No Such Thing as March Break – Selected Corporate and Securities Law Developments
March 29, 2017
March was a busy month for corporate and securities law developments, with the publishing of staff notices by the Toronto Stock Exchange (TSX) and Canadian Securities Administrators (CSA), as well as developments regarding Ontario’s Business Corporations Act (OBCA) amendments, all while proposed amendments to the Canada Business Corporations Act (CBCA) continued to make their way through the legislative process. See our January 2017 Blakes Bulletin: Proposed Regulations for Revised CBCA Provide Structure to Changes Proposed in Bill C-25.
On March 9, 2017, the TSX published a Staff Notice to provide guidance on its rules concerning both majority voting policies and the use of advance notice policies and bylaws.
Majority Voting Policies
Pursuant to the applicable provisions of the TSX Company Manual, each director of a TSX-listed issuer (subject to limited exceptions) must be elected by a majority of the votes cast with respect to his or her election, other than at contested meetings. Accordingly, issuers are required to adopt a majority voting policy or otherwise satisfy the requirement in a manner acceptable to TSX. See our February 2014 Blakes Bulletin: TSX Requires Majority Voting for Election of Directors.
The TSX staff notice summarizes the results of its review of 200 majority voting policies to assess compliance with the applicable requirements. Key findings included that certain of the reviewed majority voting policies:
- Did not require directors to tender their resignation immediately if they were not elected by a majority of votes cast, contrary to the TSX requirements
- Did not provide a time frame for the board of directors to render a decision as to whether or not to accept a resignation, or the time frame was outside the 90 day period permitted by TSX
- Did not specifically require the board to accept the resignation of a director who was not elected by a majority of votes cast, absent exceptional circumstances
- Identified factors as being exceptional circumstances that were inconsistent with the policy objectives of the TSX requirements
- Did not contain a requirement to provide a copy of a news release to the TSX with the board of directors’ decision concerning a proposed resignation
- Contained additional requirements that may have the effect of circumventing the policy objectives of the TSX requirements
While certain of the foregoing are already positive requirements in the TSX Company Manual, therefore not necessitating their restatement in a majority voting policy, it is clear that the TSX would like for the applicable provisions to be contained within a single governing document.
In a departure from past pronouncements, in the staff notice, the TSX outlines examples of situations where, depending on the unique factors applicable to the issuer, the high threshold of “exceptional circumstances” may be met, permitting an issuer’s board to reject the resignation of a director who failed to receive majority support from shareholders (Subject Director). Such examples are where:
- The issuer would not be compliant with corporate or securities law requirements, applicable regulations or commercial agreements regarding the board’s composition as a result of accepting the Subject Director’s resignation
- The Subject Director is a key member of an established, active special board committee, which has a defined term or mandate (such as a strategic review) and accepting the resignation of such Subject Director would jeopardize the achievement of the special committee’s mandate
- Majority voting is being used for a purpose inconsistent with the policy objectives of the TSX requirements
Advance Notice Policies and Bylaws
In the staff notice, the TSX acknowledges that many listed issuers have chosen to adopt policies and bylaws prescribing timeframes and procedures to nominate directors for election (Advance Notice Policies) and that such policies may be legitimately used to preserve security holder interests, provided they do not unreasonably limit the ability of security holders to nominate directors for election.
The staff notice provides guidance and clarifies the TSX’s expectations with respect to the use of Advance Notice Policies by generally affirming the current guidelines published by Glass, Lewis & Co. and Institutional Shareholder Services Inc. for Canada (see our January 2015 Blakes Bulletin: 2015 Proxy Advisory Voting Guidelines: Proxy Season Highlights and such proxy advisers’ current voting guidelines). In addition, the staff notice provides that the TSX expects issuers to adopt Advance Notice Policies sufficiently far in advance of shareholder meetings to allow security holders to comply with the applicable notice periods and encourage issuers to discuss novel provisions with the TSX prior to adoption.
Also on March 9, 2017, the CSA published Staff Notice 51-348 Staff’s Review of Social Media Used by Reporting Issuers, which reported on the social media disclosure by public companies in Canada. See our March 2017 Blakes Bulletin: New Medium, Same Expectations: CSA Cautions Canadian Public Issuers on Use of Social Media.
On March 16, 2017, the CSA published Multilateral Staff Notice 51-349 Report on the Review of Investment Entities and Guide for Disclosure Improvements. This notice summarizes the results of an Ontario Securities Commission review concerning the continuous disclosure provided by 12 of the 18 public companies identified as having determined they meet the definition of an investment entity under International Financial Reporting Standards 10 Consolidated Financial Statements (IFRS 10). Although a seemingly small sample size, the CSA noted that the number and size of such issuers has grown substantially in recent years. The review considered compliance with several areas of securities legislation, including:
- How issuers met the definition of an investment entity in IFRS 10
- Fair value measurements and disclosures
- Sufficiency of disclosures to understand investment portfolio composition, investment performance, investment strategies and oversight and related risks
- Disclosure provided by issuers heavily concentrated in only a few investments
The review identified several disclosure improvements and the CSA committed to continuing to evaluate the disclosure and evolving profile of investment entities and consider the need for policy changes if they believe sufficient disclosure is not being provided to investors.
On March 21, 2017, the CSA announced a project to review the disclosure by public companies of the risks and financial impacts associated with climate change. During the spring and summer of 2017, the CSA intends to:
- Review disclosure prepared by large TSX-listed reporting issuers on the material risks and financial impacts associated with climate change as well as related governance processes
- Gather feedback from reporting issuers about current disclosure practices through an anonymous online survey
- Conduct focus groups with reporting issuers and investor
- Examine risk disclosure requirements related to climate change in other jurisdictions and recently proposed voluntary disclosure frameworks
The CSA intends to publish a progress report outlining its findings upon completing its review.
On March 7, 2017, the Ontario Ministry of Government and Consumer Services published the final report of the Business Law Advisory Council (Council), a group formed in 2016 as part of the current reform process concerning Ontario’s corporate and commercial legislation (see also our August 2015 Blakes Bulletin: Broad Changes to Ontario Corporate Law Recommended).
Among other priorities, the Council recommended that:
- The current requirement under the OBCA that 25 per cent of directors be Canadian residents should be eliminated, as it has been in other Canadian jurisdictions
- The written consent that directors provide in advance or within 10 days of their first election be accompanied by an agreement on the part of the prospective director that he or she will attorn to Ontario’s laws with respect to the corporation
- Shareholders have the right to resubmit a proposal each year if it received a prescribed (and minimal) level of support in the first year or achieved a prescribed increased level of support in subsequent years (mirroring the current CBCA provisions)
The Council’s report also identified as “issues for future consideration” a number of matters proposed after the Council’s initial draft report in late-2016, including: majority voting and board diversity, including whether requirements relating to gender diversity (if any) would be more appropriate in corporate law or securities law. In particular, the Council noted that majority voting is an important priority and that it is reviewing the approach in the proposed CBCA amendments and whether improvements could be made to this approach in developing OBCA proposals, given that there are many who do not believe that the TSX requirement is enough.
For further information on any of these matters, please contact:
Matthew Merkley 416-863-3328
or any other member of our Capital Markets group.
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