Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their Canadian proxy voting recommendation guidelines for the 2015 proxy season. The items updated include those pertaining to the definition of independence, advance notice requirements, by-law amendments, private placements, treatment of majority voting policies, shareholder rights plans and advance notice policies.
The following summary outlines the significant changes made by ISS (ISS Updates) and Glass Lewis to their respective Canadian proxy advisory guidelines.
Definition of Independence. The current guidelines recommend that votes be withheld for any “insider” or “affiliated outside director” where the board does not have a majority of independent directors or the board lacks a separate compensation or nominating committee. The ISS Updates provide that an assessment as to independence will be made on a case-by-case basis. ISS will deem a former CEO to be independent for the purposes of serving on the board or any key committee, including the audit committee, after a five year cooling off period unless certain factors indicate otherwise. Specifically, the ISS Updates include a provision that deems any director nominee who has any material relationship with the issuer or with any one or more members of management of the issuer not to be independent. A material relationship is defined as a relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders. ISS will also recommend a withhold vote from any director who has served as the CEO of the issuer within the past five years and is a member of the audit or compensation committee.
Advance Notice Policies. With respect to Advance Notice Policies, ISS will generally recommend that investors withhold votes from individual directors, committee members, or the entire board as appropriate in situations where an Advance Notice Policy has been adopted by the board but has not been included on the voting agenda at the next shareholders’ meeting. The rationale behind the recommendation is that certain problematic provisions included within these bylaws/policies could potentially interfere with a shareholder’s ability to nominate directors. ISS is of the view that the ability for shareholders to put forward potential nominees is a fundamental right and should not be amended by management or the board without shareholders’ approval. ISS considers the following features problematic:
- for a notice of annual meeting given not less than 50 days prior to the meeting date, the notification timeframe within the advance notice requirement should allow shareholders the ability to provide notice of director nominations at any time not less than 30 days prior to the meeting. The notification timeframe should not be subject to any maximum notice period for annual meetings. If notice of annual meeting is given less than 50 days prior to the meeting date, a provision to require shareholder notice by close of business on the 10th day following first public announcement of the annual meeting is supportable. In the case of a special meeting, a requirement that a nominating shareholder must provide notice by close of business on the 15th day following first public announcement of the special shareholders’ meeting is also acceptable;
- the board’s inability to waive all sections of the advance notice policy, in its sole discretion;
- a requirement that any proposed nominee deliver a written agreement to comply with all policies and guidelines of the issuer that are applicable to directors;
- any provision that restricts the notification period to that established for the originally scheduled meeting in the event that the meeting has been adjourned or postponed;
- any requirement that a shareholder deliver information in respect of a nominee beyond what is required in a dissident proxy circular or is otherwise required to determine the nominee’s qualifications;
- a provision that the issuer will not be obligated to include any information provided by a dissident director nominee or nominating shareholders in any shareholder communication; and
- any other feature of the advance notice provisions determined to have a negative impact on shareholder interests.
By-law Amendment in addition to Advance Notice. ISS will generally be opposed to proposals to adopt or amend articles or bylaws if the complete articles or bylaws are not included in the meeting materials for review or located on SEDAR.
Furthermore, ISS will not recommend voting for proposals to adopt or amend articles or bylaws to include the following: (i) an advance notice requirement that includes one or more provisions which could have a negative impact on shareholders’ interests and which are deemed outside the purview of the stated purpose of the requirement; and (ii) any other provisions that may adversely impact shareholders’ rights or diminish independent effective board oversight.
Private Placement Issuances. With respect to private placements requiring shareholder approval, ISS will vote case-by-case taking into account:
- whether other resolutions are bundled with the issuance;
- whether the rationale for the private placement issuance is disclosed;
- dilution to existing shareholders’ position:
- discount/premium in issuance price to the unaffected share price before the announcement of the private placement;
- the market’s response to the proposed private placement since announcement; and
- other applicable factors, including conflict of interest, change in control/management, evaluation of other alternatives.
Generally, ISS will recommend a vote for the private placement issuance if (i) the issuance represents no more than 30 percent of the issuer’s outstanding shares on a non-diluted basis; or (ii) it is expected that the issuer will file for bankruptcy if the transaction is not approved or the issuer’s auditor/management has indicated that the issuer has going concern issues.
Majority Voting Policy. Glass Lewis has updated its policy with respect to Toronto Stock Exchange (TSX) listed companies which have not adopted a majority voting policy for uncontested director elections. For uncontrolled issuers, meaning an issuer without a majority shareholder owning over 50% of the shares, listed on the TSX Glass Lewis recommends that shareholders withhold votes from all members of an issuer’s governance committee if such issuer has not adopted a majority voting policy. This moves Glass Lewis’ recommendations in line with the TSX listing requirements which now requires uncontrolled companies to adopt a majority voting policy.
Shareholder Rights Plans. The updated guidelines for the 2015 proxy season indicate that Glass Lewis will consider supporting a shareholder rights plan if, along with the attributes required previously, the provisions relating to a qualifying offer under the plan do not allow the board discretion to amend material provisions without shareholder approval.
Advance Notice Policies. With respect to advance notice policies, Glass Lewis has updated its guidelines such that it will consider not supporting a policy which does not allow for a new time period for shareholder nominations if an annual meeting is adjourned or postposed.
General. Glass Lewis clarified that it would recommend voting against directors who have served on boards or as executives of companies with poor performance, inadequate risk oversight, excessive compensation, audit or accounting related issues or other displays of mismanagement or actions against shareholders’ interests. In particular, Glass Lewis typically will recommend voting against a director who:
- fails to attend a minimum of 75% of board or committee meetings without reasonable explanation; and
- is the CEO of an issuer where a serious and material restatement of financial statements occurred, has received two against recommendations from Glass Lewis for the same reason during the prior year at different companies, or exhibits a pattern of poor oversight of executive compensation, risk management or director recruitment and nomination.
The 2015 guidelines also provided guidance with respect to awards granted outside of an issuer’s standard incentive schemes. Generally Glass Lewis believes that such awards can undermine the integrity of existing incentive plans or the link between pay and performance but recognizes such awards may be appropriate in certain circumstances.