"Golden Leashes", and by-laws designed to counteract
such arrangements, have provoked significant controversy in the
2013 proxy season, and regulators, proxy advisors, and
institutional shareholders have yet to take a definitive position
in the debate. This post reviews what will certainly continue to be
a hot button topic in 2014.
Compensation by a Third Party
So-called "golden leashes" arise when a shareholder
activist privately offers to compensate its nominee directors
("activist directors") in connection with such
nominees' service as a director of the target corporation.
Arrangements vary but include compensating activist directors who
are elected based on achieving benchmarks, such as an increase in
share price over a fixed term. Shareholder activists only provide
such incentives to elected activist directors, not re-elected
Those opposed to such incentive payments say that they could
result in fragmented boards (because only the activist directors
receive the incentive payments) and distorted incentives that
result in activist directors acting in the interest of the
shareholder activists instead of independently and in the best
interests of the target corporation.
Those in favour of such incentive payments say that they are
necessary to entice high quality candidates to stand for election
in contested elections (because activist directors run the risk of
being attacked by the target corporation's board) and they aim
to link director pay to target company performance, which they say
can benefit all investors.
This year, activist investors Jana Partners LLC and Elliott
Management Corp. proposed "golden leash" arrangements for
their nominees to the boards of Agrium Inc. and Hess Corporation,
respectively. Jana was unsuccessful and Elliot settled its proxy
The Use of By-Laws as a Defensive Tactic
As a defensive tactic against golden leashes, some U.S.
companies have enacted by-laws that prohibit or limit third party
compensation of activist directors in connection with such
directors' service as a director of such corporation. These
by-laws have proven to be as controversial as "golden
Recently, Provident Financial Holdings, Inc. (a U.S. bank
holding company) went even further by enacting a by-law that not
only prohibited compensation of activist directors for
service as a director but also prohibited activist
directors from receiving third party compensation merely for
standing for election as a director of the target
corporation (this compensation practice is not uncommon in the
United States). In response, proxy-advisory firm
Institutional Shareholder Services Inc. ("ISS")
recommended that Provident's shareholders withhold their vote
for the incumbent directors that were up for election at that
corporation's recent annual meeting. Among other things, ISS
took issue with the broad by-law (prohibiting compensation even for
standing for election) being enacted without a shareholder vote
(despite the fact that such shareholder vote was not required under
Expect more Debate in 2014
ISS's position on Provident's by-law is not an
endorsement of "golden fee" arrangements generally. We
expect that ISS will address such arrangements in 2014, and likely
on a case-specific basis.
It's important to note that pursuant to securities laws in
Ontario, arrangements or understandings between activist directors
and third parties must be disclosed. Canadian regulators have not
otherwise taken a definitive position in this debate and may be
unlikely to do so.
We are unaware of any judicial consideration of either
"golden leashes" or by-laws designed to counteract such
"golden leash" arrangements – however, as both
practices gain more traction, legal challenges are inevitable.
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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