First you plan, then you pivot

Diversity, transparency, advance notice, notice and access, say-on-pay, voting infrastructure—they could be keywords, they’re certainly trending as the latest tools and regulations for issuers to master to keep pace with activists in proxy season
By Paul Brent

Rising shareholder activism in recent years along with new policies and proposals from regulators has transformed the process of preparing for the proxy season from a dry routine to a dynamic, constantly changing exercise. As the calendar turns to 2014 and issuers face the next proxy period, that exercise is again in full swing.

While it is difficult to pin down a recent event that marked the next evolutionary step in the drive for shareholder rights in this country, the proxy fight for the future of Canadian Pacific Railway Ltd. (TSX:CP) in 2012 and for Agrium Inc. (TSX:AGU) in 2013 were transformative, says Alex Moore, a partner with law firm Davies Ward Phillips & Vineberg in Toronto. While one can be tagged as a “loss” for management and the other a “win,” the spectre of a bitter CP/Agrium-style battle for control has prompted issuers to up their game with respect to issues of disclosure and shareholder involvement, he notes. “What we tell our clients is by the time a Jana or Pershing Square has emerged as one of your largest shareholders, they have already read the sentiment of your shareholder base. At that point you are playing catch up.” Restaurant operator Tim Hortons Inc. (TSX:THI) was one of the latest issuers to feel the impact of shareholder displeasure in the summer of 2013, when two U.S. activist groups appeared with a list of demands for management.

Shareholder activists rarely show up unannounced and uninvited, Moore argues. “A lot of times the activists are being invited into the position by existing shareholders that are disappointed in some way with the way management is performing, or with the company’s strategy or use of its cash on its balance sheet.”

Moore believes that companies need to consider the proxy campaign and the more general issue of shareholder engagement as a year-round exercise. “Things don’t really start at the point where you send out your circular,” he says, noting that activists might begin buying up stock in targeted issuers in the fall and make their demands known well prior to the annual general meeting.

What hot buttons, trends and new regulations do issuers need to be aware of heading into 2014? In interviews with Listed, issuers, proxy solicitation companies, industry groups and law firms outlined a series of issues around disclosure, board representation, compensation and proxy solicitation now at the forefront.


The ranks of companies holding non-binding advisory votes on executive compensation rose to 129 companies in June 2013 compared to 97 companies a year earlier, according to a report from Osler, Hoskin & Harcourt. It noted that average shareholder approval fell to 89.3% from 91.6%. Mainly due to poor performance, three Canadian companies failed on their say-on-pay votes: Equal Energy Ltd. (TSX:EQU), only 43.8% in favour; Golden Star Resources Ltd. (TSX:GSC), 38.3%; and most famously, Barrick Gold Corp. (TSX:ABX), with only 14.8%. In addition, MDC Partners Inc. (TSX:MDZ.A) garnered just 50.2% of the votes cast. The year prior, just one Canadian company failed in a say-on-pay vote.

Osler expects increased adoption of voluntary compensation votes in the upcoming proxy season. It says companies receiving a significant “no” vote on their say-on-pay resolutions “should consider the reasons underlying that vote result and take appropriate action.” In cases where the approval level is below 70%, Institutional Shareholder Services Canada will consider the company’s response to the vote, whether the issues underlying the voting result are recurring or isolated and the company’s ownership structure in determining whether to recommend voting against the say-on-pay resolution the following year. In 2013, seven companies received less than 70% approval: the four noted above, plus Canadian Natural Resources Ltd. (TSX:CNQ), at 55.8%; Thompson Creek Metals Co. (TSX:TCM), 62.8%; and Vitran Corp. (TSX:VTN), 58.6%. All but one (MDC) of the five Canadian issuers that received less than 70% support in 2012 were able to reverse their performance and exceed that level this year.


Telus' Maria Prevolos: Notice and access is "convenient, timely and environmentally friendly"

Last year marked the first time that companies in Canada were able to take advantage of new rules allowing them to send proxy materials to security holders electronically instead of mailing out paper copies. Rather than paper proxies, shareholders received a notice containing details of the date, time and place of the shareholder meeting, including a brief description of the matters to be voted on, and instructions on how to access an electronic copy of the proxy materials or request a paper copy.

Most companies took a wait-and-see approach to notice and access, although 174 issuers had adopted the new rules through June. Issuers with large shareholder bases, such as financial institutions and insurance companies, can save millions in printing costs by distributing the proxy digitally. Telus Corp. (TSX:T) was one of the few large issuers to adopt notice and access provisions in 2013. Maria Preovolos, the telecom company’s associate general counsel, says the company likes the “convenient, timely and environmentally friendly way” that notice it to deliver its proxy materials. As well, she says, it “reduces printing and mailing costs.” Telus has a reputation as an early adopter of new communications platforms such as social media, so giving shareholders digital access wasn’t that big a step. “We felt the majority of our shareholders would embrace notice and access,” adds Preovolos. “Our overall experience turned out to be extremely positive, with a high level of engagement from our shareholders.”


The recent spike in shareholder activism has prompted companies to consider adoption of additional defences. Advance notice provisions are one attempt to stifle a surprise nomination of directors at a shareholder meeting. (There is no guarantee it will work, however: see sidebar, “Shifts happen,” below.) Advance notice provisions require shareholders to submit notice to the board of directors of the shareholder’s intention to nominate individuals to serve as directors a certain number of days prior to the date of the meeting or be denied the opportunity to put forward an alternative slate of directors.

It has been a positive development: 518 Canadian issuers adopted the measure by mid-June of 2013 according to Osler, with more than 70% being smaller firms with market capitalization of less than $100 million. “Despite the fact that they were predominately smaller companies that adopted advance notice provisions, just the sheer number of them will be encouraging to other companies, particularly large companies, to adopt them,” says Andrew MacDougall, a partner in Osler’s Toronto office.


In 2013, the Ontario Securities Commission published a consultation document, “Disclosure Requirements Regarding Women on Boards and in Senior Management,” which proposes TSX-listed companies would have to meet disclosure requirements with respect to female representation on boards and in senior management. Responses were wide-ranging (see “Comply or explain: enough of a push?” for full story), and while at press time the OSC’s recommendations had not yet been released, experts say companies have seen enough to act now. Board diversity “is front and centre and there will be some sort of requirement that will need to be met within a particular timeframe so it would be a good idea for issuers to start contemplating their position on this and what they will do to adhere to the requirements,” says Dexter John, senior vice-president at CST Phoenix Advisors.

Canada’s banks, traditionally early adopters of new governance provisions and trends, can be expected to be among the leaders with regards to director diversity. Royal Bank of Canada (TSX:RY) recently announced Kathleen Taylor as its next chairwoman, making her the first woman to lead the board of a major chartered bank in Canada. The bank was also an early signatory to the Catalyst Accord to promote more women on boards, making a voluntary pledge to aim for 25% women on its board. Women now account for 29% of the RBC board.


This past March, the Canadian Securities Administrators (CSA) released proposed National Instrument 62-105 Security Holder Rights Plans. Under these new rules, target boards will be free to deploy a poison pill for a longer period than is currently permitted in the face of an unwanted bid, subject to obtaining share- holder approval. However, Quebec’s securities regulator, the Autorité des Marchés Financiers, is also proposing an alternative new regime governing all defensive tactics (not just poison pills) that would give target boards even greater discretion to defend against hostile bids.


In March, as well, the CSA published for comment proposed amendments to Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, National Policy 62-203 Take-Over Bids and Issuer Bids and National Instrument 62-103 Early Warning Systems and Related Take-Over Bid and Insider Reporting Issues. The proposed amendments set out to provide greater transparency regarding significant holdings of securities of issuers.

The amendments would see establishment of an early warning reporting threshold of 5%, requiring disclosure of both increases and decreases in ownership of 2% or more of securities, as well as enhanced content disclosure in the required early warning news releases and reports so that certain “hidden ownership” and “empty voting” arrangements are disclosed.

“With the increased shareholder activism the CSA felt that these amendments would align the Canadian standards with other foreign jurisdictions in particular the United States and the United Kingdom,” says CST Phoenix’s John.


Don’t expect any on-the-ground changes on this file in 2014. But things are happening and those who have been pushing hard to fix the proxy-voting infrastructure appear to have broken through the institutional inertia. To wit, the CSA recently ended a call for public comments regarding its consultation paper “Review of the Proxy Voting Infrastructure.” That paper acknowledges what issuers, retail shareholders and institutional investors have been complaining about for a number of years—namely, the proxy gathering system needs to be overhauled to ensure that shareholders can actually utilize their right to vote for directors (or for their removal), as well as act in a number of other corporate actions that require shareholder input.

“There are so many players and it is quite murky,” says Yvette Lokker, president and CEO of the Canadian Investor Relations Institute, noting that about one-third of CIRI’s members surveyed about the process had problems or concerns with the proxy voting system. “There are so many intermediaries and transfer agents and Broadridge and a variety of different players so you need to make sure that all of the systems are working properly so that proper reconciliation can happen.”

Scores of organizations and issuers to respond to the CSA’s draft paper, and CIRI’s key wish list echoes the demands of many. Among the proposals: add “appropriate regulation” of the proxy-voting infrastructure processes, including vote reconciliation and end-to-end vote confirmation; in cases of share lending, ensure that the voting power resides with the shareholder who has the economic interest in those shares; and conduct further research into the impact the OBO-NOBO (objecting beneficial owners/non-objecting beneficial owners) concept has on the transparency and integrity of the proxy voting infrastructure.


Shifts happen

Advance notice provisions help issuers thwart sneak attacks—until they don’t

While advance notice provisions are a popular, new defence against activist shareholder ambushes at annual meetings, issuers should know they won’t necessarily stop a determined assault.

Sterling Resources' George Kesteven: "A textbook case of shareholder activism"

The board and management at Sterling Resources Ltd. (TSX:SLG), which adopted an advance notice bylaw in April 2013 prior to its June AGM, found out firsthand the limits such rules offer. The Calgary-based oil and gas company, which had admitted to setbacks at its drilling operations earlier in the year, learned at the 11th-hour deadline under the new notice bylaw that an activist group was aiming to take control of the company.

“They came in basically the last possible day they could have under the new notice requirement of the bylaws and basically told three of the incumbents that they would not be standing for re-election and that they would be nominating three of their own nominees for the board,” said George Kesteven, Sterling Resources’ manager of corporate and investor relations.

The activists had control of approximately two-thirds of the shares in Sterling, meaning that the company had no choice but to revamp its proxy prior to its June meeting, which included dropping its current chairman. “We went out and we had to scramble to modify our proxy circular to remove the incumbents to put in place the shareholder activist representatives…they took control of our board.”

The three new nominees were elected to the seven-person board handily (giving it a majority with an allied director already on the board). The new shareholders quickly moved from there, announcing in August that CEO Mike Azancot was leaving the company. Jacob Ulrich, the current chairman, is acting CEO until a replacement is found. “If there is a textbook case of shareholder activism taking over a situation, ours is probably it,” says Kesteven, who is also chairman of the Canadian Investor Relations Institute.

The origins of advance notice provisions can be traced back to the 2012 Supreme Court of British Columbia decision Northern Minerals Investment Corp. v. Mundoro Capital Inc. regarding the company’s policy to require shareholders provide advance notice of any intention to make director nominations at the shareholder meeting. Mundoro sought a legal judgment that the board’s policy was unenforceable. Instead, the court ruled that the board’s policy was reasonable and served a valid purpose. The Mundoro decision has since served as the foundation for advance notice bylaws in corporate Canada. —P.B.

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