Canada: Testing The Waters: The Litigation Risk Implications Of Failed Say On Pay Votes For Canadian Companies

Last Updated: July 6 2013
Article by Paul D. Davis and Richard Yehia

The recent proliferation of Canadian companies adopting shareholder votes on executive compensation (so called "say on pay" votes) has the potential to dramatically alter Canadian corporate governance policies. It also creates potential litigation risk against Canadian companies by enterprising shareholders, law firms, or both. This bulletin discusses the potential litigation implications of say on pay votes. We focus on the experience in the United States with say on pay litigation, the potential application to Canadian companies, and what Canadian companies can do to minimize litigation risk.

What is Say on Pay?

Say on pay is a non-binding, advisory vote by shareholders expressing their approval or disapproval for a company's executive compensation policies. Unlike other countries such as the United States,1 say on pay advisory votes are not mandatory in Canada, and there is no indication that this will change soon.2 Nevertheless, it is increasingly being voluntarily adopted by Canadian companies seeking more transparent corporate governance practices, especially in light of recent public outcry over executive compensation levels3. While the actual impact of say on pay votes on executive compensation levels has been questioned,4 it appears that say on pay is here to stay in Canada.

Recently, Canadian companies have started to experience say on pay failures,5 including the high-profile failure of Barrick Gold Corporation, where a whopping 85% of shareholders rejected the company's proposed plan.6 These rejections have significant potential implications for the Canadian legal landscape. While say on pay voting is not mandatory and the results of such votes are not binding on a company, failed say on pay votes could, as has occurred in the United States, lead to costly shareholder litigation creating business disruption and reputational harm.

Litigation in the United States

Say on pay lawsuits in the United States have been largely unsuccessful; however, the rise in the number of say on pay lawsuits and the evolving tactics used by plaintiffs has made them an interesting study from which Canadian companies can learn. The two classes of cases discussed below provide examples of the approaches taken by plaintiffs in the United States towards say on pay lawsuits.

The first class of cases deals with direct challenges to executive compensation plans based on say on pay votes. As an example, Gordon v. Goodyear7  concerned Navigant Consulting Inc. ("Navigant"), a consulting firm that, ironically, provides risk management and financial advice to government agencies. Navigant was experiencing poor and declining financial performance, and its most recent executive compensation plan was rejected by 55% of Navigant's shareholders. Natalie Gordon, a Navigant shareholder, brought a derivative lawsuit (an action in the name of the corporation) against Navigant's board of directors. She alleged that Navigant's board of directors awarded "excessive executive compensation despite the fact that Navigant shareholders have seen the value of their investment plummet". She further alleged that Navigant's board of directors had breached their fiduciary duties towards Navigant. The Federal District Court of Illinois, applying Delaware law, rejected the plaintiff's claim. The Court held that a company's poor performance combined with a failed (albeit very close) say on pay vote was insufficient to find that the board of directors had not exercised their valid business judgment in reaching its decision. The Court also held that section 951 of the Dodd-Frank Act, the legislation creating mandatory say on pay in the United States, made clear that say on pay votes do not impose additional fiduciary duties on directors.

The second class of cases deals with challenges to the procedural aspects of say on pay votes. An example of this class of cases is Gordon v. Symantec Corp.8 The plaintiff, the same Natalie Gordon as above,9 sought an injunction restraining Symantec Corporation ("Symantec") from proceeding with its say on pay vote for failure to disclose essential information. The allegedly deficient information included the reasons Symantec changed its compensation consultant, the reasons Symantec chose particular peers as a basis of comparison, and a "fair summary" of the compensation consultant's analysis. Symantec, in turn, filed an expert report from Professor Robert Daines of Stanford Law School, who submitted a declaration that Symantec's disclosures were consistent with industry standards and complied with regulatory requirements. The California Court, citing Professor Daines' declaration, denied the plaintiff's motion, finding no precedent for the injunction.

Implications for Canadian Companies

Canada has yet to see say on pay lawsuits as in the United States. However, the increased adoption of say on pay voting by Canadian companies, combined with the recent say on pay failures of Barrick Gold Corporation and other companies, may lead to lawsuits in Canada, and Canadian companies and directors should take measures to protect themselves from the potential adverse consequences of shareholder litigation.

There are a few important distinctions between Canada and the United States that warrant consideration. The most obvious is that say on pay is not mandatory in Canada. This means that Canadian companies and directors would not have the same regulatory restrictions and protections afforded to their American counterparts. For example, in Goodyear, the Court held that section 951 of the Dodd-Frank Act made clear that say on pay does not impose any additional fiduciary duties on directors. Further, the lack of a say on pay regulatory regime creates uncertainty as to the requirements a Canadian company must adhere to when adopting say on pay voting.

Another important distinction is the different approach to derivative lawsuits by Canadian and American courts. In most states in the United States, to bring a derivative lawsuit, a plaintiff must demonstrate "demand futility", meaning the shareholder must cast reasonable doubt that (1) the majority of the directors are independent and disinterested; or (2) the transaction was the product of a valid exercise of business judgment. The procedural requirements for bringing a derivative lawsuit in Canada are distinct, and generally require court approval that a plaintiff (1) is acting in good faith; (2) has given notice to the corporation and the corporation has refused to proceed with the action; and (3) that the action is in the best interests of the corporation.10 The procedural hurdle of demonstrating "demand futility" is noticeably absent in Canada, meaning derivative lawsuits may be easier to bring for litigants in Canada.

A final, and perhaps most important, distinction is the existence of the oppression remedy in Canada. The oppression remedy allows shareholders to bring a successful claim against a corporation if the corporation's actions disregard the shareholder's reasonable expectations as a shareholder and unfairly impact the shareholder's interests. The oppression remedy provides an additional mechanism for shareholder litigants to bring so called say on pay lawsuits in Canada. As the Ontario Superior Court recently held in Unique Broadband Systems Inc., Re,11 and as Canadian courts have long held, management fees or compensation paid without proper approval, that are larger than industry norms, or that increase while a corporation is encountering financial difficulties can be oppressive.12 It is not a stretch to imagine shareholders arguing that approval of an executive compensation plan in the face of a failed say on pay vote is evidence of oppressive conduct. While a failed say on pay vote by itself would likely be insufficient to sustain an oppression claim, it can serve as a factor for a Court to consider when faced with such a claim by a shareholder. The existence of the oppression remedy therefore provides an alternative and likely simpler means for a shareholder to seek redress for a failed say on pay vote, and creates an additional factor directors must consider when assessing the results of a say on pay vote.

Minimizing Litigation Risk

The fact that the representative plaintiff was the same person in both the Goodyear and Symantec cases discussed above is no coincidence. Enterprising counsel may attempt to bring opportunistic (and profitable) litigation in the face of a failed say on pay vote using a cherry picked representative plaintiff. Canadian companies should be wary of this risk: in addition to the potential cost of litigation, the legitimate business and operational activities of a company may be disrupted, and the company and its directors may suffer reputational harm as a result of these lawsuits.

The following are some steps Canadian companies can take to minimize potential litigation risk:

  • Consider whether a say on pay vote is appropriate for the company, and what the likely outcome of a say on pay vote will be.
  • Avoid making definitive statements regarding the outcome and potential actions to be taken as a result of a say on pay vote.
  • Ensure that proxy disclosure complies with applicable corporate and securities laws and is clear and precise.
  • Keep directors informed of the litigation risk associated with say on pay votes.
  • Ensure that any performance based compensation is tied to clearly articulated performance criteria.
  • Understand and consider competitors compensation practices to ensure that compensation levels are consistent with industry standards, and address any concerns about current executive compensation programs.
  • Review compensation voting policies of proxy advisory firms and key institutional shareholders to identify factors that may influence a "no" vote.
  • Ensure that the company's compensation plans and policies are complied with.

1 Countries that have mandatory say on pay include the United Kingdom, Australia, the Netherlands, Sweden and Switzerland.

2 In 2011, the Ontario Securities Commission ("OSC") sought comments on a variety of shareholder rights issues, including say on pay. However, there has been no movement on this front, and the OSC's most recent statement of priorities references say on pay only briefly in the context of improving proxy voting mechanisms.

3 The Shareholder Association for Research and Education ("SHARE") publishes a list of Canadian public companies that have adopted say on pay votes. The number has increased from 71 in 2011 to 99 in 2012 and up to 129 in 2013.

4 See, for example, Before and After Say on Pay: Say on Pay in Canada 2009-2011, Clarkson Centre for Board Effectiveness.

5 Shareholder approval levels as a whole appear to be declining in Canada: a recent SHARE report indicates that 10.6% of Canadian companies received less that 80% shareholder say on pay approval, compared to 1.6% the previous year.

6 Three other Canadian companies have had say on pay failures thus far: QLT Inc., Equal Energy Ltd., and Golden Star Resources Ltd.

7 2012 WL 2885695 (N.D.Ill.) ["Goodyear"].

8 Case No. 1-12-CV-231541 ["Symantec"].

9 The implications of Ms. Gordon being a representative plaintiff in both cases is discussed below.

10 The specific requirements vary amongst the different federal and provincial statutes. For example, see the Canada Business Corporations Act, R.S.C., 1985, c. C-44 s. 239.

11 (2013), ONSC 2953 at para. 180.

12 For a more detailed discussion of this issue, see M. Koehnen, Oppression and Related Remedies (Thomson Canada Limited: Toronto, 2004).

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Paul D. Davis
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Blake, Cassels & Graydon LLP
Osler, Hoskin & Harcourt LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Blake, Cassels & Graydon LLP
Osler, Hoskin & Harcourt LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions