In preparation for the 2020 proxy season, Canadian public issuers should familiarize themselves with the following noteworthy developments that relate to certain corporate governance and disclosure requirements.
1. Proxy Advisory Firm Guidance
Each year, proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co., LLC (Glass Lewis) release proxy voting guidelines. Although these guidelines are not binding, they can influence how institutional shareholders will vote. Some key updates from the 2020 voting guidelines include:
- Auditor ratification: Glass Lewis may now recommend voting against all audit committee members if the company’s audit fees are less than 50% of total fees paid to the auditors over two consecutive years. As with prior years, ISS recommends voting to ratify auditors unless the non-audit (‘other’) fees paid to the auditor are greater than the sum of (i) audit fees, (ii) audit-related fees, and (iii) tax compliance/preparation fees. Under its previous guidelines, ISS allowed issuers to exclude from its non-audit fees certain enumerated one-time capital restructuring events but has broadened the possible exceptions under its 2020 policy.
- Director meeting attendance disclosure: Glass Lewis recommends voting against the Chair of the governance committee where (i) Board and committee meeting attendance is not disclosed (starting in 2020) and (ii) if the number of audit committee meetings held in the most recent year is not disclosed (starting in 2021). Glass Lewis also recommends voting against the Chair of the audit committee if the audit committee does not meet at least four times per year (starting in 2021). On meeting attendance, ISS recommends a withhold vote for individual Directors who do not meet certain attendance thresholds – with the exception of Directors who have only served for part of the fiscal year, newly public companies, or companies newly graduated to the TSX.
- Overboarded Directors: ISS clarified that it will generally not count a Board when it has been publicly disclosed that the Director will be stepping off that Board at the next annual meeting.
ISS and Glass Lewis have also included some updates and clarifications in their latest voting guidelines on Board skills and matrices, majority-owned companies and CEOs/CFOs serving on audit/compensation committees.
2. Additional Diversity Disclosure
On January 1, 2020, certain amendments to the Canada Business Corporations Act (CBCA) regarding diversity on Boards of directors and among senior management came into force. As a result, additional diversity disclosure will now be required in the materials for any annual meeting of shareholders of public companies governed by the CBCA (including venture issuers, as well as companies listed on a foreign stock exchange). These amendments broaden the current ‘comply-or-explain’ regime under National Instrument 58-101 – Disclosure of Corporate Governance Practices to include disclosure related to women, Indigenous peoples, persons with disabilities and members of visible minorities. In terms of substance, the information required to be disclosed under the CBCA amendments will be the same as currently provided under the securities regulations for gender diversity. Neither ISS nor Glass Lewis have adopted additional diversity requirements in response to the CBCA amendments.
3. Amendments to the Canada Business Corporations Act
On June 21, 2019, the omnibus Bill C-97 received Royal Assent and included several key amendments to the CBCA. These amendments include additional requirements with respect to Say on Pay resolutions and disclosure on clawback policies. These amendments are not yet in force, but public companies governed by the CBCA should be aware of the upcoming requirements. The CBCA amendments include:
- Mandatory Say on Pay resolutions: Although Say on Pay resolutions are not currently required under Canadian corporate and securities law, many Canadian issuers have voluntarily adopted the practice. Following the CBCA amendments, public companies governed by the CBCA will be required to have a Say on Pay vote at each annual meeting. When instituting or deciding whether to institute a Say on Pay vote, issuers should also consult guidance from proxy advisory firms.
- Disclosure of recovery of benefits of Directors and senior management: ‘Prescribed corporations’ (to be defined by regulation, but likely to include venture issuers) will be required to disclose information relating to the recovery of incentive benefits or other benefits paid to Directors and employees who are members of senior management. Regulations prescribing the specifics of the disclosure have not yet been published.
4. ESG and Climate Change
ESG and climate change disclosure continues to be an area of focus for regulators. On August 1, 2019, the CSA published CSA Staff Notice 51-358 – Reporting of Climate Change-related Risks to assist companies with identifying and disclosing material risks posed by climate change. This notice does not create any new requirements but clarifies and expands on previous guidance.
5. Auditor Report
For periods on or after December 15, 2020, public companies are required to provide additional disclosure in audit reports of ‘key audit matters’ (KAMs). KAMs are company-specific issues that, in the auditor’s judgment, were the most significant during the course of auditing the company’s financial statements. It will be important for companies to consider how this additional qualitative disclosure aligns with other public disclosure.
6. Regulation of Cannabis Issuers
On November 12, 2019, the CSA released CSA Multilateral Staff Notice 51-359 – Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry. This notice provides further guidance on disclosing financial interests in M&A transactions and potential conflicts of interest. The CSA notes that this guidance is also applicable to other issuers operating in emerging growth industries.
7. Majority Voting
On May 1, 2018, the omnibus Bill C-25 received Royal Assent and amended the CBCA such that Director nominees can only be elected in uncontested elections if the number of votes cast in their favour represents the majority of total votes cast for and against them (under these majority voting requirements, shareholders will be allowed to vote ‘against’ the election of a Director instead of simply a ‘withhold’ vote). However, unlike the existing TSX requirement, Directors do not need to resign if they do not receive a majority vote. If this occurs, Director nominees may continue in office until the earlier of (i) 90 days and (ii) the date on which their successor is appointed or elected. These amendments have not yet come into force.