Last year was an unusual year in Canada with regards to developments that affect public company securityholder meetings. Unlike in past years, the changes did not focus so much on initiatives by the Canadian Securities Administrators (CSA) requiring, in particular, enhanced disclosure to securityholders. Rather, in 2012, shareholder activists, Canadian courts, stock exchanges and proxy advisors, in addition to the CSA, all contributed to a dynamic environment that should affect issuers’ thinking about this year’s securityholder meetings.
To assist in preparing for the 2013 proxy season, this article highlights certain developments over the last year which may be of particular relevance to corporate secretaries and in-house counsel of public companies.
1. Shareholder Activism
High-profile proxy battles in Canada in 2012, such as those at TELUS Corporation and Canadian Pacific Railway Limited, should serve as reminders to public companies of the value of keeping informed and thinking ahead. No issuer is immune from shareholder activism, and some shareholder activism is, arguably, not in the best interests of all shareholders. It is important for an issuer to stay connected with its shareholder base, and be aware of trading activities and other investor strategies. Information on shareholder sentiment and activities is relevant to virtually all aspects of meeting preparation, including the timing of the meeting and record date, the location of the meeting, the resolutions proposed to be tabled at the meeting, and the disclosure in the proxy circular. An issuer which does not routinely gather such information and take it into account in planning its annual general meeting (and as part of its governance and investor relations generally) should make a concerted effort to do so well in advance of its meeting.
2. Slate Voting
Recent amendments to the Toronto Stock Exchange (TSX) Company Manual now require all TSX-listed issuers to permit their securityholders to vote for the election of each director individually. This is in line with the TSX Venture Exchange Corporate Finance Manual, which provides that issuers must not construct mechanisms that entrench existing management, such as the election of a slate of directors, if shareholders are not permitted to choose whether to elect the board as a slate or to elect directors individually.
Institutional Shareholder Services Inc. (ISS) has confirmed that, for the 2013 proxy season, it will generally recommend, where there is an uncontested directors’ election, that shareholders withhold votes from all directors nominated by slate ballot.
3. Majority Voting Policies
A majority voting policy typically requires a director who receives a majority of “withhold” votes to tender his or her resignation. As discussed in more detail in our earlier MarketCaps article, the TSX Company Manual has been amended to provide that a TSX-listed issuer subject to National Instrument 51-102 – Continuous Disclosure Obligations must disclose in its securityholder meeting materials whether it has adopted a majority voting policy for the election of directors for uncontested meetings. If a policy has not been adopted, the issuer must explain in its securityholder meeting materials (i) its practices for electing directors and (ii) why it has not adopted a majority voting policy. If a policy has been adopted, the TSX expects that an issuer will provide fulsome disclosure of that policy (which might include, for example, information with respect to any principles or policies that the board might apply if it has discretion to accept or reject a resignation). Note also that, after each meeting at which directors have been elected, TSX-listed issuers are required to (i) notify the TSX if a director has received a majority of “withhold” votes (if a majority voting policy has not been adopted) and (ii) promptly issue a press release providing detailed disclosure of the voting results for the election of directors.
Concurrent with the adoption of the amendments referenced above, the TSX published further proposed amendments to the TSX Company Manual that would require its listed issuers to have majority voting for director elections at uncontested meetings. Subject to Ontario Securities Commission approval, the TSX anticipates that this proposal would become effective as of December 31, 2013.
In its updated proxy voting guidelines for the 2013 proxy season, Glass Lewis & Co., LLC (Glass Lewis) has advised that it will recommend that securityholders withhold votes from all members of an issuer’s governance committee if the issuer is in the S&P/TSX composite index and has not adopted a majority voting policy.
4. Telephone Proxy Solicitation (Mosquito Consolidated Gold Mines)
This past summer, the British Columbia Supreme Court in International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited granted an order declaring a previously held contested annual general meeting to be invalid, and all resolutions passed at the meeting to be null and void, after the court found “serious flaws” in the voting procedures used by Mosquito which were found to have had an oppressive and unfairly prejudicial effect on the dissident shareholder’s right to a fair and transparent process in the context of the contested meeting. Mosquito had utilized its proxy solicitor’s telephone solicitation system to solicit proxies for the contested shareholder meeting. The system used call centre operators, employed by the proxy solicitor, to call registered shareholders and NOBOs (non-objecting beneficial shareholders) and to take their votes by asking them to verbally authorize the proxy solicitor to execute a proxy or voting instruction form on their behalf. Call centre operators were permitted to accept as truthful an oral representation from a person at the telephone number that they were the person entitled to vote, or that they had the authority to vote on behalf of a shareholder.
Although Mosquito’s management information circular indicated that proxies could be solicited by telephone, the court found that the circular contained insufficient disclosure regarding the voting process. The court identified several flaws in the telephone solicitation system used by Mosquito, such as its reliance on an oral grant of authority, its failure to use a unique identifier to identify shareholders, its incomplete record linking the chain in the line of intermediaries (i.e., in respect of NOBOs, the proxy solicitor did not have omnibus proxies from the registered holder (CDS) to Broadridge or from Broadridge to the transfer agent), its failure to provide a contemporaneous and verifiable record of voting instructions, and its failure to ensure that shareholders were permitted to make their voting choices privately and without undue pressure from a proxy solicitor.
The Mosquito case illustrates that issuers using a system such as the telephone solicitation system used by Mosquito must consider whether sufficient safeguards are in place to ensure that proxies and voting instructions are properly given and that securityholders have the freedom to vote as they choose. Further, issuers will need to carefully consider the disclosure included in their management information circulars relating to proxy solicitation and voting procedures.
5. Advance Notice Requirements (Mundoro Capital)
The past year also saw the successful “stealth proxy contest” at QLT Inc., where dissidents successfully replaced the board with their own slate of directors that was proposed at the annual general meeting, without a dissident circular having been publicly circulated in advance of the meeting. This was possible under certain exemptions allowing a dissident to contact a small number of securityholders without having to widely distribute a dissident circular, and because nominations may be made from the floor.
One way for an issuer to prevent these sorts of stealth tactics is to adopt an advance notice requirement by adopting a policy or bylaw that generally requires shareholders to give advance notice of their intention to nominate directors for election at an upcoming shareholders’ meeting (which prevents other shareholders from being “ambushed” with a last-minute nomination at the meeting). Both ISS and Glass Lewis will generally support the adoption of an advance notice requirement pursuant to which shareholders are required to notify the issuer not more than 65 days and not less than 30 days before the meeting if they intend to nominate new directors to the board.
The validity of an advance notice policy was recently considered by the British Columbia Supreme Court in Northern Minerals Investment Corp. v. Mundoro Capital Inc. In this particular case, the policy (which was implemented shortly before a scheduled shareholder meeting) was allowed to stand, with the court noting that the policy ensured an informed nomination process, and prevented a small group of dissident shareholders from potentially taking advantage of a poorly attended shareholders’ meeting to impose their slate of directors on the unsuspecting majority. An issuer considering an advance notice policy or bylaw should take steps to ensure that it is implemented in an orderly manner and in accordance with its governing statute, to prevent any argument that it is unenforceable or is being put in place to influence or preclude a proxy contest.
6. Executive Compensation
Say-on-pay (non-binding shareholder votes on executive compensation) remains a voluntary practice in Canada, but it continued to gain momentum in 2012. As of the end of the year, there were 100 Canadian issuers which had voluntarily adopted say-on-pay, according to the list maintained by the Shareholder Association for Research & Education (SHARE). However, the 2012 proxy season also marked the first time that a Canadian issuer failed to obtain majority shareholder support on its say-on-pay vote. The shareholders of QLT Inc. voted against a resolution approving, on an advisory basis, the compensation of the company’s named executive officers. In 2011, QLT Inc. shareholders had approved the say-on-pay vote. Another notable aspect of last year’s Canadian say-on-pay results is that the percentage of Canadian companies that received less than 75 per cent support for their say-on–pay votes increased, according to SHARE. In light of these trends, issuers will need to consider carefully whether or not to include a say-on-pay vote as part of their upcoming securityholder meeting and to assess shareholder sentiment on such a vote.
ISS Evaluation of Executive Compensation
Aligning executive pay with company performance will increasingly be a focal point with respect to say-on-pay and other votes in the 2013 proxy season. ISS has advised that it will generally recommend against management say-on-pay proposals, as well as equity-based incentive plan proposals and the election of directors who are compensation committee members, if, in its view, there is significant long-term misalignment between executive pay and company performance. ISS has adopted a new methodology for the 2013 proxy season for determining whether there is such misalignment, which will involve both a quantitative and qualitative assessment. Issuers would be well advised to review the new methodology against their executive compensation practices to see whether or not ISS may recommend a negative or withhold vote for any of their upcoming securityholder resolutions.
At the end of November 2012, the CSA adopted amendments to allow for “notice-and-access”, which, if all necessary ministerial approvals are obtained, will be available to issuers in respect of securityholder meetings taking place on or after March 1, 2013. With notice-and-access, a reporting issuer (other than an investment fund) may deliver proxy-related materials to shareholders by (a) posting the relevant information circular (and, if applicable, other proxy-related materials) on a non-SEDAR website and (b) sending a notice package to shareholders which informs beneficial owners that the proxy-related materials have been posted, and explains how to access them. Notice-and-access potentially will save issuers significant costs in printing and mailing paper copies of securityholder meeting materials. When using notice-and-access for the first time, however, an issuer will need to take a number of steps and implement changes with regards to several established procedures. For example, under notice-and-access, an issuer must set the record date for notice of the meeting to be at least 40 days before the meeting, and must file a notification at least 25 days before such record date (i.e., at least 65 days before the date of the meeting). Depending upon the lead time that may be needed to adopt these steps and changes, an issuer may or may not be able to adopt notice-and-access for the 2013 proxy season. In addition, it is important for issuers to consider their ability to make use of notice-and-access under their governing statute.
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.