In proxy contests earlier this year involving the boards of
Agrium Inc. ("Agrium") and Hess Corporation
("Hess"), the compensation by activist shareholders of
their proposed director nominees was heavily criticized both by the
target boards and by third party commentators. The Agrium and Hess
contests have given rise to a debate over the merits and propriety
of nominee compensation generally, with some institutional
shareholders and commentators calling for the prohibition of the
practice. In the face of this critical commentary, the recent
experience of Provident Financial Holdings, Inc.
("Provident"), a U.S. bank holding company, suggests that
efforts by boards to prohibit the practice entirely are likely to
In advance of Provident's annual meeting of shareholders
held last week, the proxy advisory firm Institutional Shareholder
Services ("ISS") recommended that shareholders withhold
votes against three directors who earlier in the year had approved
an amendment to Provident's by-laws that would prohibit
directors from receiving compensation from anyone other than
Provident for their candidacy or service as a director. Following
the meeting, Provident disclosed that over 30 percent of the votes
cast were withheld from these directors, a withhold vote that was
far in excess of that seen in prior Provident shareholder
The by-law amendment adopted by Provident disqualifies from
election to the board any person who is a party to any compensatory
arrangement or understanding with any person or entity other than
Provident in connection with such person's candidacy or service
as a director (other than indemnification or reimbursement
arrangements or pre-existing employment agreements). The by-law
amendment was based on a draft by-law that the New York law firm
Wachtell, Lipton, Rosen & Katz ("Wachtell") has
recommended that companies adopt in order to address what Wachtell
perceives to be a threat to the integrity of the boardroom and the
board decision-making process presented by independent compensation
arrangements between activist shareholders and their director
nominees. Wachtell proposed the draft by-law in a memorandum which
was circulated in May of this year, following the Agrium and Hess
experiences. According to ISS, since May, at least 25 companies in
the United States have adopted similar by-laws or by-law
amendments. Provident was the first of these companies to hold its
annual meeting and ISS took the opportunity to address the
board's decision to adopt the by-law amendment in its analysis
for the Provident meeting.
According to ISS, the by-law amendment adopted by Provident may
be concerning to investors for the following reasons:
it prohibits individuals from board service due to any
arrangements to compensate a nominee during their candidacy, with
only limited exceptions;
it could deter legitimate efforts to seek board representation
via a proxy contest;
it could have the effect of excluding highly qualified
individuals from being candidates for board service, thereby
serving to entrench the incumbent board;
it was adopted after a significant shareholder made Schedule
13D filings with the U.S. Securities and Exchange Commission
disclosing the addition of affiliates to its group; and
it was adopted without giving shareholders the opportunity to
vote on the matter (despite the board not having been required to
submit the amendment to a shareholder vote).
Although Provident's board survived the recent vote in the
face of ISS's concerns, ISS's recommendation in connection
with Provident's uncontested annual meeting, and the ensuing
shareholder votes withheld from directors who supported the
prohibition, should be seen as a cautionary note for how boards in
Canada and the United States might want to think about this issue
in the upcoming proxy season. While the payment of compensation by
activist shareholders to their director nominees has been the
subject of considerable criticism from various quarters, much of
that criticism has been about the terms of the compensation, as
opposed to the principle of such compensation. Accordingly, any
efforts by boards to prohibit the practice outright could
reasonably be expected to be resisted by both proxy advisors and
shareholders and to result in votes withheld in respect of the
election of incumbent directors who support such measures.
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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