Trends and Strategies for Companies Involved in M&A Transactions

In a report entitled “M&A Activism: A Special Report”[1] (the Report), the editor-in-chief of Activist Insight describes the types of companies most at risk of being targeted by shareholder demands, providing steps that can be taken to increase the resilience of M&A transactions.

The Report identifies a number of trends and findings, as summarized below:

  • Deal Prevention: M&A demands from shareholders have increased in recent years in both Canada and the United States, most commonly by activists seeking to prevent deals, to pursue appraisal rights, and to make their own takeover bids. Notably, 45% of Canadian shareholder activism between 2010 and the end of 2016 were intended to prevent deals, compared to 21% in the United States.
  • Target Profiles: The Report provides insight into the types of companies most at risk of being targeted by shareholder demands. Basic materials as well as services and technology companies are most frequently targeted by demands for M&A transactions in both the United States and Canada. Demands are often directed at companies with a market capitalization below $2 billion.
  • Defense Tactics: Steps can be taken to ensure the resilience of M&A transactions proposed by companies. Having a well-defined business strategy and keeping on message with that strategy is a strong defense to any activist attack. Communicating and pursuing voting lock-up agreements with influential shareholders early and frequently are also recommended tactics.
  • Proxy Advisories: The Report emphasizes the important role played by proxy voting agencies in determining ultimate levels of shareholder support or opposition. Proxy voting agencies will often ignore fairness opinions commissioned by sellers where detailed financial analysis is not included in the opinion. Longstanding shareholders may oppose M&A transactions where they believe a stock that they own is not being sold at an optimal price or at the wrong time.
  • Deal Structure: According to the Report, deal structure is important in predicting a transaction’s ultimate success. Activists scrutinize the deal process and boards are held to a high optical standard, meaning a deal cannot appear to be quick or unexpected to shareholders. Consideration should be given to the potential risks and consequences of: (i) dead votes, where shareholders of record sell before voting or before a revised bid is made; (ii) mergers requiring shareholder votes, particularly if the consideration is entirely or partially stock-based; and (iii) deal protections, such as no-shop clauses and termination fees, which can aggravate investors due to the transfer of risk from the buyer to the shareholders’ meeting.

It is important that companies pay attention to their susceptibility to opportunistic M&A demands and to consider strategies to protect themselves adequately. A full copy of the Report can be obtained here.

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The author would like to thank Brandon Burke, summer student, for his assistance in preparing this legal update.

[1] Josh Black, Activist Insight, “M&A Activism: A Special Report” (2017) Harvard Law School Forum on Corporate Governance and Financial Regulation.

Fasten Your Seatbelts: Preparing for the Globalization of Hedge Fund Activists

Activist hedge funds have grown up and gone global, reinforcing the need for companies of all shapes and sizes to plan ahead for the possibility of an attack. A recent article by Martin Lipton in the Harvard Law School Forum of Corporate Governance and Financial Regulation reviews recent developments in the activist landscape and reconfirms the importance of preparing for an attack.

The Fight Has Gone Global

One recent development is the expansion of hedge fund activism across the globe within the past two years. Mr. Lipton suggests that activism typically associated with the American marketplace is quickly gaining traction abroad. According to the Activist Investing Annual Review 2017, a total of 758 companies worldwide received public shareholder demands in 2016, a 13% increase on 2015’s total of 673.

The growth of activist hedge funds in Europe and Asia have, in a large way, contributed to this worldwide increase. 97 European companies faced public activist demands in 2016, up from 72 in 2015, and predictions for 2017 suggest this number will continue to grow. The result of the Brexit referendum, far from scaring investors away, seemed to unlock potential for investors – both the UK and continental Europe experienced an increased presence of American hedge funds and institutional investors. US hedge fund investments in Europe are up 20% in 2017 as of July 4th and many funds will be looking into activist opportunities to boost the return on their investment.

Activism in Asia, on the other hand, has tended to take a slightly different form than that in North America, with the investment community favouring behind-the-scenes negotiations over public demands. Despite this, hedge fund activism in Asia is still experiencing major growth, rising from 52 public activist demands in 2015 to 77 in 2016. Japan, in particular, has opened its doors to shareholder and hedge fund activism, as part of Prime Minister Shinzo Abe’s plan to revitalize the country’s economy, and many activists are waiting to sink their teeth into these previously non-activist-friendly markets.

The growth in Europe and Asia is balancing out the relative stabilization in North America and Australia, with Canada experiencing a slowdown of companies facing public activist demands: 49 in 2016, down from 60 in 2015. However, far from taking this as a sign for Canadian companies to kick their feet up, Mr. Lipton argues that this global trend indicates that no company, no matter its size, success, popularity or location, should believe they are safe from a potential attack from activists.

Stay Prepared

In a previous post, we outlined some strategies for defending against an activist attack.  The key to a successful defence lies in advance preparation, including maintaining and strengthening shareholder relations, preparing the board for an activist attack, and monitoring market activity and attack indicators. With the strength of activist hedge funds growing worldwide, it is important now, more than ever, for companies to brace themselves for impact and decide whether to negotiate with activists or gear up for a fight.

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The author would like to thank Abigail Court, Summer Student, for her assistance in preparing this legal update.

The drivers and consequences of settlement agreements in proxy fights

Activist interventions are being increasingly resolved by way of settlement agreements, with 3% of activist interventions in 2000 having resulted in a settlement agreement versus 16% in 2011.[1] In light of this emerging trend, the Columbia Business School recently published a paper, Dancing with Activists, in which the authors sought to provide the first systematic analysis of the drivers, nature, and consequences of such settlements. The authors identified 4 main drivers of settlement agreements: (1) the activist’s stake; (2) market reaction to a SEC Schedule 13(d) filing; (3) settlements in past engagements; and (4) past firm performance.

It is of note that in reaching their conclusions, the authors only reviewed activist intervention in the United States.

The Activist’s Stake

When the activist has a larger stake in the company, it is more likely that a settlement will result. A higher stake provides a signal of the activist’s confidence that it would be able to increase the target firm’s value. A large activist stake also means that the activist has more votes and therefore has more leverage in reaching a settlement because they pose a more credible threat to ousting the incumbents. The authors found that when the activist’s stake is above the median (6.4%), the probability of a settlement increases by about 4-5%.

Market Reaction to 13(d) Filing

An activist holding a stake in a U.S. target is required to file a SEC Schedule 13(d) upon acquiring more than 5% of any class of securities of a public company if they have an interest in controlling the management of the company. The market reaction to this filing will affect the likelihood of a settlement. A favourable market reaction signals the market’s approval of the activism campaign, thereby increasing the activist’s bargaining power.

Settlements in Past Engagements

Activists with a track record of obtaining settlements in past contests are associated with an increased likelihood of a settlement. This track record is likely a result of having high credibility to win proxy contests, therefore providing the activist with better chances of reaching a settlement in the future. The authors found that each past settlement adds about 3% to the probability of reaching a settlement in the current campaign.

Past Firm Performance

If the target firm has poor past performance, a settlement is more likely to take place. Again, this relates to the bargaining power of the target. The activist is more likely to gain approval from other voters if they are dissatisfied with the management of the target. This bolsters the activist’s credibility in succeeding and therefore leads to an increased likelihood of settlements.

Nature of Settlements – Incomplete Contracting

Hedge fund activist investors want to effect operational changes to the target company or require an increase in shareholder payouts. Despite this, many of the settlement agreements do not contract for these large scale changes and agreements are mostly restricted to boardroom turnover. Postponement of the operational changes allows the incumbent directors to save face – the immediate firing of a CEO, whom the incumbents had been previously supporting, may be publicly viewed as “throwing the CEO under the bus”. Instead, settlements often result in the appointment of a number of activist-affiliated directors to the board who then join the independent incumbent directors. The open-minded board can be persuaded by the activist’s directors thereby allowing for greater changes downstream without the immediate costs of taking the conflict to a contested election.

[1] See Dancing with Activists, Table 1 at Page 46.

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The author would like to thank William Chalmers, Summer Student, for his assistance in preparing this legal update.

The CCGG’s Stewardship Principles

Last month, the Canadian Coalition for Good Governance (CCGG) published its new Stewardship Principles paper designed to assist institutional investors fulfil their responsibilities to their beneficiaries or clients and enhance the value of their investments. The principles reflect what the CCGG believes are appropriate stewardship responsibilities for institutions investing in Canadian public equities and are directed to both asset owners and asset managers. While it is not the institutional investor’s role to manage the public companies in which it invests, in order to fulfil its role as fiduciary to its beneficiaries and clients, the CCGG believes an institutional investor has a responsibility to exercise voting rights, monitor board oversight and engage with companies on matters that might have an impact on the company’s value. The CCGG intends that the principles be used as a guide only, acknowledging that how the principles are implemented will depend on the nature of the institutional investor’s business model and relationship with its beneficiaries or clients. Below is a summary of the principles:

Principle 1 – Develop an approach to stewardship

It is advised that institutional investors integrate stewardship into its regular investing process, which may include providing a procedure for voting proxies, engaging with companies, reporting to beneficiaries or clients, managing potential conflicts of interest, aligning compensation with stewardship principles and outsourcing stewardship responsibilities. This should be supplemented by disclosure of the stewardship plan to clients and beneficiaries. Disclosing the plan creates accountability and can include reporting results and progress and explaining to clients and beneficiaries how following the stewardship plan leads to enhanced value.

Principle 2 – Monitor companies

It is recommended that institutional investors monitor the companies in which they invest in so as to mitigate risk and enhance value. Monitoring can take a variety of forms, including, reviewing public disclosures, engaging with portfolio companies, obtaining third party research or analysis and sharing research and information with other investors or investor groups.

Principle 3 – Report on voting activities

Institutional investors should adopt and periodically report to beneficiaries and clients their proxy voting guidelines and how voting rights are exercised. Voting decisions should be informed, independent, in line with the institutional investor’s voting policies and ultimately in the best interests of beneficiaries or clients. This may require that institutional investors obtain advice from proxy advisors, which advice should be assessed rigorously.

Principle 4 – Engage with companies

Thoughtful engagement with portfolio companies is strongly encouraged to discuss investor concerns. Institutional investors should consider how and when to escalate engagement activities if a board is unresponsive to any concerns expressed. There is a range of escalation activities that could be undertaken when a concern is not sufficiently addressed, including, speaking at shareholder meetings, making public statements, voting against or withholding votes from directors or requisitioning a special shareholders meeting to address specific concerns.

Principle 5 – Collaborate with other institutional investors

Collaboration is viewed by the CCGG as beneficial to both investors and the companies they invest in as it allows for the globalization of good governance practices and provides a greater understanding of the various viewpoints at play.

Principle 6 – Work with policy makers

It is advised that institutional investors engage with regulators and other policy makers where appropriate, to ensure that the shareholder perspective is considered when new laws and policies are being developed.

Principle 7 – Focus on long-term sustainable value

Institutional investors should focus on a company’s long-term success and sustainable value creation rather than short term considerations. To achieve this, institutional investors should develop an understanding of each portfolio company’s strategy and understand the risks and opportunities associated with the economic, political, social and regulatory environment.

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The author would like to thank Travis Bertrand, Summer Student, for his assistance in preparing this legal update.

Members of Special Situations team weigh in on Canadian activism in Ethical Boardroom Magazine

Members of Norton Rose Fulbright’s Canadian Special Situations team have weighed in on shareholder activism in Canada with an article in the Spring Edition of Ethical Boardroom Magazine. The article, written by Trevor Zeyl (assisted by Joe Bricker), offers insights on shareholder activism in Canada in the past year, and some predictions for 2017 and beyond. The Spring Edition of Ethical Boardroom can be viewed here (free subscription required):

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Court dismisses petition for a court-ordered shareholders meeting with independent chair in lieu of a meeting requisitioned by shareholders

In a dispute between three petitioning directors (the Petitioners) and three requisitioning shareholders (two of whom were also directors) (the Requisitioning Shareholders) of Photon Control Inc. (Photon) (TSX-V: PHO), the Petitioners asked the British Columbia Supreme Court (the Court) to exercise its powers under the Business Corporations Act (British Columbia) (the Act) to intervene in the calling, holding and conduct of a shareholders’ meeting that the Requisitioning Shareholders had requisitioned under the Act. The Court dismissed the petition. In addition, the Court also ruled that the chair of the requisitioned meeting did not have to be independent and could be one of the Requisitioning Shareholders, even if that shareholder was also a director of Photon and the business of the meeting involved the removal and election of directors.


The Court in Goldstein v. McGrath[1] stated that a court’s power to call a general meeting of shareholders under section 186 of the Act should only be exercised in extraordinary circumstances. In this case, the Requisitioning Shareholders requisitioned the Board under the Act to call a general meeting of shareholders in order to, among other things, remove the Petitioners and elect two new directors to the Board. The Board was deadlocked at the time and was not able to call the meeting within the time required under the Act. As a result, the Requisitioning Shareholders called the meeting by issuing a notice of general meeting to shareholders of Photon under the requisitioning provisions of the Act. The Petitioners petitioned the Court to order a combined annual general meeting and requisitioned meeting of shareholders, and further asked the Court put conditions on the meeting and the parties, including a requirement for an independent chair (as opposed to one of the Requisitioning Shareholders who would be entitled to chair the meeting under Photon’s articles).

Court’s power to order a shareholders’ meeting should only be exercised in extraordinary circumstances

The Court explained that it should only exercise its discretionary powers to order a meeting of shareholders under the Act in extraordinary circumstances, including if it is impracticable for the company to call or conduct the meeting or if the company fails to hold the meeting of shareholders in accordance with the Act or the company’s organizational documents.

The Court then ruled that a deadlocked Board was not enough to warrant calling the meeting. To the contrary, the court stated that it was practical for the Requisitioning Shareholder to call the requisitioned meeting, as it followed the clear statutory process available to shareholders under the Act, and the Petitioners could not rely merely on their own unwillingness to call that meeting as a reason to petition the Court to intervene.

Chair of requisitioned meeting does not need to be independent of the requisitioning shareholders

The Petitioners also claimed that the chair of the meeting should not be one of the Requisitioning Shareholders, and should be someone independent. The Court explained that in order for it to make such a ruling, it must be shown that the chair proposed by the Requisitioning Shareholders has demonstrated a capacity for potential impropriety at the meeting, and absent such evidence there is no basis for the Court to intervene.

Importantly, the Court ruled that even if there was an apprehension of bias of the proposed chair and the proposed chair was a director of the company and one of the Requisitioning Shareholders, this still would not warrant the Court’s appointment of an independent chair for the meeting. The Court explained that an existing director will always have an interest in the outcome of a meeting in which his or her election is to be considered, and that alone is not sufficient to demonstrate the potential impropriety of the director acting as chair of the meeting or to order that an independent chair be appointed instead.

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[1] 2017 BCSC 586.



Making your vote count II: CSA finalizes proxy voting protocols

The Canadian Securities Administrators (CSA) have recently released finalized guidance and protocols for meeting vote reconciliation under CSA Staff-Notice 54-305 Meeting Vote Reconciliation Protocols (the Protocols) which are implemented on a voluntary basis. The Protocols mark the latest step in a systemic review that began in 2013 to bring greater transparency and simplicity in vote tabulation specifically for shares held through intermediaries.

As discussed in our previous update, the Protocols are primarily intended to address the issue that all votes of beneficial holders are properly tabulated to ensure that true beneficial holders can exercise their right to direct the voting of beneficially owned securities. As such, the Protocols delineate the responsibilities for those parties responsible for vote collection and tabulation at each stage of the process and clearly outline the operational processes that each party should implement (which includes specific guidance on particular scenarios). These parties include the Canadian Depository Securities, intermediaries (such as bank custodians and investment dealers), primary intermediary voting agents (such as Broadridge Investor Communication Solutions Inc.), and transfer agents that act as meeting tabulators. Additionally, the Protocols lay the foundation for paperless meeting vote reconciliation and end-to-end vote confirmation initiatives (that will allow beneficial owners to confirm whether their voting instructions have been received and followed).

Each of the parties’ respective responsibilities and operational processes are discussed under four separate objectives/stages that the CSA believes will ensure accurate, reliable and accountable meeting vote reconciliation:

  1. providing meeting tabulators with accurate and complete vote entitlement information for each intermediary that will solicit voting instructions from beneficial owners and submit proxy votes;
  2. meeting tabulators setting up vote entitlement accounts for each intermediary in a consistent manner;
  3. sending accurate and complete proxy vote information to the meeting tabulator, and meeting tabulators tabulating and recording the proxy votes in a consistent manner; and
  4. informing beneficial owners as to whether proxy votes submitted to the meeting tabulator in respect of their shares were not accepted at a meeting (along with an explanation).

Although the Protocols represent a welcome initiative aimed at clarifying the proxy voting process, the extent to which market participants will actively coordinate their efforts in respecting the CSA’s direction ultimately remains to be seen. To this end, the CSA has established a technical committee in order to assist in monitoring the implementation of the protocols over the course of the next two proxy seasons and in its ultimate determination as to whether enhanced regulatory measures are necessary.

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The authors would like to thank Brian Peebles, Articling Student, for his assistance in preparing this legal update.

Glass Lewis’ 2017 Canada Policy Guidelines

Towards the end of last year, Glass, Lewis & Co., LLC (Glass Lewis), a leading governance and proxy voting firm, released its 2017 Proxy Paper Guidelines for Canada (the Guidelines) for the upcoming 2017 proxy season.  Although the Guidelines contain changes compared to the guidelines released by Glass Lewis in 2016, most were foreshadowed in the 2016 guidelines so should come as no surprise.  The key changes are detailed below.

Director Overboarding

When making recommendations in relation to directors, Glass Lewis will generally recommend voting against (a) a director who is an executive of any public company and serves on more than two boards of public companies; and (b) any director who serves on more than five boards of public companies. If the above thresholds are exceeded, before making its recommendation, Glass Lewis will consider the potential director’s board duties (including committees) at the other companies, attendance records and involvement on boards of private companies, as well as the size and location of the companies where he/she serves.  For directors who are overboarded, Glass Lewis will not recommend against these directors serving at the company where they also serve as an executive. The rationale here is that executives will prioritize their attention to their executive duties over commitments to other, external public boards.

The same standard is relaxed with respect to TSX Venture Exchange companies and a case-by-case evaluation is applied to directors who serve for boards that are listed on both the TSX and TSX Venture Exchange.

Shareholder Rights Plans

Previously, Glass Lewis did not support plans that required take-over bids to remain open for greater than 90 days. However, in a direct response to the updated take-over bid rules established in Multilateral Instrument 62-104 and National Instrument 62-203, Glass Lewis will now support plans that require offers to be open for a maximum period of 105 days.

Say-On-Pay Proposals

Although advisory votes regarding executive compensation are not mandatory in Canada, where a company does conduct one, Glass Lewis may recommend voting against members of the compensation committee if no action is undertaken after the company fails to obtain majority approval on a say-on-pay proposal.

Equity Compensation Plans

When making a recommendation, Glass Lewis will not support full value award plans (such as restricted share plans, deferred share plans, share award plans or incentive compensation plans) that allow for a company to issue a fixed percentage of its outstanding shares above a rolling maximum of 5%.

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The author would like to thank Robert Corbeil, articling student, for his assistance in preparing this legal update.

Re Hemostemix Inc: Alberta Securities Commission upholds decision of TSXV in contested private placement

Following recent amendments to Canada’s takeover bid rules, private placements in the face of hostile bids have become newly controversial. Private placements in the context of proxy contests have received less attention. Yet this is somewhat surprising, because they are another facet of the same underlying question: whether regulators should allow a financing that may significantly affect the voting power of hostile shareholders in an ongoing shareholder persuasion campaign.

The Alberta Securities Commission (ASC) has just released its reasons for upholding the TSXV’s allowance of a private placement in the context of a proxy contest, without requiring shareholder approval. Re Hemostemix Inc.[1] carries important lessons for companies contemplating a private placement amidst shareholder agitation. It also re-affirms that the ASC will generally defer to judgments of the TSX and TSXV on this and other matters, absent compelling evidence they were unreasonable or contrary to the public interest.


Hemostemix Inc. (Hemostemix or the Company) is an early-stage company listed on the TSXV. In August of 2016, the Company announced a private placement (the Placement). The Placement included a $1 million debenture (the Debenture) issued to Wunderlich. In applying for TSXV approval, the Company stated that if Wunderlich converted his debenture and exercised the warrants issued under the Placement, he would hold 19.47% of the outstanding common shares. The Debenture was secured by a general security agreement (the GSA) and contained several negative covenants binding on the Company.

The TSXV accepted the Placement. Before doing so, the TSXV was in communication with counsel for both the Appellants and the Company, and received representations including an acknowledgement from Wunderlich that he was not acting “jointly or in concert” with the Company or management (the Acknowledgment). Among its reasons for approval were that the 20% threshold for “control person” was not met; the Company demonstrated a need for financing; the overall terms of the financing were not punitive within the context of the venture marketplace; and the fact that there would be no effect on the results of the shareholder meeting (the record date had elapsed). The Appellants appealed under s. 30 of Alberta’s Securities Act.

The ASC’s reasoning

The ASC declined to overturn the approval. In doing so, it first noted that as a matter of administrative law, a decision of the TSXV is reviewable on a standard of reasonableness, entitling it to significant deference. The Appellants cited three grounds from the case law for not deferring: that the TSXV erred in law; that the TSXV overlooked material evidence; and the TSXV failed to consider the perception of the public interest.

In considering whether the TSXV erred in law, the ASC looked at whether Wunderlich was a control person. Wunderlich’s holding did not exceed the 20% threshold in the TSXV definition. To the ASC, the TSXV adequately accounted for evidence that Wunderlich would not be acting “jointly and in concert” with Baker (a director) and Redekop (a former director and CEO), who between them owned approximately 26% of the shares, to bring his holding over 20% or otherwise “materially affect control of the issuer”.

They next considered whether the TSXV overlooked material evidence. First, they extensively reviewed the TSXV’s use of the Company’s Board minutes. The Appellants noted that Wunderlich was present at both of the meetings where the Placement was considered (one as an “Insider”, the other as a “Nominated Director”), and stated that he may have been acting in concert with others. Nonetheless, the TSXV had contended that “special access” was not a relevant consideration in determining who was a “control person” under their internal guidance on control persons (the Guidance), and that the Guidance was carefully thought through. The ASC accepted that the TSXV considered the minutes carefully with respect to Wunderlich’s relationships and was entitled to rely on the Acknowledgment.

Second, they looked at whether the TSXV overlooked material evidence that the Debenture gave Wunderlich “superior rights” within the meaning of the Guidance, thus potentially making him a “control person”. Here, they noted that even though the TSXV did not obtain a copy of the GSA, the TSXV was aware of it, Hemostemix’s filing with the TSXV contained a full summary of its terms and conditions, and those terms and conditions were not unusual in the circumstances.

The ASC next considered the public interest. The ASC distinguished this case from Hudbay and Mercury, two cases in which shareholder votes were required. In contrast to those cases, this case involved a “relatively modest financing”, which the TSXV considered in the context of Hemostemix’s difficult financial circumstances and market conditions. The Guidance was designed to promote the public interest in fair and efficient capital markets and facilitate an efficient administrative process. The ASC rejected the Appellants’ submission that the TSXV should have probed the representations made by Hemostemix’s counsel and in the Acknowledgement, referring again to the interest in fair and efficient markets. The ASC concluded that a shareholder vote could have delivered a pyrrhic victory for dissident shareholders and worthless shares for all holders.

Key takeaways

It is important to re-iterate that this case was a review of the TSXV’s decision rather than a fresh re-hearing of all of the evidence. It thus re-enforces that the ASC will generally defer to the judgment of the TSX and TSXV unless there are compelling reasons to depart from it.

That said, in considering complaints about private placements, securities regulators are clearly alive to market conditions and the need for a given financing. In this respect, the ASC’s reasons provide a faint echo of the Dolly Varden decision regarding private placements and hostile bids.[2] The ASC’s reasons appear especially sensitive to the implications of unwinding a financing that had already occurred, when there was clear evidence that the Board had carefully deliberated.

Nonetheless, the TSXV’s and ASC’s extensive reviews of the Company’s Board minutes suggest that where these kinds of financings are concerned, companies should be prepared to show that they fully and fairly considered various options. They should also prepare their board minutes in anticipation that they may end up before a regulator.

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The author would like to thank Joe Bricker, Articling Student, for his assistance in preparing this legal update.

[1] 2017 ABASC 14.

[2] 2016 BCSECCOM 359, 39 OSCB 8927.

Board Watch: More Complexity, More Committees

As a result of the increasing and ever-evolving responsibilities falling on the shoulders of boards of directors, the traditional three key committee model (covering audit and financial reporting, executive compensation, and director nominations and board succession planning) can be inadequate. The creation of additional committees has been one way to manage the burden.  According to EY in its recent Board Matters post entitled “Board committees evolve to address new challenges”, the prevalence of additional committees reflects “changing board priorities and pressures, boardroom needs and company circumstances.”

The statistics support this: more than 75% of S&P 500 companies have at least one additional board committee, up from 61% in 2013. A review of the S&P SmallCap 600 board committee structure reveals that 46% of smaller companies have at least one additional board committee.  A review of EY’s findings is summarized in more detail below.

Executive Committee Additions Lead the Way

S&P 500 companies most frequently (37% of the time) added an executive committee. Executive committees are generally permitted to exercise the authority of the board when the board is not in session, except in cases where action of the entire board is required by law. Following closely behind, 31% of the S&P 500 companies added a finance committee, 12% a compliance committee, and 11% a risk committee. In turn, the top five additional committees at smaller companies were executive (18%), risk (7%), finance (7%), strategy (6%) and compliance (5%).

Highest Growth: Compliance, Risk and Technology Committees

Between 2013 and 2016, compliance committees grew by 3%, risk and technology committees by 2% and M&A committees by 1%, while executive, finance, and public policy and regulatory affairs committees decreased by net 1%. For S&P SmallCap 600 companies, risk committees recorded the highest year-on-year growth at 3%.

Notably, while boards responded to some issues with the creation of new committees, others were assigned under the umbrella of existing committees. For example, of the 15% of companies that disclosed a committee focus on cyber, digital and information technology, over half assigned this responsibility to the audit committee.

Industry Matters

In six out of ten industries – telecom, utilities, financials, health care, industrials, and materials – over 75% of companies have added at least one additional committee. The unique compliance, risk and operational challenges of these sectors plays a part in this. Among the companies listed on the S&P SmallCap 600 index, utilities companies most frequently add additional committees (82%) followed by financial services in second place (68%).

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The author would like to thank Hugo Margoc, articling student, for his assistance in preparing this legal update.