Corporate governance and shareholder activism have seen a number of key developments recently in Canada
NEW TAKE-OVER BID REGIME
In March 2015, the Canadian Securities Administrators released for comment draft rules on what some observers have been calling a new “just say slow” take-over regime.
The proposed rules mandate that a take-over bid must remain open for 120 days, though target boards may in certain cases shorten that period to 35 days. Shareholders will still have their say on a bid by way of a new 50 per cent minimum tender condition. If the minimum condition is met, undecided shareholders will have 10 days to accept. Exemptions are unchanged under the new rules.
Under the current regime, directors must issue a circular evaluating the bid within 15 days, and bids must remain open for only 35 days. While defensive measures such as poison pills are frequently used to buy time, bidders can generally obtain regulatory orders to cease trade the pills within 60 days.
“The new regime takes the sting out of the process by setting bright-line ground rules,” says Alfred Page in Borden Ladner Gervais LLP’s Toronto office. “While that makes things easier for bidders in some ways, it makes it harder in others.”
The extended bid length, for example, gives other interested bidders a longer period to intervene, creating uncertainty for the initial bidders, especially if they are hostile. In turn, the uncertainty can give boards more negotiating leverage.
“We anticipate that hostile bidders will perceive the benefit of engaging more with target boards who will have the ability to waive the minimum tender period for friendly transactions,” write John Emanoilidis, Andrew Gray, Thomas Yeo and Sophia Tolias in Torys LLP’s client bulletin.
According to the Torys lawyers, poison pills will still be useful as a device to regulate exempt purchases of target securities. “However, we would expect that the regulators would not generally permit a target board to maintain a poison pill if a bid has been accepted by a majority of disinterested shareholders and if the bid otherwise complies with the new rules,” they write.
The comment period for the draft rules closed on June 29, 2015.
The 2015 proxy season was the first in which companies listed on the TSX were required to have a majority voting process for the election of the director.
“Majority voting means that each director must be elected by more than 50 per cent of the votes cast at a shareholder meeting,” says David Phillips of Bennett Jones LLP in Calgary. “That is different than the corporate law requirement, where votes for director election are either ‘for’ or ‘withheld.’ Under corporate law, a vote withheld is not a vote against.”
Phillips lauds the new rule. “Under the previous system, there was no real method for displaying dissatisfaction with a nominee when a company put forward the same number of nominees as there were director positions,” he says. “It’s a good development that I think should be extended to the TSX-V.”
Contested meetings, where the nominations exceed the seats available, are exempt from the new rules. “That exemption reflects the fact that these types of election are true elections where the nominees who receive the most votes ought to be elected, whether or not they garner a majority of the votes cast,” Phillips explains.
Also exempted are majority-controlled companies where majority voting occurs by definition. Non-exempt companies must describe the majority voting policy in the information circulars related to meetings at which directors will be elected.
The mandatory majority voting policy follows on other rule changes adopted for the 2013 proxy meeting. These earlier rules eliminated staggered boards and slate voting, required disclosure of whether a majority voting policy was in place and an explanation of why it was not in place if that was so. So, many TSX companies adopted majority voting before it became mandatory.
DIRECTOR TERM LIMITS
Also as of the 2015 proxy season, TSX companies have had to disclose director term limits or other board renewal mechanisms. Absent any limits, companies must explain why this is the case in the management information circular for the company’s annual meeting or in its annual information form.
Like the majority voting rule, this rule applies only to TSX-listed companies and not to the TSX Venture Exchange or the Canadian Securities Exchange.
According to Phillips, term limits are uncommon in Canada. The Canadian Spencer Stuart Board Index reports that only 21 of the 100-largest Canadian public companies by revenue had term limits, which ranged from seven to 15 years.
“Mandatory retirement is more common for large companies,” Phillips says. “As for smaller companies, very few of them have term limits.”
DIVERSITY: WOMEN ON BOARDS
The 2015 proxy season also saw a new disclosure requirement pertaining to women on boards and in senior management.
“Like directors’ term limits, the approach is ‘comply or explain’ by making the disclosure in the management information circular for the company’s annual meeting or in its annual information form,” Phillips says.
Again, these requirements apply only to TSX-listed companies. Neither Alberta nor British Columbia has adopted the rule, although companies resident there are bound by it if listed on the TSX.
Even so, it’s important to remember that Canada, unlike some countries, such as Norway, has no mandated quotas regarding the representation of women. But that may change.
“I think that eventually we’ll see more pointed regulation,” Page says. “But I do hope that we don’t lose sight that the reason we’re interested in diversity is because we want to encourage the management benefits that can come from having directors with diverse experience and abilities. If we stray too far into some kind of political imperative, we’ll find ourselves mired in endless debate.”
ADVANCE NOTICE POLICIES
Generally speaking, advance notice bylaws and policies require those intending to nominate a director or slate of directors to give issuers advance notice of their proposals. Although such policies are relatively new in Canada, they have particular relevance because dissidents have the ability to ambush shareholder meetings by making nominations at the meeting itself without providing advance notice to the company.
The validity of advance-notice policies had not been tested until the issue made its way to the BC Supreme Court after Mundoro Capital Inc. gave notice of its AGM to be held in June 2012. Fifteen days before the meeting, the company announced that it had approved an advance-notice policy setting a deadline by which shareholders had to submit their nominations for directors.
Northern Minerals Investment Corp., a Mundoro shareholder, responded by asking the court to declare the advance-notice policies unenforceable. In turn, the company postponed the AGM for one month and advised that shareholders would be asked to approve the new policies on the postponed date.
At the hearing, Mundoro challenged both the board’s authority to implement the policy and its authority to postpone the date of the AGM. The court dismissed the application, ruling that the board had authority both to implement the policy and to postpone the meeting.
The ruling made it clear, however, that the decision was not a general endorsement of advance-notice policies and that each case would depend on its own facts. In this case, the court concluded that there was evidence of good faith on the part of Mundoro’s directors and of the policy’s reasonableness. In particular, the directors were not attempting to influence a proxy contest and would be seeking shareholder approval of the policy.
PROXY CONTESTS: NOMINEE COMPENSATION
The controversy over the future of director nominee compensation, which first took shape in the 2013 proxy battle between JANA Partners LLC and Agrium Inc., may be boiling down to a disclosure issue.
JANA, a US activist hedge fund represented by Berl Nadler in Davies Ward Phillips & Vineberg LLP’s Toronto office, sought to elect five of its nominees to potash giant Agrium’s 12-person board. JANA’s intention was to influence what it saw as a poor corporate strategy. Most significantly, JANA objected to the retention of Agrium’s retail and wholesale divisions under the same corporate umbrella, arguing that the company’s share price did not adequately reflect the value of the retail business.
Accordingly, JANA wanted Agrium to sell the retail division, but was concerned that the board lacked the necessary retail experience. So JANA recruited three nominees with the perceived experience and two other high-profile candidates. By way of inducement, JANA offered an up-front cash payment to cover their time and effort. JANA also offered further compensation based on a percentage of the net profits that JANA might earn on the sale of its Agrium shares. If JANA did not sell the shares within three years, the percentage compensation would be paid as if it had done so.
Agrium objected to the payments, labeling them a “golden leash” that made it impossible for JANA’s nominees to be independent as they were effectively JANA’s employees.
“We believed and still believe that nominee compensation is inappropriate,” says Walied Soliman in Norton Rose Fulbright Canada LLP’s Toronto office, who acted for Agrium. “It’s particularly inappropriate if the payments are aimed at achieving a stakeholder’s objective while the nominees, if elected, will be exercising their duties in a fiduciary capacity.”
Still, Soliman concedes that it would be difficult to convince a court that such payments were illegal.
“I don’t think a court would give you that up front,” he says. “But I do think that courts would be more open to questioning subsequent board decisions where a golden leash is in place.”
However, Agrium’s position garnered considerable support in the institutional and government community. But Nadler says that it was the structured nature of the compensation rather than the lack of independence argument that attracted the support.
“What resonated was the argument that the nominees had personal incentives to take short-term action rather than acting in the long-term best interests of the company,” he says. “Had JANA’s nominees received shares instead of cash, that perception might not have been as intense.”
As it turns out, Glass, Lewis & Co. and Institutional Shareholder Services Inc. (ISS), the leading shareholder advisory firms, didn’t see eye-to-eye on the issue. Glass saw the payments as compromising the nominees’ independence and as giving rise to a potential conflict because the arrangements were short-term. ISS saw no adverse impact on independence, did not comment on the conflict issues and endorsed two JANA nominees.
The long-term versus short-term debate is hardly new. The long-termers argue that directors, as the corporation’s stewards, must take the long view, especially in the face of opportunistic unsolicited bids or shareholder initiatives to focus on short-term returns. The short-termers argue that shareholders have the right to deal with their shares as they please, including standing up to boards that encumber these rights by invoking fiduciary duties.
Still, at least 25 American companies have adopted a proposal from Wachtell, Lipton, Rosen & Katz, known as the “Lipton bylaw,” which disqualifies director nominees who receive compensation from any source but the company.
But Nadler maintains the Lipton bylaw goes too far. “Most criticism of golden-leash arrangements has focused on the terms of the compensation, not the principle of compensating shareholder nominees,” he says. “And recent experience suggests that efforts by boards to prohibit the practice entirely are likely to meet resistance.”
Indeed, after Provident Financial Holdings, Inc., a US-based bank holding company, passed what was essentially a Lipton bylaw, ISS recommended that shareholders at the November 2013 annual meeting withhold votes from three directors who had approved the bylaw.
The Provident board survived the uncontested vote. But following the meeting, Provident disclosed that more than 30 per cent of the votes cast were withheld from the three directors. “The withhold vote was far in excess of that seen in prior Provident shareholder votes,” Nadler says.
Despite the criticism of nominee compensation, Nadler believes that Provident provides a cautionary note. “Any efforts by boards to prohibit the practice outright could reasonably be expected to be resisted by both proxy advisors and shareholders and to result in votes withheld in respect of the election of incumbent directors who support such measures,” he says.
For his part, Soliman doesn’t expect to see many more forays by activists into the golden-leash arena. “The institutional shareholder community came out pretty strongly against JANA on this point,” he says.
Nadler agrees that JANA’s failure to elect any directors to Agrium’s board may have a “chilling effect,” but believes disclosure rules for compensated nominees would help deal with the problem.
“Shareholders should be given the opportunity to decide who they want as directors,” he says. “So a bylaw prohibiting compensation is a bad idea, but requiring disclosure is a good one.”
Julius Melnitzer is a legal affairs writer in Toronto.