Timely Disclosure

Timely Disclosure

Updates and Commentary on Current issues in M&A, Corporate Finance and Capital Markets

Alberta and Nunavut Propose Exemption for Start-Up Companies

On October 19 2015, the Alberta Securities Commission and the Nunavut Securities Office jointly published for comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (Proposed Exemption). The Proposed Exemption is directed principally at small and early-stage non-reporting issuers and is designed to allow them to raise a defined amount of money in a cost effective manner while still providing appropriate investor protection. The Proposed Exemption is intended to eliminate certain costs arising from the use of the National Instrument 45 -106 Prospectus Exemptions , offering memorandum exemption and is designed to work with other start-up crowdfunding exemptions.

Proposed Exemption

The Proposed Exemption requires that an offering document and report of exempt distribution be prepared and filed by an issuer through SEDAR. The offering document must contain prescribed information and each investor must sign a risk acknowledgement form. The information required in the offering document under the Proposed Exemption is more streamlined than that required under the offering memorandum exemption and financial statements are not required, which will make the Proposed Exemption more accessible to early stage issuers as they will no longer be required to rely on the offering memorandum exemption for raising capital. The Proposed Exemption provides a prospectus exemption but not a registration exemption. A person or company operating a crowdfunding portal will generally be considered a dealer and must still comply with the registration requirements.

Investment Limits

The Proposed Exemption limits the amount of money investors can invest, which varies depending on whether a registered dealer is involved in the offering. If a registered dealer is not involved, an investor may invest, in a 12 month period, up to $1,500 in a single investment or up to $3,000 in the issuer and its affiliates, including issuers engaged in a common enterprise (Issuer Group). If a registered dealer is involved, purchasers may invest, in a 12 month period, up to $5,000 in a single investment and up to $10,000 per Issuer Group.

There is a $1,000,000 lifetime limit on the amount that may be raised in reliance on the Proposed Exemption. Once an issuer has raised $1,000,000, it is presumed that an issuer should have the capacity to prepare financial statements and comply with other disclosure requirements under the offering memorandum exemption, in which case it would no longer need to rely on the Proposed Exemption.

Apart from the Proposed Exemption and other start-up crowdfunding exemptions, Canadian and U.S. Regulators have recently introduced comprehensive crowdfunding exemptions which contemplate the use of a registered portal.

Next Steps

The crowdfunding rules found in the Proposed Exemption suggest that securities regulators are receptive to the financing needs of start-up businesses. The Proposed Exemption will be a welcome addition for many early stage companies who struggle to raise capital through traditional avenues.

Comments on the Proposed Exemption are due by December 18, 2015.

Comprehensive Crowdfunding Rules Published in Final Form

On November 5, 2015 securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (Participating Jurisdictions) published in final form the long awaited crowdfunding regime: Multilateral Instrument 45-108 Crowdfunding (Crowdfunding Regime) which includes a crowdfunding prospectus exemption (Crowdfunding Exemption) and a registration framework for funding portals. The Crowdfunding Regime is set to come into force in the Participating Jurisdictions on January 25, 2016.

Purpose of the Crowdfunding Regime

For many small and medium sized business enterprises (SMEs), selling securities over the internet to a large number of investors has emerged recently in some jurisdictions as the new way of accessing capital.  Through the Crowdfunding Regime, the Participating Jurisdictions intend to leverage the use of the internet and social media to facilitate online capital raises for start-ups and SMEs and provide new investment opportunities through a single funding portal. The Crowdfunding Regime maintains certain investor protections and regulatory oversight in line with the Participating Jurisdictions’ mandate to protect investors.


As previously discussed in Timely Disclosure, in December 2013 the Ontario Securities Commission (OSC) initiated a consultation process to consider various prospectus exemptions to facilitate capital raising for SMEs. On March 20, 2014 the OSC published a notice and request for comment proposing four new capital raising prospectus exemptions in Ontario, including the proposed crowdfunding regime. The OSC received 70 written submissions during the four month comment period, and the Crowdfunding Regime was published in final form on November 5, 2015.

The Crowdfunding Exemption

The Crowdfunding Exemption permits both non-reporting and reporting issuers to issue securities to investors subject to certain conditions designed to protect investors. Some key conditions are:

Issuer Limits: Issuers may use the Crowdfunding Exemption to raise no more than $1.5 million during the 12 month period prior to the end of the current offering.  Other capital raising prospectus exemptions remain available to an issuer during this period.

Investor Limits: Non-accredited investors are limited to investing up to $2,500 per investment and $10,000 per calendar year; accredited investors are limited to investing $25,000 per investment and $50,000 per calendar year. There are no investment limits for permitted clients (being individuals with net financial assets of at least $5 million or corporations with net assets of at least $25 million).

Simple Securities: Issuers can offer only non-complex securities, including common shares and preference shares (and securities convertible into such shares), limited partnership units and flow-through shares.

Disclosure Document: Issuers must prepare an offering document that contains all of the information about the issuer and its business that an investor should know before purchasing the issuer’s securities. The disclosure will take the form of 45-108F1 Crowdfunding Offering Document (Crowdfunding Offering Document).

Canadian Issuer: The issuer must be incorporated or organized under the laws of a Canadian jurisdiction and must have its head office in Canada, and a majority of its directors must be resident in Canada.

Financial Statements: Non-reporting issuers that distribute securities in reliance of the Crowdfunding Exemption must have their financial statements: (i) audited or reviewed by a public accounting firm if the cumulative amount raised under the Crowdfunding Exemption is between $250,000 and $750,000; and (ii) audited if the cumulative amount raised under the Crowdfunding Exemption is over $750,000.

Funding Portal: Issuers may distribute securities only through a funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer. The Crowdfunding Offering Document and other permitted materials must be posted solely on the funding portal’s online platform.  Funding portals are restricted from offering securities of a related issuer and must fulfill certain gatekeeping responsibilities including reviewing the issuer’s Crowdfunding Offering Document prior to allowing an issuer access to the portal. In addition, the funding portal must obtain background checks on the issuer and its directors, executive officers and promoters.

Advertising and Solicitation: all relevant information about the issuer’s crowdfunding offering must be made available on the funding portal’s online platform and not on any other website. An issuer may, however, inform potential investors of its proposal to offer its securities under the Crowdfunding Exemption and refer potential investors to its online platform.

Hold Period: securities issued in reliance of the Crowdfunding Exemption will be subject to a four-month hold period if the issuer is a reporting issuer and to an indefinite hold period in the case of a non-reporting issuer.

Other North American Crowdfunding Developments


Following a consultation period held early last year, the securities regulators of British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan announced on May 14, 2015 that they have implemented changes to their securities legislation to provide for registration and prospectus exemptions for start-ups and early-stage companies that wish to raise capital through crowdfunding (Start-up Exemption). The notable difference between the Start-up Exemption and the Crowdfunding Exemption is that the Start-up Exemption is available only to non-reporting issuers.  In addition, the offering limit under the Start-up Exemption is $500,000 versus $1.5 million under the Crowdfunding Exemption. There is no portal requirement under the Start-up Exemption.

The Alberta and Nunavut regulatory authorities have also published for comment a prospectus exemption to facilitate capital raising of up to $1 million for start-ups and early stage businesses. The exemption is being designed to work with the above noted start-up and crowdfunding exemptions.

United States

Finally, the United States Securities and Exchange Commission’s (SEC) much anticipated crowdfunding exemption was adopted on October 30, 2015.  The exemption, titled “Regulation Crowdfunding”, limits an issuer’s capital raise to an aggregate of US$1 million through crowdfunded offerings in a 12-month period and, in that same period, limits investors across all crowdfunding offerings to: (i) the greater of US$2,000 or 5% of the lesser of their annual income or net worth if either is less than US$100,000; or (ii) if both their annual income and net worth are equal to or more than US$100,000, 10% of the lesser of their annual income or net worth (not to exceed US$100,000 for any individual). Regulation Crowdfunding may not be used by companies who already report to the SEC, or by non-US incorporated companies. It is expected to become effective in May 2016.

OSC Introduces Offering Memorandum Prospectus Exemption

In March 2014, certain members of the Canadian Securities Administrators proposed amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) with the aim of allowing business enterprises, with a focus on small and medium size enterprises, to benefit from greater access to capital from investors. On October 29, 2015, the securities authorities in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (Participating Jurisdictions) announced final amendments to NI 45-106 (Final Amendments) which will introduce an offering memorandum (OM) exemption in Ontario (OM Exemption) and substantially harmonize the OM exemption in the other Participating Jurisdictions.  Subject to ministerial approvals, the Final Amendments will come into force in Ontario on January 13, 2016 and in the other Participating Jurisdictions on April 30, 2016.

The Final Amendments substantially mirror the amendments proposed in March 2014 with some exceptions.  Among other matters, key features of the OM Exemption include the following requirements:

  • the issuer must deliver a comprehensive OM in the prescribed form to investors at the point of sale which incorporates the issuer’s marketing materials and is subject to statutory liabilities in the event the document contains a misrepresentation;
  • investment limits of between $10,000 and $100,000 for investors who are individuals dependant on whether the investor is an eligible investor, but such limitations do not apply to investors who qualify as an eligible investor under the accredited investor or family, friends and business associates exemption;
  • investors must sign a risk acknowledgement form including two new schedules which confirm the investor’s status as either an eligible investor, non-eligible investor, accredited investor or an investor who would qualify to purchase securities under the family, friends and business associates exemption; and
  • non-reporting issuers must provide to investors on-going disclosure, specifically, audited annual financial statements, an annual notice on how the proceeds raised under the exemption have been used and notice in the event of a discontinuation of the issuer’s business, a change in the issuer’s industry or a change of control of the issuer.

OSC finds significant deficiencies at exempt market dealers

The Ontario Securities Commission (OSC) published OSC Staff Notice 33-746 (Notice) on September 21, 2015.

The Notice focuses on registered firms and individuals directly overseen by the OSC describing the initiatives within the Compliance and Registrant Regulation Branch (CRR), notices published, rule amendments and regulatory action taken as a result of registrant misconduct.   The OSC encourages firms to review the Notice in its entirely and to use it as a self-assessment tool to increase awareness and enhance their compliance with Ontario securities law.

The Notice, in large part, sets out the compliance issues identified by CRR, some of which are repeated deficiencies, and includes guidance to address these deficiencies.  The Notice highlights the significant compliance deficiencies specific to higher risk exempt market dealers (EMDs), some of which are summarized below.

Inadequate Know Your Client (KYC), Know Your Product (KYP) & Suitability Assessment

EMDs are not collecting sufficient information about their clients in order to (i) establish the identity of their clients, (ii) ensure the registrant has sufficient information to meet its suitability obligation, and (iii) assess reliance on a prospectus exemption.  EMDs were also unable to demonstrate compliance with the KYP requirement.

The regulatory framework for KYC, KYP and suitability is set out in section 3.4 and Part 13, Division 1 of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). A registrant is required to obtain adequate and current KYC information from its clients, in advance of making a recommendation to buy or sell a security, in order to assess suitability of an investment.  Dealing representatives should have discussions with their clients to better understand their needs, objectives, and willingness and ability to accept certain risks of investing. Registrants should have KYC forms that are easy to read and understand.  The forms completed by clients should be reviewed to ensure they are accurate and complete.

EMDs and their dealing representatives must be knowledgeable about the products being recommended and able to explain the key features, risks, initial and ongoing costs and fees associated with a proposed investment as well as understanding the requirements of prospectus exemptions relating to the products being recommended to clients.  An EMD should be conducting its own due diligence for products it wishes to offer to its clients instead of relying on information obtained from unregistered third parties.

Inadequate Internal Controls and Supervision

EMDs were found to be “renting” their registration by sponsoring dealing representatives that were not acting on behalf of the EMD but rather an issuer affiliated with the dealing representative.  These dealing representatives were selling only products of their affiliated issuers rather than the products being offered by their sponsoring firm.

Dealing representatives of EMDs were found to have inadequate training and supervision resulting in inadequate KYC information collected from clients, unsuitable trades including investments being sold under a prospectus exemption for which clients were not qualified, and the firm being unaware of the marketing and outside business activities by its dealing representatives.

EMDs are required to have a compliance system in place to ensure their dealing representatives are acting on behalf of the firm and in compliance with securities laws.

Inadequate Relationship disclosure information

EMDs did not provide adequate relationship disclosure information (RDI) to clients, including the nature and type of account they were opening, the firm’s services and products, the risks and costs involved, and the EMD’s obligation to assess suitability of investments prior to recommending an investment.

Subsection 14.2(2) of NI 31-103 sets out the details of the information a firm must provide to its clients.  RDI should contain fulsome, meaningful and up-to-date information in order that clients understand the services and products offered by the registrant, the level of risk associated with the products and services offered by the firm, the costs associated with operating their account and any conflicts of interest that may exist between the registrant and the client. As set out in subsection 14.2(2)(k) of NI 31-103, the RDI must contain “a statement that the firm has an obligation to assess whether a purchase or sale of a security is suitable for a client prior to executing the transaction or at any other time”.

Gender Diversity and Board Renewal – How does your company compare?

On September 28, 2015 ten members of the Canadian Securities Administrators (CSA members), including the Ontario Securities Commission, released Multilateral Staff Notice 58-307 (Staff Notice) entitled Staff Review of Women on Boards and in Executive Officer Positions – Compliance with National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101).  The Staff Notice summarizes the findings of the review by the CSA members of the corporate governance disclosure of 722 reporting issuers being, of the 886 reporting issuers on the TSX, those that had published their disclosure by July 31, 2015.  Highlights of the results of the review are set out below:

Female Representation

The CSA members’ review found that, of the sampled issuers:

  • 49% have at least one woman on their board;
  • 60% have at least one woman in an executive officer position; and
  • 15% have added one or more women to their board this year.

Of the sampled issuers with a market capitalization above $2 billion:

  • 60% have two or more female directors; and
  • over 30% have adopted a written policy for identifying and nominating women directors.

Term Limits

With respect to the disclosure of whether issuers have adopted director term limits or other mechanisms of board renewal, of the sampled issuers:

  • 19% have adopted director term limits; and
  • 56% have adopted other mechanisms of board renewal.

The most commonly cited mechanism of board renewal was some form of annual board assessment.

Gender Diversity Policy

With respect to the disclosure of whether the issuer has a written policy relating to the identification and nomination of women, of the sampled issuers:

  • 14% disclosed the adoption of a clear written policy for identifying and nominating women directors;
  • 65% disclosed that they had decided not to adopt a written policy; and
  • 11% disclosed a general diversity policy without specific provisions for the identification and nomination of women directors which may not meet the requirements of NI 58-101.

Of the sampled issuers who have adopted a written policy for identifying and nominating women directors:

  • 48% disclosed that the policies were adopted or updated this year;
  • 98% disclosed that gender was specifically considered when making board selections; and
  • 47% set specific quotas or targets for female directors.

The results of the CSA members’ review did not vary significantly by region. Industry and size of the issuer were the most significant indicators of whether issuers adopted initiatives to increase the representation of women on their board or in executive officer positions. Insurance, utility, communications and entertainment industries had the highest policy adoption rates at roughly 30%, while oil and gas, technology, biotech, hospitality and environmental industries had the lowest rates, at less than 10%.

The Staff Notice provides guidance aimed at improving issuer disclosure in order to further the goal of increasing transparency for investors and other stakeholders regarding the representation of women on boards and in executive officer positions. It also addresses disclosure practices regarding board term limit or other mechanisms of board renewal and provides examples of how these disclosure requirements may be met.

TSX Amends Company Manual to Provide New Rules for Closed-End Funds and ETFs

The Toronto Stock Exchange (TSX) announced amendments to the TSX Company Manual (Amendments) effective September 17, 2015 relating to the listing of Exchanged Traded Products, Closed-End Funds and Structured Products, as defined in the Amendments.

Proposed Amendments were first published on January 15, 2015.  Nine commentators (including Fasken Martineau DuMoulin LLP) provided comments.  A summary of the comments and the TSX response to them are included with the announcement.

Among other matters, the final Amendments included the following changes from the proposed Amendments:

  • the definition of Closed-End Fund was amended to align with the definition of non-redeemable investment fund in the Securities Act (Ontario);
  • the minimum market capitalization for a Closed-End Fund was reduced from $20 million to $10 million;
  • management of Non-Corporate Issuers must have adequate and appropriate experience in the asset management industry and with listed issuers;
  • the net asset value of a Closed-End Fund must be calculated no less frequently than required under applicable securities laws (rather than a minimum weekly basis);
  • the issuance of additional securities of a Closed-End Fund must yield net proceeds per security of no less than 100% of the most recently calculated net asset value (NAV) per security calculated prior to the pricing of such issuance (no longer requiring it to be ‘immediately prior’) and all transactions must close within 30 days of the pricing (rather than from the date of the calculation of NAV);
  • the TSX may require securityholder approval for any amendments to the constating documents of an Exchange Traded Product or Closed-End Fund that are not covered by the amendment provisions of the documents that may materially affect the rights of securityholders;
  • the extension of an Exchange Traded Product or Closed-End Fund beyond the originally contemplated termination date may require securityholder approval unless securityholders are provided with the opportunity to redeem securities at NAV within 3 months of the originally contemplated termination date and notice of the extension at least 30 days prior to the redemption deadline;
  • Non-Corporate Issuers must pre-clear any information circulars and other materials related to corporate actions (for example, redemptions, consolidations or stock splits) to be sent to securityholders at least 5 business days in advance of finalization (which narrows the requirements from what was in the Proposed Amendments); and
  • the TSX agreed that the requirements of National Instrument 81-102 – Investment Funds provide substantial comfort regarding the approval for fund mergers and accordingly repealed Section 604(g) of the TSX Manual.

Understanding the results of the Continuous Disclosure Review Program

On July 16, 2015 the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-344 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2015 summarizing the results of their Continuous Disclosure Review Program (Program).  The purpose of the Program is to monitor the compliance of continuous disclosure documents prepared by reporting issuers (issuers) and to help issuers understand and comply with their obligations under the continuous disclosure rules.

In fiscal 2015, there was a total of 1058 Continuous Disclosure Reviews, 280 of those being full reviews while 778 were issue oriented reviews focused on a specific accounting, legal or regulatory issue.  Highlights of the continuous disclosure reviews in fiscal 2015 are as follows:

  • 8% resulted in enforcement, cease trade orders or issuers being placed on a defaulting issuer list (compared to 9% in fiscal 2014);
  • 21% resulted in a requirement to amend and refile the applicable continuous disclosure document (compared to 14% in fiscal 2014);
  • 30% resulted in changes or enhancements required in the issuer’s next filing of the applicable continuous disclosure document (compared to 37% in fiscal 2014);
  • 9% resulted in a letter to the issuer, designed to educate or make the issuer aware of certain disclosure enhancements, best practices and expectations (compared to 16% in fiscal 2014); and
  • 32% resulted in no action being required (compared to 24% in fiscal 2014).

To help issuers better understand their continuous disclosure obligations the CSA also highlighted areas where deficiencies were commonly found and provided some best practice examples on how to address the deficiencies.  Regarding MD&A, the CSA noted several issues, including:

  • failing to provide sufficient analysis of liquidity and capital resources;
  • providing inadequate results of operations disclosure;
  • including forward looking information and non-GAAP measures without clearly identifying them as such or including the appropriate disclosures; and
  • providing inadequate disclosure regarding related party transactions.

Interestingly, the CSA also noted that in some instances issuers are failing to file certain disclosure documents all together, the most common of those being material contracts and material change reports.

Of special interest to mining issuers, the CSA noted that mining issuer disclosure must comply with NI 43-101 Standard of Disclosure for Mineral Projects (NI 43-101), including written disclosure contained on an issuer’s website including investor presentations, media articles and links to third party content.  Regarding investor presentations of mining issuers, the CSA noted several areas where mining issuers need to improve to better comply with NI 43-101, including:

  • naming the qualified person who approved technical information and explaining their relationship to the issuer;
  • providing required cautionary statements so that investors can understand the limitations of study results;
  • including clear statements on whether mineral resources include or exclude mineral reserves;
  • for exploration targets, expressing potential quantity and grade as a range and including the required statements outlining the target limitations; and
  • avoiding overly promotional terms, such as “world class” and “spectacular and exceptional results”.

The CSA stressed the importance of the mining sector in Canadian capital markets and noted that they will continue to review mining issuers’ website disclosure as part of the Program.

Canadian Securities Administrators Propose Harmonized Exempt Distribution Reporting Rules

On August 13, 2015, the Canadian Securities Administrators (CSA) published proposed amendments to the reporting requirements in National Instrument 45-106 Prospectus Exemptions (NI 45-106).


Current Reporting Forms

The reporting forms required to report an exempt distribution presently consist of two forms, being Form 45-106F6 British Columbia Report of Exempt Distribution (Form 45-106F6) which is used for distributions in British Columbia and Form 45-106F1 Report of Exempt Distribution (Form 45-106F1) which is used for distributions in all other Canadian jurisdictions.  Issuers who meet an exemption under BC Instrument 45-533 may file a Form 45-106F1 in British Columbia instead of filing a Form 45-106F6.

In March 2014, the provinces of Alberta, Saskatchewan, Ontario and New Brunswick published proposed amendments to NI 45-106 that would result in the creation of two additional reporting forms which would be Form 45-106F10 Report of Exempt Distribution for Investment Fund Issuers and Form 45-106F11 Report of Exempt Distribution For Issuers Other Than Investment Funds (March 2014 Proposed Forms).

As described below, the CSA proposes to replace Form 45-106F1, Form 45-106F6 and the March 2014 Proposed Forms with a single, revised Form 45-106F1.

Current Filing Systems

Form 45-106F1 or Form 45-106F6, as applicable, are filed with the British Columbia Securities Commission (BCSC) through the BCSC eServices website and issuers are required to have a profile created on the BCSC eServices system before a filing can be completed.  Issuers who have a System for Electronic Document Analysis and Retrieval (SEDAR) profile automatically have a profile existing in BCSC eServices.  Issuers who do not have a SEDAR profile are required to submit a profile form to the BCSC to create their profile on BCSC eServices at least 24 hours before they can submit the reporting form.  BCSC eServices requires the filer to enter a few pieces of information from the Form 45-106F1/F6 into certain fields on the eServices submission page before attaching the reporting documents and completing the submission.  The Form 45-106F1 or Form 45-106F6 is typically populated in Word format, and then converted into PDF format before being uploaded to BCSC eServices.  In addition, the schedules to Form 45-106F1 and Form 45-106F6 are removed and filed as separate PDF documents.

Form 45-106F1 filings with the Ontario Securities Commission (OSC) are filed through the OSC’s Electronic Filing Portal (OSC Portal).  Unlike the BCSC eServices system, the OSC Portal does not require a profile to be created by an issuer in order to make a filing.  However, unlike the BCSC eServices system, where only a few pieces of information need to be entered into the submission page, the submission on the OSC Portal requires the filer to enter every piece of information in the entire Form 45-106F1 onto the submission page.  In addition, Schedule I to Form 45-106F1 must be completed in Excel format and uploaded to the submission page.  The Form 45-106F1 is typically originally populated in Word format, the Schedule I information is populated a second time in Excel format, and the filer populates the Form 45-106F1 in its entirety again electronically on the OSC Portal.  If the Form 45-106F1 is only being filed in Ontario, a filer may draft the Form 45-106F1 in the OSC Portal and the Excel version of Schedule I and forgo the creation of the Word version.

Form 45-106F1 filings in all other Canadian jurisdictions simply require the executed Form 45-106F1 to be mailed to the securities commission.  A recent proposal by the CSA would allow the filing of Form 45-106F1 reports through SEDAR.

The time and costs to issuers to complete the reporting for an exempt distribution have been increasing as a result of the introduction of BCSC eServices and OSC Portal filing systems requiring the creation of different forms, completion of different formats of the schedules, and population of the electronic submission pages.  The CSA have received this feedback from the industry in response letters to various proposed amendments to NI 45-106 and are therefore proposing the current amendments, in part, to harmonize the reporting forms into one.

In addition, the proposed amendments include the requirement to provide additional information to the CSA to assist them in regulatory oversight of the exempt market and to provide information for future policies.

Proposed Changes

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The Canadian Coalition for Good Governance Releases Policy Paper on Proxy Access

The Canadian Coalition for Good Governance (CCGG) has released a policy paper entitled “Shareholder Involvement in the Director Nomination Process:  Enhanced Engagement and Proxy Access”.

In the policy paper, CCGG refers to “proxy access” as the ability of shareholders to have meaningful input into the director nomination process, whether by being able to influence who the nominees are or through actually nominating directors.

Under Canadian corporate law, although shareholders elect directors, they typically are not involved with choosing the nominees for the board.  CCGG stated that its view is that board composition in Canada will benefit from meaningful shareholder input into the nomination process and that such input is an essential component of shareholder democracy.

The paper sets out CCGG’s recommendations including that companies adopt policies and procedures that will enable shareholders to communicate with independent directors about board composition on a regular basis, that corporate and securities statutes be amended as necessary to include proxy access provisions consistent with those set out in CCGG’s policy paper, and that issuers adopt a proxy access policy voluntarily prior to amendments to these statutes.   The paper also highlights the approach of other jurisdictions to proxy access including the United States where companies are beginning to adopt proxy access bylaws.

CCGG proposed that proxy access legislation or policy include the following components:

  • shareholders holding an aggregate economic and voting interest of at least 3% or 5% of outstanding voting shares (depending on the company’s market capitalization) should be able to nominate directors to be placed on the same form of proxy as the company’s nominees;
  • shareholders must hold the prescribed percentage of shares up to the time of the applicable meeting;
  • disclosure about a shareholder’s nominees should be set out fairly and with the same prominence as the company’s nominees in the proxy circular along with the use of a universal proxy form for all nominees;
  • shareholders do not need to hold their shares for a specific period of time before being permitted to nominate a director;
  • the number of directors to be nominated by shareholders cannot exceed the lesser of 3 directors or 20% of the board;
  • reasonable solicitation costs on the part of the shareholder should be paid by the company unless shareholders resolve otherwise; and
  • shareholders nominating directors must represent that they are not seeking control and have the minimum prescribed ownership.

Responding to the Activist: Compensating the Special Committee

As we have noted in our previous post, a special committee appointed to lead a company’s response to an activist can expect to receive a greater degree of public scrutiny, but may take comfort from the fact that the legal standard against which its members will be judged will not change.  While that should provide some comfort to committee members, the job of serving on a committee can nevertheless be time-consuming and challenging.  However, given the extra time and effort needed to properly discharge the committee’s mandate, it is customary and appropriate to compensate committee members for their efforts above and beyond their regular compensation as directors.

Compensation arrangements generally involve one or both of the following and are typically paid in cash:

  • a flat retainer fee (which could be a monthly or quarterly fee), often with the committee chair receiving a greater amount to account for the additional responsibilities of the chair; and/or
  • a per meeting fee, which may be lower when attending by phone given that there is less disruption or travel time involved to attend the meeting (the quantum is typically based on the attendance fee for regular board meetings). Where the work of the committee turns out to be more intensive than originally anticipated, the meeting fee can serve to balance a retainer fee that in hindsight could be viewed as providing insufficient compensation.

Committee members should also be reimbursed their reasonable expenses, often consistent with the board’s existing expense reimbursement policy.

There are no specific rules governing the quantum of compensation in these circumstances, though some guiding principles may be helpful:

  • The board should consider the organization’s general board compensation philosophy and practices.
  • Success fees, which may compromise the committee’s independence, should generally be avoided.
  • The quantum of compensation should not be excessive in relation to the fees paid to board members in connection with their regular board duties or, for that matter, the compensation paid to management.
  • As a further reference point, the board also may look to the compensation paid to members of the audit committee, a committee whose independence is legislatively mandated.

This is the fifth in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids.  For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.