-changeover Canadian GAAP and IFRS.♦♣
- Non- and additional GAAP measures – failure to provide comprehensive discussion of the closest GAAP measure.♣♠
- Discussion of operations – superficial discussion that does not explain the factors that contributed to material variations in operations.♣♠
- Related party transactions – omitting the name of the related parties and failing to describe the business purpose of the transaction.♣
- Working capital – weak disclosure of how issuers can meet working capital obligations as they come due.♠
- Forward looking information – failing to update previously disclosed forward looking information.♠
- Significant projects – failing to provide material updates for significant projects.♠
- Unbalanced and promotional disclosure – potentially unfavourable developments should be disclosed just as promptly, prominently and completely as positive news.♠
- DC&P and ICFR Disclosure – incomplete or qualified conclusions regarding disclosure controls and procedures and internal controls over financial reporting.♣
Technical Disclosure (for Resource Issuers)
- Incomplete or inadequate disclosure of preliminary economic assessments, mineral resources and mineral reserves.♦♣
- Non-compliant or omitted certificates and consents of qualified persons.♦♣
- Incomplete or inadequate disclosure of historical estimates and exploration targets, including source and date for estimates and comments on relevance and reliability.♦♣
- Omitting the name of the qualified person from documents containing scientific and technical information.♦
- Well-flow test results – disclosure of short-term test rates or peak rates without identifying them as such.♠
- Core and non-core terminology – unclear and inconsistent use of core and non-core in relation to the discussion of properties.♠
Executive Compensation Disclosure
- Summary compensation table – failing to disclose grant date fair value of share-based awards and option- based awards and the key assumptions and estimates used to calculate fair value.♦♣
- Compensation discussion and analysis – not fully and accurately explaining significant elements of compensation.♦ Boilerplate disclosure that does not establish a clear link between performance goals and compensation awarded.♣
- Performance goals – omitting goals used to determine annual bonuses and failure to quantify performance goals.♣
- Benchmarks – omitting benchmark group and selection criteria.♣
Corporate Governance Disclosure
- Disclosure – failing to provide meaningful disclosure regarding governance practices, such as the process used to identify new board candidates for board nomination.♦
- Meetings of independent directors – failing to disclose the number of meetings of independent directors.♣
- Compliance with code of conduct – not describing how the board ensures compliance and the measures taken to encourage and promote a culture of ethical business conduct.♣
- Nominations – not describing the process for identifying new board nominees.♣
- Effectiveness – incomplete descriptions of the process for assessing board and committee effectiveness.♣
- Principal Security Holders – failing to disclose principal security holders where information is available on SEDI.♣
- Audit Committee – omitting audit committee charter and incomplete disclosure regarding audit committee.♣
CEO and CFO Certificates
- Form of certificates – changing the form of certificate by adding or omitting text.♣♠ Using old versions of the forms.♠
- Dates of financial periods – referring to incorrect
financial periods in the certificates.♣
Common deficiencies from the Reports are identified using the following symbols:
CSA Notice ♦
1 If security holder approval is required to implement the amendments because changes are required to the issuer's constating documents, the TSX will not consider the issuer to be in breach of these obligations if the security holders do not approve the amendments. However, the issuer is required to resubmit and recommend the required amendments at an annual meeting within three years.
2 Further proposed amendments, which have been published for comment, would require all TSX listed issuers to adopt a majority voting policy effective January 1, 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.