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Shareholder Control over Executive Compensation under Bill 101

Bill 101, An Act to Amend the Business Corporations Act (Bill 101), proposes a number of updates to the Ontario Business Corporations Act (OBCA). Introduced as a private member’s bill in early March, Bill 101 aims to shift power to shareholders through amendments in areas such as shareholder meetings, shareholder proxies, as well as the election and diversity requirements of directors. Among Bill 101’s most ambitious changes is to provide shareholders with power over executive compensation. These executive compensation amendments build on a trend in which many public companies are voluntarily providing shareholders with a “say-on-pay”. Bill 101’s proposal in this area, however, goes much further by providing shareholders with the unprecedented ability to both propose and approve executive remuneration policies. The implications of this power raises important questions regarding the respective responsibilities and duties of directors and shareholders.

Shareholders’ Current Say-On-Pay

Most Canadian business statutes, including the OBCA and the Canada Business Corporations Act, explicitly provide directors with the authority to fix compensation for directors, officers and employees, subject only to the company’s articles, by-laws and any unanimous shareholder agreement. Today in Canada there are no corporate or securities laws that provide shareholders with the ability to approve, much less propose, executive compensation.

While not legally required to do so, a trend in recent years has seen many publicly listed Canadian companies voluntarily provide shareholders with a vote on executive compensation. These say-on-pay motions are advisory only, with the results not binding the directors’ decisions. Although non-binding, the say-on-pay process is seen as providing shareholders with value by encouraging directors to consider and clearly explain compensation policies to shareholders.

While the voluntary adoption of non-binding advisory votes is steadily increasing, Canada lags behind certain other jurisdictions in both mandating say-on-pay votes and in providing teeth to the votes through binding outcomes (see a recent Timely Disclosure post). For example, the United Kingdom and Australia have mandated periodic shareholder votes on executive compensation policies.


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In its decision Mennillo v. Intramodal inc., 2016 SCC 51 (Intramodal), the Supreme Court of Canada (Court) was asked whether a corporation’s failure to comply with statutory formalities was oppressive against a shareholder. The majority ruled that based on the facts the company’s failure to comply with certain Canada Business Corporation Act (CBCA) requirements did not trigger the oppression remedy. In the words of Justice Cromwell, who provided reasons for the majority, “sloppy paperwork on its own does not constitute oppression” (para 5).

Companies, directors and their shareholders should be cautious, however, not to draw the wrong lesson from the majority’s decision in Intramodal. Compliance with corporate statutes, whether federal or provincial, is not optional. In addition to violating the law, a failure to comply with corporate statutory formalities can still trigger an oppression remedy where the violation frustrates the reasonable expectations of a company stakeholder, which includes a company’s shareholders, directors, officers and creditors.

As this post will discuss, the decision in Intramodal did not establish a precedent that statutory non-compliance on its own cannot result in an oppression remedy.


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New Paper Discusses the Rise of Advance Notice Provisions in Canadian Corporate Bylaws

In recent years many Canadian firms have amended their corporate bylaws to include advance notice provisions (ANPs). ANPs provide for advance disclosure from shareholders who propose to nominate directors at a shareholders’ meeting. As recently as 2011, no Toronto Stock Exchange (TSX)-listed firm had adopted an ANP. Fast forward to today, and nearly half of all firms on the TSX have added an ANP in their bylaws.

What are ANPs and what accounts for their rapid adoption by Canadian public firms? A recent study and paper, An Empirical Analysis of Advance Notice Provisions in Corporate Bylaws: Evidence from Canada, by Anita Anand and Michele Dathan of the University of Toronto’s Faculty of Law and its School of Management, respectively, provides insight into the recent ANP trend. The authors analyze a sample of 1,156 TSX-listed firms to identify the shared characteristics and rationale among firms that have adopted ANPs.

What are ANPs?

ANPs are corporate bylaw provisions that stipulate advance disclosure requirements from shareholders who propose to nominate directors at a shareholders’ meeting. The disclosure must be circulated to all shareholders (typically at least 30 days in advance of the meeting), and pertain to information about the nominating shareholder and the proposed director or directors. The information required may include the nominating shareholder and proposed director’s name, occupation, residency, shareholdings in the company, descriptions of key agreements or arrangements between the nominating shareholder and proposed director, their relationship with competitors, as well as information that would be required in a dissident proxy circular.

What characterizes a firm likely to propose an ANP?


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On February 3, 2015 the Ontario Securities Commission (OSC) published Staff Consultation Paper 15-401 Proposed Framework for an OSC Whistleblower Program (Paper). The Paper outlines the OSC’s proposal for an award-based whistleblower program (Program). The OSC is welcoming written comments on the Program until May 4, 2015.

The purpose of the Program is to encourage individuals to come forward with information regarding breaches of Ontario securities law. The Program would offer a discretionary financial award to individuals who provide information of misconduct that leads to monetary penalties or settlements of over $1,000,000.

Background

The Paper follows OSC Staff Notice 15-704 Request for Comments on Proposed Enforcement Initiatives published for comment in October 2011. The Program would be the first of its kind amongst Canadian securities commissions. It follows the example of the U.S. Securities and Exchange Commission’s (SEC) whistleblower program established in 2011.

Objectives of the Program

The Program is part of an effort by the OSC’s Enforcement Branch to obtain information regarding securities law transgressions quickly and effectively. The Paper outlines certain specific objectives of the Program, including:

  • motivating those most likely to have information to come forward;
  • increasing the number and efficiency of securities law cases handled by the OSC;
  • increasing the quality of the information used in investigations and proceedings;
  • encouraging cooperation from the whistleblower throughout the investigation and proceedings; and
  • encouraging issuers to self-report misconduct.

In pursuing these objectives, the OSC aims to investigate more securities law cases involving sophisticated players and complex issues, with better information.

Financial Incentive

Under the Program the OSC would offer awards to individuals who provide information that lead to monetary sanctions or settlements under section 127 of the Securities Act (Ontario) of over $1,000,000.  Where penalties exceed this amount, the OSC would have the discretion to award the whistleblower up to 15% of the total sanction or settlement, excluding costs, capped at a maximum award of $1,500,000.

Eligibility

In order to be eligible for the award, the whistleblower must be an individual and the information must be original, provided voluntarily (i.e. not compelled or requested from the individual) and be of high quality. The Paper describes “high quality information” as information that is timely, relates to serious misconduct, is detailed, may stop further harm and is likely to save the OSC significant time and resources. In particular the OSC is looking for information regarding securities law transgressions that are extensive, abusive, create significant risks to investors and are perpetrated by individual in positions of authority.
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