Legal Updates

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Friday, February 28, 2020

With the upcoming 2020 proxy season fast approaching, both issuers and investors should be aware of changes and developments in a number of areas of corporate governance and securities law. As in past years, proxy advisory firms Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”) have updated and published their Canadian proxy voting guidelines for the upcoming proxy season, the full versions of which are available here and here, respectively. Glass Lewis’ guidelines are effective for meetings held on or after January 1, 2020, and ISS’ guidelines are effective for meetings held on or after February 1, 2020. To assist in preparing for the 2020 proxy season, we have summarized below key developments, including certain amendments to the Canada Business Corporations Act (the “CBCA”), and the more significant changes to each firm’s Canadian guidelines.

ISS 2020 Updates

1. Ratification of Auditors and Excessive Non-Audit (“Other”) Fees (TSX and Venture)

Similar to its 2019 guidelines, ISS generally recommends voting for proposals to ratify auditors unless non-audit (“other”) fees paid to the auditors exceed the aggregate amount of audit fees, audit-related fees and tax compliance fees. If non-audit (“other”) fees do exceed such amount, ISS recommends withholding votes for individual directors who are members of the audit committee. However, in determining whether non-audit (“other”) fees are excessive, ISS previously included a carve-out for fees related to significant one-time capital restructuring events which was specifically limited to initial public offerings, emergence from bankruptcy and spinoffs. In its 2020 guidelines, ISS has included these events as examples only, meaning that other similar events such as M&A transactions (including dispositions) may now also fall under such exemption, assuming there is sufficient disclosure about the transactions and a clear breakdown of fees.

2. Board of Directors

Majority-Owned Companies (TSX and Venture)

Once again, ISS guidelines support a one-share, one-vote principle stating that it may recommend voting for the election of director nominees who are or who represent a controlling shareholder of a majority-owned issuer so long as specific independence and governance criteria set out in its guidelines are met by the controlled company. In its 2020 guidelines, ISS has clarified that its policy of supporting such director nominees on a case-by-case basis applies only to non-management director nominees and only if all of the independence and governance criteria set out in its guidelines are met. This policy does not apply to dual class companies having common shares with unequal voting or board representation rights.

Director Attendance (TSX)

In its 2020 guidelines, ISS reconfirmed that it generally recommends withholding votes for individual director nominees if TSX-listed companies:

(i) have not adopted a majority voting director resignation policy and the individual director has attended less than 75% of the aggregate number of board and key committee1 meetings in the past year without valid reason; or

(ii) have adopted such a policy and the individual director has attended less than 75% of such meetings and a pattern of low attendance exists based on prior years’ meeting attendance.

ISS has clarified that, in determining director attendance on a case-by-case basis, exceptions will be made for director nominees: (i) who served for only part of the fiscal year; (ii) of newly listed companies; or (iii) of companies that have recently graduated to the Toronto Stock Exchange (the “TSX”).

Former CEO and CFO on the Audit or Compensation Committee (TSX)

In its 2019 guidelines, ISS recommended withholding votes for any director nominee who was a member of the audit or compensation committee of a TSX-listed company and served as the Chief Executive Officer (the “CEO”) of the company in the past five years or the Chief Financial Officer (the “CFO”) of the company in the past three years. Comparatively, to align with its definition of director independence, in its 2020 guidelines, ISS has extended its recommendation to withhold votes for a director nominee who served as the CEO of the company’s affiliate or a company acquired by the company within the past five years as well as a nominee who served as the CFO of such entities within the past three years.

Overboarding Directors (TSX)

As discussed in our previous legal update, ISS once again generally recommends withholding votes for overboarded director nominees, being those nominees who are non-CEO directors of TSX-listed companies and serve on more than five public issuer boards or who are CEOs of TSX-listed companies and serve on the boards of more than two public companies in addition to their own (with such recommendation applying only to the outside board). ISS’ 2020 guidelines note that, in order to provide for orderly transitions, there is a limited exception to such recommendation if a director nominee intends to step down from a board at the next annual general meeting of such company and has disclosed this fact in the company’s proxy circular. If such disclosure has been made, ISS will generally not count such board in calculating the number of boards a nominee sits on, regardless of being temporarily overboarded. Comparatively, ISS will include the new board(s) a director nominee is joining even if the shareholder meeting in respect of such election has not yet occurred.

3. Compensation (Venture)

Once again, ISS recommends voting on a company’s share-based compensation plans on a case-by-case basis and generally recommends voting against an equity compensation plan if: (i) the basic dilution represented by all equity compensation plans is greater than 10%; (ii) the average annual burn rate is greater than 5% per year; or (iii) the plan expressly permits the repricing of options without shareholder approval and the company has repriced options within the last three years. As per its 2020 guidelines, ISS will also generally recommend voting against an equity compensation plan if the plan is an evergreen plan, meaning it is a rolling equity plan that permits auto-replenishment of share reserves without needing regular approval from shareholders at least every three years.

Moreover, for meetings on or after February 1, 2021, ISS will also recommend withholding votes for the continuing compensation committee members (or the board chair if the entire board fulfills the role of a compensation committee and no specific committee members have been identified) if the company: (i) maintains an evergreen plan; (ii) has not sought approval of such plan in the last two years; and (iii) does not intend to seek shareholder approval at an upcoming meeting. ISS has noted the need for such a policy update following the influx of Canadian Securities Exchange (“CSE”) listings over the past two years and the fact that the CSE does not require regular approval of evergreen plans.

Glass Lewis 2020 Updates

1. Director Attendance and Committee Meeting Disclosure (TSX and Venture)

Similar to its 2019 guidelines and ISS’ guidelines, Glass Lewis will generally recommend voting against the election of an individual director nominee who fails to attend 75% of board and/or committee meetings without a valid explanation, assuming such nominee has served at least one full year. In addition to such recommendation, in its 2020 guidelines, Glass Lewis also recommends voting against the governance committee chair when a company does not disclose its records for board and committee meeting attendance, and beginning in 2021, when a company does not disclose the number of audit committee meetings that took place during the most recent year. Also beginning in 2021, Glass Lewis will generally recommend voting against the audit committee chair if the audit committee meets less than four times in a year.

2. Contractual Payments and Arrangements (TSX and Venture)

As noted in our previous legal update, analyzing ongoing and new contractual payments and executive entitlements remains a focus of Glass Lewis’ review as Glass Lewis is of the opinion that aligning executive compensation with issuer performance (and the associated disclosure thereof) is critical to shareholders’ interests. In its 2020 guidelines, Glass Lewis has clarified its approach and noted that it generally disfavours contractual agreements that are excessively restrictive in favour of executives. Glass Lewis has built upon its 2019 guidelines where it identified inadequately explained or excessive sign-on arrangements as factors that may support a negative voting recommendation and added excessive severance payments and new or renewed single-trigger change-in-control arrangements as problematic factors. Once again, Glass Lewis has identified guaranteed multi-year bonuses as a factor that may lead to an against voting recommendation. Glass Lewis’ 2020 guidelines encourage companies to eliminate rather than extend such entitlements in revised or renewed employment agreements.

3. Company Responsiveness (TSX and Venture)

As highlighted in our previous legal update, the voluntary adoption of the practice of “say-on-pay” continues to increase with approximately 200 companies offering their shareholders a say-on-pay in the first half of 2019 as compared to 180 companies last year and 160 companies the year before that. Despite their currently being no legal obligation to do so, Glass Lewis believes that say-on-pay proposals should be submitted to shareholders annually. Glass Lewis reviews say-on-pay proposals on both a qualitative and quantitative basis and in its 2020 guidelines noted a focus on specific areas such as the following: (i) the quality and content of a company’s disclosure; (ii) the quantum paid to executives; and (iii) the link between compensation and performance.

Glass Lewis has also expanded its guidelines in the area of company responsiveness following low shareholder support for say-on-pay proposals (i.e., where 20% or more of shareholders opposed management’s proposal) and what it considers to be an appropriate response. Glass Lewis notes its expectations regarding altering a company’s response level based on the significance and persistence of shareholder opposition and having fulsome disclosure about specific changes and engagement activities undertaken in response to shareholder feedback. Absent such disclosure, Glass Lewis may consider recommending that shareholders vote against an upcoming say-on-pay proposal.

4. Board of Directors

Board Skills (TSX)

As per our previous legal update, in its 2019 guidelines, Glass Lewis announced that its analysis of director elections will include board skills matrices for S&P/TSX 60 Index companies to assess certain competencies and identify potential skills gaps. In its 2020 guidelines, Glass Lewis has clarified that it expects companies to provide meaningful disclosure in line with developing best practice standards. Issuers are encouraged to review Glass Lewis’ Board Skills Appendix for an overview of the skills that Glass Lewis considers in respect of certain key industry sectors in its analysis, which remains unchanged from 2019.

Board Diversity (TSX)

As discussed below, as of January 1, 2020, publicly-listed CBCA companies are required to disclose certain information regarding board and executive officer diversity policies and statistics relating not only to gender but also to members of “designated groups” (the “CBCA Amendments”). The term “designated groups” takes its meaning from the federal Employment Equity Act, and includes women, Aboriginal peoples, persons with disabilities and members of visible minorities. Glass Lewis has not amended its guidelines following the CBCA Amendments; however, Glass Lewis has stated that it will review any new diversity disclosure resulting from the CBCA Amendments, and for applicable TSX-listed issuers, it will reflect such expanded disclosure in its analysis of director elections.

CBCA Updates

As discussed in our previous legal update, on May 1, 2018, Bill C-25 in respect of the CBCA Amendments, among other things, received Royal Assent, and on January 1, 2020, the regulations in support of the CBCA Amendments came into force. In addition to expanding the required disclosure beyond gender, the CBCA Amendments apply to all reporting issuers, including issuers listed on the TSX, TSX Venture Exchange and CSE.

Starting with their 2020 annual shareholders’ meeting, applicable CBCA companies will need to include in their proxy circular whether the company has adopted a written diversity policy in respect of nominating members of designated groups for election as directors and if not, an explanation as to why they have not. Furthermore, applicable CBCA companies will need to disclose, among other things: (i) whether the board has considered the level of representation of designated groups when nominating individuals as directors and appointing executive officers; (ii) whether targets for such representation have been set and any progress made towards achieving its targets or, if no targets have been set, the reasons why not; and (iii) the number and proportion of members of designated groups on the board and in executive officer positions. Effective January 1, 2020, as a result of the CBCA Amendments, such proxy circulars must also be filed with Corporations Canada.

If you have any questions with respect to this legal update, please contact Troy Pocaluyko (, Al Wiens (, Mark Wilson (, Patricia Good ( or any other member of our Corporate Governance practice group.

Key committees include the audit committee, compensation committee and nominating committee.