On January 13, 2022, TMX Group Ltd. (Toronto Stock Exchange (“TSX”) and TSX Venture Exchange (“TSXV”)), Laurel Hill Advisory Group (“Laurel Hill”) and Fasken hosted a conversation on disclosure and regulatory considerations for issuers leading into the 2022 proxy season. The panel discussed six discrete areas of recent developments that will be relevant for public companies:
- diversity disclosure;
- an update on proxy voting guidelines;
- an update from TSX and TSXV;
- continuous disclosure updates;
- corporate law amendments; and
- capital raising.
For a further discussion of these items, please see the Fasken Proxy Season Preview 2022 webinar.
The webinar discussion featured Der Allen of Laurel Hill, Valérie Douville of TSX and TSXV, and Neil Kravitz and Taisha Lewis of Fasken and was moderated by Gordon Raman of Fasken.
- Diversity Disclosure
Diversity Disclosure Requirements
Disclosure requirements with respect to diversity currently stem from National Instrument 58-101 Disclosure of Corporate Governance Practices (“NI 58-101”). The disclosure requirements, which apply to non-venture issuers, relate to women in board and executive officer positions and generally require companies to disclose whether they have adopted a written policy relating to the identification and nomination of women into such positions and how the issuer considers the level of women in such positions in identifying and nominating candidates for such positions. If an issuer has not adopted such policies or does not take such considerations into account, an issuer must disclose its reasons why. NI 58-101 also requires disclosure of any targets the issuer has adopted with respect to such positions, its annual progress towards achieving those targets, and if no targets have been established, why not. Finally, companies must disclose the number, and percentage, of women in board and executive officer positions.
Currently these disclosure requirements only apply to women in board and executive officer positions. Public companies that are governed by the Canada Business Corporations Act (“CBCA”) have additional disclosure obligations pursuant to such act. The disclosure obligations are substantially similar to NI 58-101 but rather than just covering women, they cover “designated groups” (i.e. women, Aboriginal peoples (First Nations, Inuit and Métis), persons with disabilities, and members of visible minorities). These companies may also voluntarily provide disclosure with respect to additional “designated groups” identified in their information circulars.
On May 19, 2021 the Canadian Securities Administrators (“CSA”) announced that they would be holding consultations on its consideration of broader diversity on boards and in executive officer positions in light of “the increasing attention being given to diversity in all segments of society, including business”.
Change to NASDAQ Diversity Disclosure Requirements
NASDAQ's Board Diversity Rule (“Rule”), which was approved by the Securities & Exchange Commission (“SEC”), is a disclosure standard designed to encourage minimum board diversity, providing stakeholders with consistent, comparable disclosures concerning a company's current board composition. The Rule requires companies listed on US exchanges to (a) publicly disclose board-level diversity statistics on an annual basis using a standardized template, and (b) have or explain why they do not have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+ with certain flexibility provided for smaller reporting companies and foreign issuers. The introduction of the Rule will be staggered over a period of four years, from now until 2026.
Trend in representation of women in corporate leadership
Based on the CSA Multilateral Staff Notice 58-313 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions, there has been a notable increase in the representation of women in corporate leadership over the last six years. Women hold about 22% of board seats and women filled 35% of board vacancies. 6% of chairs of boards are women, 32% of issuers adopted targets for the representation of women on their boards and 6% of issuers adopted targets for the representation of women in executive officer positions.
- An Update on Proxy Voting Guidelines
Proxy advisory firms have updated their guidelines requiring greater disclosure related to gender diversity. Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) have outlined enhanced disclosure policies.
ISS proposes to expand the board gender diversity policy by generally voting withhold for the chair of the nominating committee or chair of the committee designated with the responsibility of a nominating committee, or chair of the board of directors if no nominating committee has been identified or no chair of such committee has been identified, for (a) S&P/TSX Composite Index companies where women comprise less than 30% of the board of directors, and the company has not provided a formal, publicly-disclosed written commitment to achieve at least 30% women on the board at or prior to the next annual general meeting; and (b) for TSX companies that are not also S&P/TSX Composite Index constituents where the company has not disclosed a formal written gender diversity policy, and there are zero women on the board.
The policy requiring S&P/TSX Composite Index companies to have at least 30% women directors on the board was announced in 2020 and will come into effect for meetings on or after February 1, 2022. Companies that have made a clear commitment to achieve the 30% target at or prior to their next meeting will be seen as meeting the expectations of this policy.
Glass Lewis will now use the term “gender diverse directors”, defined as women and directors that identify with a gender other than made or female, and will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors, at companies listed on the TSX. For companies listed outside of the TSX, including the TSXV, and all boards with six or fewer total directors, Glass Lewis will apply a policy requiring a minimum of one gender diverse director beginning meetings held after January 1, 2022.
For companies that do not meet the minimum requirements, Glass Lewis may still refrain from making negative recommendations if the company has provided sufficient explanation or disclosed a plan to address the lack of diversity on the board. Beginning with meetings after January 1, 2023, Glass Lewis will transition from fixed numerical approach to a percentage approach whereby it will generally recommend voting against the nominating committee chair of a board that is not at least 30% gender diverse for companies listed on the TSX.
In order to align with recommendations from the Canadian Coalition for Good Governance and general market trends, ISS proposes a change for Canadian Benchmark policy to raise the support threshold that triggers a responsiveness analysis on a company's management say-on-pay proposal from 70% to 80% support. This means that say-on-pay proposals that receive the support of less than 80% of votes cast will trigger a responsiveness analysis the following year.
This change is supported by the fact that other major ISS markets such as the UK, Continental European, and Australian markets, all have thresholds higher than 70% for their responsiveness policy, or equivalent.
In an attempt to align ISS's existing policy for non-venture companies with venture listed companies, for meetings of venture companies on or after February 1, 2023, ISS will generally vote withhold for individual director nominees who are non-CEO directors and serve on more than five public company boards; or who are CEOs of public companies and serve on the boards of more than two public companies besides their own (only in respect of the outside boards). A one-year grace period will be granted to allow issuers to make appropriate changes to their boards.
In the event a director is temporarily overboarded (for example, joining a new board in March but stepping off another board in June), ISS will generally not count a board when it is publicly-disclosed that the director will be stepping off that board at the next annual meeting.
Equity-based Compensation Plans
For TSXV listed companies, ISS will generally vote withhold for continuing compensation committee members, or where no compensation committee has been identified, the board chair or full board, if the company maintains an evergreen plan (including those adopted prior to an initial public offering) and has not sought shareholder approval in the previous two years and is not seeking shareholder approval at the meeting.
Other Updates From Proxy Advisory Firms
Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).
Glass Lewis will recommend that shareholders vote against the compensation, nominating and/or governance committee chair if the committee consists of fewer than two members for the majority of the fiscal year. This policy will apply to all issuers on Canadian stock exchanges.
For companies in the S&P/TSX 60, Glass Lewis will recommend voting against the governance committee chair if the company fails to provide clear disclosure regarding the board's role in overseeing material environmental and social issues. For companies in the S&P/TSX Completion index, this policy will apply for meetings held after January 1, 2023; the failure to provide clear disclosure will be noted as a concern for meetings held after January 1, 2022 and an against recommendation will be made in 2023.
Glass Lewis will make clarifying amendments to the overall approach to Environmental, Social and Corporate Governance, shareholder proposals, linking executive pay to environmental and social criteria, short-term and long-term incentives, grants of front-loaded awards, authorizations/increases in authorized preferred stock, and disclosure of fee for audit services.
- An Update from the TSX/TSXV
The CSA have continued to follow developments in relation to climate-related disclosure since the CSA Staff Notice 51-358 Reporting of Climate Change-related Risks in August 2019. Most recently, the CSA staff conducted research of domestic and international developments in this area, as well as an issue-oriented review of recent climate-related disclosure by Canadian reporting issuers. The CSA thereafter published a proposed National Instrument 51-107 Disclosure of Climate-related Matters and its companion policy (“NI 51-107”) for a comment period expiring February 16, 2022. The proposed NI 51-107 would introduce disclosure requirements regarding climate-related matters for reporting issuers (other than investment funds) related to strategy, risk management and metrics and targets. The disclosure requirements of NI 51-107 would be consistent with the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations. TSX and TSXV indicated that while they are generally supportive of regulatory initiatives that facilitate climate-related disclosures that are aligned with the TCFD recommendations, they recognize that there are significant cost and resources involved in providing meaningful climate-related disclosure. In light of this, TSX and TSXV believe that added regulatory burden from NI 51-107 will be proportionally greater for TSXV listed issuers and proposed certain accommodations for such issuers. TSX and TSXV also recommends that the CSA take into consideration other adjustments. We will be publishing a more detailed Timely Disclosure article related to NI 51-107.
Housekeeping Rule Amendments
The Notice of Housekeeping Rule Amendments to the TSX Company Manual published on November 18, 2021 made various rule amendments, including decommissioning the TSX SecureFile as of November 19, 2021 and replacing it with TMX LINX, a centralized portal for TSX-listed issuers and other stakeholders to interact with TSX. It is a single point of access for TSX-listed issuers and their advisors to file submissions, while having transparency into the progress of their transactions. The web-based platform enables TSX-listed issuers and their legal counsel to manage the submission, send and receive documents, and communicate with TSX. Effective November 22, 2021, all TSX Reporting Forms and certain other documents must be filed on TMX LINX.
TSX update to its Guide to Security Based Compensation Arrangements
TSX has published an updated Guide to Security Based Compensation Arrangements. The update is intended to help listed issuers gain a better understanding of the issues relating to security based compensation arrangements and assist issuers in preparing meaningful disclosure that complies with TSX requirements.
Security Based Compensation Plans
Effective November 24, 2021, the TSXV made amendments to its policies regarding security based compensation plans. The TSXV expanded its existing policies to: (1) clarify the rules for classes of compensation securities other than stock options, such as deferred share units (“DSU”), performance share units (“PSU”), restricted share units (“RSU”) and stock appreciation rights (“SAR” and together with DSU, PSU and RSU, the “New Compensation Securities”), (2) Add categories of Security Based Compensation Plans; (3) permit the exercise of stock options on a cashless and net exercise basis; and (4) codify certain of the TSXV's pre-existing unwritten rules governing security based compensation plans and grants.
TSXV's Capital Pool Company (“CPC”) Program
Effective January 1, 2021, the TSXV updated the policies governing the CPC program, with the goal of achieving increased flexibility, reduced regulatory burdens, and improved economics with measures such as relaxation of timing restriction for a qualifying transaction (“QT”); changes to policies restrictions on non-QT related expenses; increased Incentives and Compensation Securities; increased flexibility for funding and expenditures; changes to escrow terms; lower public distribution requirements; and flexibility for the positions of directors and officers.
- Continuous Disclosure
Non-GAAP and Other Financial Measures Disclosure
The CSA introduced new mandatory disclosure requirements for certain issuers with respect to non-GAAP and other financial measures in National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure ( “NI 52-112”) which became effective on August 25, 2021. NI 52-112 applies to disclosures for a financial year ending on or after October 15, 2021 for reporting issuers. Unless a specific exception applies, reporting issuers will be subject to the new rules when they disclose financial measures outside their financial statements, including disclosures on websites, in news releases, management discussions and analysis (“MD&A”), investor presentations, and on social media platforms.
The general requirements for disclosure of non-GAAP and other financial measures include specific rules regarding labelling, identification, prominence, reconciliation, comparative information for a previous period, and forward looking information disclosures. An issuer must label a non-GAAP financial measure in a way that describes the measure with consideration to the measure's composition and must clearly identify the measure as such. NI 52-112 continues to require issuers to disclose a quantitative reconciliation of a non-GAAP financial measure to the most directly comparable financial measure. If the non-GAAP financial measure is disclosed in an MD&A or in an earnings release of the issuer, the issuer must disclose the non-GAAP financial measure for a comparative period using the same composition. The new rules also clarify when disclosure can be incorporated by reference from the issuer's MD&A and instances where incorporation by reference is prohibited (i.e. incorporation by reference from one MD&A to another is not permitted, and the quantitative reconciliation of a financial measure in an earnings release cannot be incorporated by reference). Lastly, NI 52-112 provides that when disclosing a non-GAAP financial measure that is forward-looking information, an issuer must disclose the equivalent historical non-GAAP financial measure, use the same label, prominently display the forward-looking non-GAAP financial measure and describe any significant differences between the forward-looking non-GAAP financial measure and the equivalent historical non-GAAP financial measure.
NI 52-112 also contains a few exceptions. Most notably for issuers in the mining and oil and gas industries, for financial measures that are derived from a financial covenant in a written agreement and for financial measures that are required to be disclosed by other laws or self-regulatory organizations. There is also an exception to the comparative period disclosure which can be omitted if it is “impracticable” to do so. However, the cost or the time involved in preparing such disclosure would not be sufficient rationale for an issuer to avoid providing such disclosure.
The CSA proposed amendments to continuous disclosure obligations to combine reporting issuer's financial statements, MD&A and annual information form (applicable to annual disclosure) into one reporting document in an effort to increase reporting efficiency. The proposed amendment would also eliminate duplicative or redundant disclosure requirements. Lastly, the CSA, as part of this simplified disclosure mandate, announced they may permit venture issuers (that are not investment funds or regulated by the SEC) to voluntarily report on a semi-annual basis, provided they issue a special news release after the end of each quarter for which they did not report financial results. During the comment period on the proposed amendments, the CSA received positive feedback with many citing the improved efficiency and quality of disclosure as the key benefits from these amendments. The estimated timeline for all the proposed amendments is for the finalized rules to be published in September 2023 and come into effect in December 2023.
Disclosure of how an issuer may be affected by COVID-19 continues to be relevant for companies. In particular, disclosure related to the direct or indirect impacts on its business from COVID-19, including supply chain issues, increased costs, interest rates or inflation, and disclosure of how these issues may be material to a particular company is still relevant.
Misleading Promotional Activities – British Columbia
An emerging issue concerning problematic promotional activities was addressed by the CSA in a staff notice towards the end of 2018. Proposed British Columbia Instrument 51-519 Promotional Activity Disclosure Requirements, and companion policy (“BCI 51-519”), were released on May 26, 2021 by the British Columbia Securities Commission (“BCSC”) to provide investors with improved transparency about the source and reliability of promotional activity, enabling them make more informed investment decisions and assist the BCSC to identify and hold responsible those issuers and persons who conduct problematic promotional activity.
In general, BCI 51-519 would require disclosure of the engagement details, the compensation being paid to the promoter, ownership of any securities and any other facts that could reasonably be seen to interfere with the objectivity of the person. In addition, BCI 51-519 would impose further disclosure obligations on venture issuers. This would include the requirement to file a news release if they retain or compensate a person to engage in promotional activity and if a venture issuer's total expenditures on promotional activity exceed 10% of its total operating expenses in any annual or interim period, BCI 51-519 would require the venture issuer to separately disclose the components of those expenditures in its interim and annual MD&A.
The TSX has welcomed the proposal from the BCSC as it has noticed an increase in the volume of promotional activity, particularly amongst junior issuers on venture exchanges. The TSX has increased it scrutiny of promotional activity for issuers on its exchanges and would like more to be done from securities regulators to curb this problem for all issuers.
- Corporate Law Amendments
Alberta Corporate Law Changes
Continuing the growing trend in Canada, Alberta became the sixth jurisdiction to remove the Canadian residency requirement for corporate directors on March 29, 2021. More recently, Alberta has introduced further changes to its corporate statue, expanding the due diligence defence for directors and expanding the scope at which a corporation can indemnify a director or officer in an effort to “attract the best and brightest directors to Alberta”. The amendments would also give corporations the option to waive any interest or expectancy in or to, specific types of corporate opportunities, would provide corporations more flexibility surrounding plan of arrangement transactions, would clarify that the scope of the duty of care is to the corporation, and would contain other general updates that will reduce administrative burdens for corporations. The amendments received Royal Assent on December 2, 2021 and are expected to be proclaimed into force after accompanying regulations have been developed.
Ontario Corporate Law Changes
Following in the footsteps of Alberta, on July 5, 2021 the Canadian residency requirement for directors of Ontario corporations was removed. The amendments to the Business Corporations Act (Ontario) will also lower the approval threshold for ordinary written resolutions for non-offering corporations (i.e. private companies) to a 50% majority of shareholders entitled to vote, which is down from the previous requirement of 100%.
CBCA Voting Amendments
On May 1, 2018 the amendments to the CBCA adopting majority voting for uncontested elections (“CBCA Amendments”) received Royal Assent, but those provisions could not become operational until regulations were enacted. On March 27, 2021 proposed regulations under the CBCA were announced which, if brought into force following a 30-day comment period, would implement the majority voting provisions in the CBCA (“Proposed Regulations”).
The CBCA Amendments will implement majority voting by providing that distributing corporations (i.e., public companies) will be required to elect directors on an individual basis for uncontested elections rather than by a slate system. Under the current slate system, all directors are elected or defeated in a single vote. The CBCA Amendments will also prohibit the board of directors from appointing a person as a director if that person failed to be elected under the majority voting rules, except in prescribed circumstances. The Proposed Regulations prescribe two circumstances: if the person is needed either to meet the corporation's obligations under the CBCA to have at least two directors who are not officers or employees of the corporation or its affiliates, or the person is needed to satisfy the requirement that at least 25% of the directors be resident Canadians. The Proposed Regulations would also introduce annual board elections and would amend the form of proxy to be used by CBCA distributing corporations to allow shareholders to vote “For” or “Against” the election of proposed directors (rather than “For” or “Withhold”).
As of the time of this writing, the CBCA Amendments have not yet come into force.
- Capital Raising
New Prospectus Exemption
The CSA has recently proposed a new capital raising exemption for reporting issuers that are listed on a Canadian stock exchange called the listed issuer exemption (the “Listed Issuer Exemption”). The exemption would allow qualified issuers to raise the greater of $5,000,000 or 10% of the aggregate market value of the issuer's listed securities to a maximum of $10,000,000, or up to 100% dilution, in each case during any 12-month period. An offering document would be required to be filed in connection with the offering, which would not be subject to review or approval by the CSA. The content of the proposed form of offering document would include (i) any new developments in the issuer's business; (ii) details on the issuer's financial condition, including confirmation that the issuer will have sufficient funds to last 12 months after the offering; (iii) details on how the proceeds will be used from the current offering; and (iv) details on how proceeds of any previous offerings in the last 12 months have been used. Importantly, the offering document would become part of the issuer's continuous disclosure record for the purposes of secondary market civil liability. In the event of a misrepresentation, purchasers under the Listed Issuer Exemption would have the same rights of action under secondary market civil liability as purchasers on the secondary market. Purchasers will also have a contractual right of rescission against the issuer for 180 days following the distribution.
The CSA recognizes that for smaller offerings, the current prospectus regime can be onerous, including the high costs associated with preparing a prospectus, and the proposed exemption would allow smaller issuers to access the capital markets while maintaining adequate disclosure for retail investors.
Another feature of the proposed exemption is that securities offered would not be subject to a hold period. In order to take advantage of the exemption, issuers would be required to meet certain qualifications as set out in the proposal, including that the issuer must have equity securities listed on a Canadian stock exchange (or convertible securities that are convertible into listed equity securities), must have been a reporting issuer for at least 12 months prior to the offering news release and must have active business operations. An important limiting feature is that the exemption will not be available to companies seeking to use the proceeds for a significant acquisition or restructuring transaction.
Seasoned Issuer Exemption
For a six month trial period that began on January 4, 2022, the CSA is allowing well-known seasoned issuers (“WKSI”) to access capital markets through a shelf offering without the need to file and receive comment on a preliminary base shelf prospectus. Instead, the WKSI can file a final base shelf and expect to receive the issued receipt on the same or next business day, significantly accelerating the offering process. The CSA is focused on reducing the regulatory burden where it believes there are minimal risks for capital markets, which applies to WKSI, since they have a strong market following, complete public disclosure record and sufficient public float. The threshold requirement to qualify as a WKSI includes having either (i) outstanding listed equity securities that have a public float of C$500,000,000, or (ii) at least C$1,000,000,000 aggregate amount of non-convertible securities, other than equity securities, distributed under a prospectus in primary offerings for cash, not exchange, in the last three years. The proposed changes, if made permanent, would bring the Canadian shelf prospectus system in line with that of the United States which has had a similar model in place for several years. The temporary exemptions will provide the CSA an opportunity to evaluate the appropriateness of the eligibility criteria and identify any potential public interest concerns or operational considerations that should be addressed in future rule amendments.
Although the COVID-19 pandemic continues, specific disclosure and regulatory changes related to COVID-19 were not significant this past year. However, a number of other disclosure and regulatory changes have been introduced that will be relevant for companies as they prepare for the upcoming 2022 reporting season.
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.