Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their Canadian proxy voting recommendation guidelines for the 2016 proxy season.

The following summary outlines the significant changes made by ISS (ISS Updates) and Glass Lewis (Glass Lewis Updates) to their respective Canadian proxy advisory guidelines.

ISS

Definition of “Overboarded”. While existing overboarding thresholds will remain in place for 2016, the ISS Updates provide that beginning as of February 1, 2017, ISS will generally recommend a withhold vote for a director of a Toronto Stock Exchange (TSX) listed issuer (i) who serves as a CEO of any public company while serving on a total of more than one (down from the current two) public company boards (other than the board of the company he or she is CEO of) and any other director who serves on a total of more than four (down from the current six) public company boards; and (ii) has attended less than 75% of the board and committee meetings within the past year without a valid reason.

Externally-Managed Issuers. ISS’ current guidelines do not have a recommendation regarding externally-managed issuers. The ISS Updates set out a framework on how ISS will vote on say-on-pay resolutions or on individual directors, committee members or boards when an issuer is externally-managed and has provided inadequate disclosure about the relevant management services agreements and how senior management is compensated. The factors ISS may consider including the following:

  • the size and scope of the management services agreement;
  • comparison of executive compensation with peers;
  • overall performance;
  • related party transactions;
  • independence of board and committee;
  • existence and the process for managing of conflicts of interest;
  • disclosure and independence in the selection of the management services provider;
  • risk mitigating factors in the management services agreement such as fee recoupment mechanisms;
  • historical compensation concerns; and
  • executives’ responsibilities.

Equity Compensation Plans. The ISS Updates set out a new model for evaluating equity compensation plans of TSX listed issuers. Previously, ISS would recommend an against vote for an equity based compensation plan which had certain features which were against ISS guidelines. The new model used by ISS is a “scorecard” model that will consider a variety of positive and negative factors of the compensation plan leading to a score which will determine ISS’ recommendation. The factors considered are in three categories: Plan Cost, Plan Features and Grant Practices.

  • The Plan Cost aspect will assess the total estimated cost of the benefit plan relative to the issuer’s peers.
  • The Plan Features aspect will assess whether:
    • the plan contains change of control provisions which do not meet ISS standards;
    • the plan allows for financial assistance for the exercise of equity grants;
    • public disclosure of the full text of the benefit plan is available to shareholders; and
    • there is reasonable share dilution compared to market best practices.
  • The Grant Practices aspect considers how grants have been made in the past by the issuer including:
    • reasonable three year burn rate compared to market best practices;
    • meaningful time vesting requirements for the CEO’s most recent grant;
    • issuance of performance-based grants to the CEO;
    • a clawback provision for equity awards; and
    • post exercise or settlement shareholding requirements.

If the combination of these factors, as determined by an overall score, indicates that the plan is not in shareholders’ interests, ISS will generally recommend that shareholders vote against the plan.

ISS will continue to recommend generally that shareholders’ vote against a plan with:

  • discretionary or insufficiently limited non-employee director participation;
  • plan amendment provisions which are not in line with ISS requirements; and
  • a history of repricing options without shareholder approval.

We understand that ISS will be providing additional guidance to clarify how benefit plans will be evaluated under the new scorecard approach described in the ISS Updates.

GLASS LEWIS

Director Overboarding Policy – TSX Issuers. 
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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)

On April 16, 2015, the securities regulators in British Columbia, New Brunswick and Saskatchewan published for comment Multilateral CSA Notice 45-315 – Proposed Prospectus Exemption for Certain Distributions through an Investment Dealer whereby the regulators proposed a new prospectus exemption that, if approved, would greatly increase the potential private placement investor base for a listed

On May 21, 2015, the TSX announced one set of amendments and one request for comment on proposed amendments to the TSX Company Manual (Manual), both respecting physical certificate requirements for securities. The amendments should not have a noticeable impact for many listed issuers or industry participants, but they do highlight a few trends to be aware of.

The amendments and proposed amendments were promulgated in response to the trend of increasing dematerialization of physical securities the securities industry has experienced over approximately the last decade, initiated on the part of industry participants such as transfer agents, exchanges, brokers, and especially, clearing agencies and depositories, like the Canadian Depository for Securities (CDS). Legal practitioners, transfer agents, issuers and underwriters should all be familiar with the effects of the trend, noting the continual increase in electronic closings in recent years, for both financing and M&A transactions. Topically, this trend is reflected in the increasing number of electronic issuances of securities to even United States purchasers by Canadian listed issuers, which until very recently would have required physical certificates to be delivered to those purchasers, mainly for legending and transfer restriction purposes.

The dematerialization of evidence of securities ownership is itself an industry response to mitigate the costs and risks associated with the physical evidence of security ownership, including the costs of printing, storing, transferring, and physical handling of certificates, and the risk of theft and loss. CDS especially, through its rules, has been at the fore of implementing the shift for participants to embrace dematerialization to reduce such costs and risks, as CDS was often the entity with the responsibility to securely store physical certificates, and maintain facilities, staff and processes for their handling and transfer.

The published amendments to the Manual are characterized by TSX as being of a “housekeeping” nature, which characterization the Ontario Securities Commission did not disagree with. The amendments have been in force since May 21, 2015. The amendments update the language of the Manual to contemplate additional forms of evidence of security ownership other than physical certificates, such as holding securities through CDSX, the electronic deposit system of CDS, and direct registration systems, (commonly referred to as “DRS”). The amendments otherwise update the Manual to codify or clarify existing practices and dematerialization trends as they apply to transactions for TSX listed issuers, including amendments to, among other things, the listing agreement, and the rules for supplemental listings, stock splits, and consolidations. One practical change in the amendments to highlight is that the Manual now codifies that TSX listed issuers may have a transfer agent with a principal office in one or more of each of Vancouver, Calgary, Toronto, Montreal, or Halifax, whereas the Manual previously required that issuers have a transfer agent with a principal office in Toronto.
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On January 15, 2015, the Toronto Stock Exchange (TSX) published for comment proposed amendments to the TSX Company Manual which would introduce listing requirements for non-corporate entities, such as exchange-traded products, closed-end funds and structured products, as those terms are defined in the proposed amendments.

The proposed amendments address the following, among other matters:

  • minimum

On July 17, 2014, the Canadian Securities Administrators (CSA) published the results of their continuous disclosure review program (Program) in CSA Staff Notice 51-341 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2014 (Staff Notice).  The purpose of the Program is to monitor the compliance,

On May 6, 2014, the TSX Venture Exchange (TSXV) amended the definition of “Tier 1 Property” contained in Policy 1.1 – Interpretation of the TSXV Corporate Finance Manual (TSXV Manual).

The TSXV views its Tier 1 as its premier tier reserved for its most advanced issuers with the most significant financial resources.  As such, the listing requirements for Tier 1 issuers are more substantial than those of Tier 2 issuers (where the majority of the TSXV’s listed issuers trade).  On the other hand, however, the TSXV affirms that Tier 1 issuers benefit from decreased filing requirements and improved service standards.

The “Tier 1 Property” definition contained in the TSXV Manual sets out the property-related criteria an issuer must satisfy to qualify to list as a Tier 1 Mining Issuer on the TSXV.  The amended definition is not intended to substantially change the nature of this requirement, but instead looks to clarify ambiguities in the previous definition in an effort to provide greater interpretative certainty.

The amendments to the definition include the following:
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On November 28, 2013, the Toronto Stock Exchange (TSX) published proposed amendments to the TSX Company Manual (the Manual) and requested comments on the proposed amendments (the Amendments), such comments to be delivered by January 13, 2014. The proposed amendments would 1) amend Section 611 of the Manual to allow issuers listed on the TSX to adopt security-based compensation arrangements (Compensation Arrangements) for employees of a target issuer in the context of an acquisition without security holder approval under certain circumstances (the Compensation Arrangement Amendment); and 2) amend Section 626 of the Manual toclarify the definition of a “backdoor listing” (the Backdoor Listing Amendment).

Arrangement Amendment

Background

Currently, Section 613 of the Manual provides that any Compensation Arrangement adopted by a listed issuer must be approved by its security holders. There are two exceptions to this rule: 1) listed issuers may provide a Compensation Arrangement as an inducement for employment to an officer, provided the number of securities issuable does not exceed 2% of the issued and outstanding securities over a 12-month period; and 2) listed issuers may assume a Compensation Arrangement of a target issuer in the context of an acquisition, in which case the number of securities issuable under such Compensation Arrangement will be taken into account to determine whether security holder approval is required for the acquisition. With the Compensation Arrangement Amendment, the TSX proposes to add a third exception.

The Proposed Amendment

The Compensation Arrangement Amendment would create a new exception that would allow listed issuers to adopt Compensation Arrangements for employees of a target issuer in the context of an acquisition without security holder approval, provided that the number of securities issuable under such Compensation Arrangement and the number of securities issuable pursuant to the acquisition (including any related Compensation Arrangement) does not exceed 2% and 25% of the number of issued and outstanding securities of the listed issuer, respectively.
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NYSE Euronext announced on May 23, 2013 the opening of EnterNext, a new subsidiary dedicated to companies that have a capitalisation of under €1 billion, which already covers over 750 SMEs (Small and Medium Enterprises) listed on the regulated market of NYSE Euronext and on NYSE Alternext.

Although it is not a new market segment, and may not be compared to the London Stock Exchange’s AIM (Alternative Investment Market) for instance, EnterNext has been designed to facilitate the financing requirements and development of European SMEs that operate regionally, nationally and internationally.

Missions

EnterNext has its own substantial resources and the full support of the NYSE Euronext group. Whilst working closely with regional economies, it has been designed to operate on a pan-European basis. Backed by its own teams and financial resources, EnterNext will build upon NYSE Euronext’s efficient market model. The new subsidiary promotes and facilitates all offers and services currently available to SMEs and its responsibilities amongst others include:

  • positioning the stock exchange as a source for alternative financing;
  • managing the day-to-day and grassroots relationships with issuers and listing candidates ;
  • promoting SMEs to investors as an attractive asset class;
  • developing a regional and national marketing strategy;
  • defining and promoting new services and financing options such as the Initial Bond  Offerings (IBO) first launched in the second half of 2012.

Governance

EnterNext has adopted an open governance structure, with a 15-member Board of Directors headed by a newly appointed Chairman and CEO. The remaining 14 seats will be divided equally between qualified external Directors and NYSE Euronext nominees. Candidates have been selected from the four countries in which the group operates in Europe, based on their experience and expertise with SMEs.

The appointed Chairman and CEO of Enternext is Eric Forest, current head of Oddo Corporate Finance’s Equity Capital Market business. He is also in charge of Corporate Broking activities at Oddo Corporate Finance.

France – Lancement d’Enternext, filiale de NYSE Euronext dédiée aux PME 
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On August 17, 2012 the TSXV published a bulletin entitled Private Placements – Temporary Relief from Certain Pricing Requirements, which provided, on a temporary basis and subject to compliance with the bulletin, the granting of relief to TSXV issuers from certain existing pricing requirements related to private placement financings. These temporary measures were effective