Overboard, under deliver?

We recently reported that Institutional Shareholder Services (ISS) released its 2018 Americas Proxy Voting Guidelines Updates (the Policy Update), which, among other things, establishes modified guidelines for determining whether a director serving on the board of multiple public companies is “overboarded”.

Starting in 2019, ISS will recommend a withhold vote for (1) directors of TSX-listed companies who are CEOs and serve on two or more public boards and (2) any non-CEO director who serves on the board of five or more public companies.

Overboarding is a hot button topic in the realm of corporate governance. Questions arise surrounding whether a director serving on too many boards can adequately discharge his or her duties. When overstretched, the effectiveness of directors at overseeing management may be undermined. However, a counter-argument arises when considering the relative benefits to companies with boards comprised of experienced and robust directors that hold significant diversity of experience.

The Role of the Corporate Director

Directors are the leaders who approve and oversee corporate strategy and approve major capital spending decisions. They are charged with the long term stewardship of Canada’s organizations.

– Institute of Corporate Directors, “Director Lens – Fall 2017 Survey”

A 2014 Korn Ferry report found that in Canada, the average time spent by a director on his or her board responsibilities was 304 hours per year, per board. Chief among the many important roles played by directors of public companies is oversight of management. Additional duties and responsibilities include: determining executive compensation, attending functions on behalf of the company, preparing for board meetings and keeping current with industry trends, attending board meetings, training-related responsibilities, and various tasks pertaining to committee work. All things told, the responsibilities of directors can be onerous and time-consuming.

The Risks of Overboarding

In light of the broad duties and responsibilities outlined above, overboarded directors may not be able to dedicate the requisite amount of resources and energy needed to effectively serve. A recent article appearing in the Harvard Law School Forum on Corporate Governance and Financial Regulation considered directors’ professional commitments and offered three examples of how multiple competing commitments may impair risk oversight. This analysis holds true for overboarded directors:

1) Competing commitments may disincline directors from actively engaging in the corporate decision-making process, which can manifest as missed board meetings or infrequent participation;

2) External commitments may disincentivize directors from challenging management, thereby undermining the board’s oversight function; and

3) Directors spread over multiple commitments may be confronted with a disproportionately severe event requiring particular attention, thereby pushing other commitments to the back-burner.

Presumably, the negative effects of overboarding will ultimately be felt by shareholders, who may suffer as a result of directors failing to adequately discharge their responsibilities. The Policy Update may therefore have the effect of protecting shareholders by curtailing instances of directors serving on too many boards and thusly being unable to carry out their responsibilities properly.

The Case for Directors on Multiple Boards

There are certain arguments that run contrary to the change in the Policy Update. Benefits can flow to shareholders through boards stacked with directors diverse in experience. By limiting the number of boards that any given director can serve on, particularly robust directors may be gate-kept from sitting on boards where they can create value-adding opportunities. Effectively shrinking the pool of candidates, by implementing policies geared towards curtailing candidates from board seats, may be problematic in some cases (such as in cases where a board is seeking a particular skill set). Further, benefits may flow to shareholders of companies where the board is comprised of directors serving on many boards, to the extent that interconnectivity and access to various market segments manifests as sound decision-making at the corporate level.


On the one hand, companies comprised of directors serving on too many boards has the potential to detract from company performance and shareholder interests. On the other hand, having robust directors with varied experience and professional expertise underpins properly functioning companies. As is so often the case in corporate law, a balancing of interests is required to achieve optimal results. Adequate checks and balances are critical. In the difficult business of drawing a bright line, ISS has set the standard for non-CEO directors warranting a withhold vote at five. The implications and consequences of this policy remain unclear, but the impact is sure to be felt in every corner of the market.

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

Shareholder activism leads to higher rate of CEO turnover – win or lose

Shareholder activism is now a global phenomenon. Activists commonly seek to shake up the board of a target company in hopes of instilling change and increasing shareholder value. The impact on target companies can be both disruptive and enduring – often resulting in turnover among top management and in particular chief executive officers (CEOs). A recent study by Lazard found that since 2013, the average annual turnover rate of CEOs at target companies was 23 percent, compared to 12 percent at non-target companies.

It should not come as a surprise that successful activists who secure board seats may have greater influence in locating and retaining management candidates that align with their interests and objectives. A recent study by FTI Consulting of over 300 activist campaigns reveals that within a year following an activist campaign where the activist secured board seats, CEOs were three times as likely to be replaced.

Interestingly, however, CEOs were still twice as likely to be replaced within a year after an activist campaign even where activists do not secure board seats. There are of course many variables involved in considering change of management. One possible explanation is that an activist attack signals to the target company the need for change. Alternatively, the turnover could be a result of the manner in which management handled the activist attack.

All in all, CEOs and other top management alike should consider themselves warned – activist attacks require prompt and effective action to respond to the threat and, if appropriate, address the underlying issues identified by the activists. Their jobs could be on the line.

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The author would like to thank Samantha Sarkozi, articling student, for her assistance in preparing this legal update.

ISS releases 2018 Americas Proxy Voting Guidelines Updates

On November 16, 2017, Institutional Shareholder Services (ISS) released its 2018 Americas Proxy Voting Guidelines Updates (the Updates). These updates implement changes in a number of areas, with the most significant being a gender diversity policy and new criteria for determining when a director is “overboarded”. Except where indicated below, the changes are effective for meetings held on or after February 1, 2018.

Gender Diversity

The Updates implement ISS’s proposal, in its 2018 Benchmark Policy Consultation, to implement a gender diversity policy. For S&P/TSX Composite Index companies, ISS will generally recommend a withhold vote for the Chair of the Nominating Committee or Chair of the Committee responsible for director nominations, or the Chair of the Board if no nominating committee has been identified or no chair of the nominating committee has been identified, if:

  • The company has not disclosed a formal written gender diversity policy; and
  • There are zero female directors on the board of directors.

This ISS policy complements the requirements in National Instrument 58-101, which contains a “comply or explain” provision with respect to gender diversity. Canadian non-venture issuers must disclose whether they have adopted a written policy relating to the identification and nomination of women directors, and if not, why not. NI 58-101 also prescribes certain features for such policies.

ISS has indicated that it will devote significant attention to the content of these policies, stating that “boilerplate or contradictory language” may result in withhold recommendations with respect to director votes. It has also noted that in evaluating board diversity, it will scrutinize the approach taken to the board’s disclosed approach to diversity in executive officer positions.

While the policy will be effective for meetings held after February 1, 2018 only for S&P/TSX Composite Index companies, it will take effect in February of 2019 for all TSX issuers. The following types of issuers will be exempt:

  • Newly publicly listed companies within the current or prior fiscal year;
  • Companies that have transitioned from the TSXV within the current or prior fiscal year; or
  • Companies with four or fewer directors.

Director Overboarding

The Updates implement ISS’s proposal, also in its 2018 Benchmark Policy Consultation, to change the criteria for considering a director “overboarded” – that is, to be serving on too many boards to carry out his/her responsibilities properly.

At present, ISS defines an “overboarded” director as “a CEO of a public company who sits on more than 1 outside public company board in addition to the company of which he/she is CEO, OR the director is not a CEO of a public company and sits on more than 4 public company boards in total.” It generally recommends a withhold vote where: (i) irrespective of whether the company has adopted a majority voting director resignation policy, the director is overboarded; and (ii) the individual director has attended less than 75 percent of his/her respective board and committee meetings held within the past year without a valid reason for these absences.

ISS will eliminate the attendance criterion, and now generally recommend a withhold vote for meetings on or after February 1, 2019 for TSX companies where:

  • for a director who is a CEO of a public company, that director serves on more than two other public company boards; or
  • for any other director, the director serves on more than five public company boards (withhold only at their outside boards).

While a CEO’s directorships at parent and subsidiary companies will count in determining the number of boards on which he or she serves, ISS will not recommend withhold votes for CEOs with respect to parent/subsidiary boards.

Other Changes

Other changes in the Guidelines include:

  • When considering advance notice policies for TSX and TSXV companies, ISS will now consider it problematic if there is a requirement that any nominating shareholder provide representation that the nominating shareholder be present at the meeting in person or by proxy at which his or her nominee is standing for election for the nomination to be accepted, notwithstanding the number of votes obtained by such nominee.
  • The voting guidelines on pay for TSX companies have been updated to reflect the incorporation of the Relative Financial Performance Assessment (RFPA) into ISS’s quantitative pay assessment. The RFPA compares the company’s rankings to a peer group with respect to: (i) CEO pay; and (ii) financial performance in three or four metrics (which will vary depending on industry), in each case as measured over three (3) years. Further details will be unveiled in a future white paper.

There are also a number of minor alterations , including changes to certain nomenclature to align terms across jurisdictions.

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Management diversity: will targets and quotas improve gender diversity?

On October 5, 2017, the Canadian Securities Administrators (CSA) released Staff Notice 58-309 (Staff Notice) reporting findings of a review carried out by various Canadian securities regulators of disclosure regarding women on boards and in executive officer positions by TSX issuers, as prescribed in National Instrument 58-101 Disclosure of Corporate Governance Practices. We previously reported on the introduction of disclosure requirements in 2014.

The findings are generally positive, and have shown that gender diversity of boards is improving. The review has found that the total board seats occupied by women has increased from 11% in 2015 to 14% in 2017. The highest representation of women on boards was disclosed by issuers with over $10 Billion in market capitalization, who had 24% of their board seats occupied by women. Issuers with at least one woman on their board has increased from 29% in 2015 to 61% in 2017. Issuers with at least one woman in executive officer positions has increased from 60% in 2015 to 62% in 2017.

Despite the positive findings of the Staff Notice, the Ontario Securities Chair, Maureen Jensen, expressed disappointment at the lack of progress in the representation of women on boards at a recent panel held in Toronto. Ms. Jensen noted that there has not been a large increase in the three years since the introduction of the disclosure rules, and at the current rate of increase of female representation on boards, it would take thirty years for women to reach parity with men. Due to the lack of progress, Jensen suggested that there may need to be more drastic measures taken, such as supplementing the rules with guidelines meant to push issuers to set targets for female representation. Interesting to note is that the Staff Notice review also found that issuers have been reluctant to adopt targets for representation of women, with only 11% adopting targets for representation of women on their board in 2017 and only 3% adopting targets for executive officer positions.

Following the release of the Staff Notice, Aaron Dhir, an associate professor at Osgoode Hall Law School, has echoed Ms. Jensen’s sentiment and has called for more drastic action to ensure more women are elected to corporate boards, including getting provincial governments to institute mandatory quotas for corporate boards, similar to quotas that have been instituted in a number of European countries, including Norway, France, the Netherlands, Italy, and Germany. Recent research by Nima Sanandaji on the effects of mandatory quotas in Norway suggests that mandatory quotas may lead to negative consequences for businesses. Sanandaji’s research found that the introduction of mandatory quotas for public companies requiring 40% of board members to be women led to a 3.5% decline in share prices as companies were forced to promote less experienced women in order to meet the short compliance time frame. The quotas also failed to positively impact women’s roles in business generally, with the gender wage gap remaining unchanged and no evidence of greater enrollment of women in business programs following their introduction. Despite the appeal of a simple solution of mandatory quotas for corporate boards to promote gender parity, reality experienced in Norway suggests that they may do more harm than good in the long run.

It remains to be seen whether more drastic measures will be taken by the securities regulators. However, setting up quotas and targets may not be the ideal solution to improve gender diversity of corporate boards.

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The author would like to thank Olga Lenova, articling student, for her assistance in preparing this legal update.

Proxy access: wrong for Canadian companies, wrong for Canada

In our latest memo, members of Norton Rose Fulbright’s Canadian Special Situations team weigh in on proxy access. The memo is written by Walied Soliman and Orestes Pasparakis, Partners and Co-Chairs of our Canadian Special Situations team, and Joe Bricker, Associate. The memo is reproduced below:

Recently, two prominent Canadian companies became the first major issuers to adopt proxy access policies.

These policies allow shareholders to nominate directors to serve on a company’s board and have their nominees featured in management’s circular and form of proxy. Typically, they afford nomination rights to one or more shareholders (up to 20) who have collectively held 3 per cent of shares for 3 years, and allow shareholders to nominate up to 20 per cent of directors.

We believe that Canadian companies should generally resist proxy access proposals.

Proxy access policies are proving popular in the United States, with over 60 per cent of S&P 500 index companies having adopted them. While proxy access is new to Canada, experts predict that many more Canadian companies will soon introduce it for shareholders. But while this may suit U.S. law and practice, it makes less sense in Canada.

Consider the tension between the roles of directors and shareholders. If we assume that shareholders are best characterized as “owners,” it is still not desirable for owners to make every decision themselves or oversee management directly.

Shareholders are entitled to accountability from directors, but Canada already gives them the tools they need to achieve it, within careful limits. This makes proxy access unnecessary.

The Canada Business Corporations Act and most provincial equivalents allow shareholder proposals in management’s proxy, and specifically allow proposals to include nominations. In other words, a limited form of proxy access already exists. The nomination provisions are rarely used though, in part because of their limitations. These include word limits for shareholder proposals, and the fact that management’s circular need not feature shareholder nominees with the same prominence as management nominees.

Canadian law also affords greater opportunities for shareholder activism than does U.S. law. In most jurisdictions, holders of 5 per cent of a company’s shares can requisition a meeting at any time to replace directors. That said, while activism is an crucial part of healthy capital markets, it should not be a cost-free proposition. The current practical requirement for activists to file a dissident circular to solicit proxies demands a certain level of seriousness and conviction.

It is vital to note the fundamental differences in ethos between U.S. and Canadian corporate law. In some respects, the U.S. has embraced a more shareholder-centric view. For instance, where a change of control is imminent, Delaware law has interpreted the best interests of the company as meaning simply the highest price for shareholders. Proxy access is an extension of such thinking, privileging direct shareholder participation over other considerations.

In contrast, the Supreme Court of Canada held in 2008 in the BCE case that the “best interests of the corporation” require Canadian directors to look to “inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.”

Canadian directors are accountable to more than shareholders, let alone any one of them. This makes good sense. As UCLA law professor Stephen M. Bainbridge argues, delegation is “what makes the modern corporation feasible.”

Proxy access is not just unnecessary to ensure adequate oversight of directors, it also threatens a number of negative practical consequences in the Canadian market. Given that companies here tend to have low market capitalizations by American standards, allowing shareholders to gain large positions more easily, the impacts are likely to be greater in Canada than in the U.S.

Proxy access threatens to turn every meeting into a contested one. This adds to the enormous governance burdens placed on Canadian public companies.

It undermines the careful thought that nominating committees put into board composition and cohesion. In our experience, nominating committees usually look carefully at the skills matrix of their directors, ensuring it matches the needs of the company.

As the eminent American lawyers Martin Lipton and Steven A. Rosenblum have suggested, institutional investors are not necessarily experts in corporate management. Their employees tend to be trained in financial analysis. Under ordinary circumstances, directors should therefore be entrusted with delegated authority to nominate in the long-term best interests of the company.

There is also the spectre of boards perennially divided into two or more warring camps of directors, whose allegiances are rigidly determined by who nominated them. This risk of boardroom conflict is compounded by the fact that proxy access unfairly favours certain shareholders over others. The typical policy assumes that large holders who have held their shares for an arbitrary length of time—most often institutional investors— should have a greater say than noninstitutional ones who have held them for less than that arbitrary time.

Finally, widespread proxy access would enhance the influence of proxy advisors, which ironically is a particular concern for many of the same good governance proponents who advocate proxy access. Proxy advisors provide a vital service to clients by helping large investors make voting decisions responsibly. But they cannot make the perfect decision for every investor or situation. In a world of proxy access, many investors might be less engaged. Third-party advisors will consequently wield even greater influence.

Proxy access upsets the careful Canadian equilibrium. In the interests of good governance and long-term value creation, most companies should resist attempts to import this U.S. trend. Canadians should simply say: “access denied.”

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Environmental, social and governance (ESG) practices are paving their way into the mainstream

As discussed in our earlier blog post, the Kingsdale Advisors’ (Kingsdale) annual Proxy Season Review for 2017 identified ESG trends as one of several issues on the horizon for public companies. Kingsdale noted that heightened scrutiny from investors could translate into a demand for enhanced disclosure on the part of issuers.

The three factors that form ESG are integrated into investment analyses to determine the sustainability and future financial performance of companies. These factors are also used as tools by companies to analyze, evaluate and to better understand the overall risks and opportunities that their businesses are exposed to.

Emerging ESG Trends

EY’s 2017 report on ESG and nonfinancial performance provided key insights into the views of more than 320 institutional investors with regards to nonfinancial reporting by public companies and the role ESG analysis plays in their investment decision-making. One key finding concerning investor sentiment on ESG practices was that nonfinancial performance plays a pivotal role in investment decisions for most of the institutional investors that took part in the survey. Furthermore, the number of institutional investors adopting ESG analysis has been growing steadily over the past few years.

In the U.S., there have been record numbers of both public company resolutions involving climate change and successful climate change-focused shareholder proposals. This trend indicates that investors are  taking greater proactive steps to address climate concerns and ensure the long-term viability of their investments.[1]

According to a recently published survey report conducted and published by RBC Global Asset Management (RBC GAM), responsible investing has moved into the mainstream due to greater awareness and interest in the adoption of ESG analysis. The report states that approximately 73% of institutional investors in Canada use ESG principles as part of their investment approach.

Moreover, earlier this year, Glass Lewis announced its partnership with Sustainalytics, a company that focuses on sustainability research and analysis, to integrate ESG content into Glass Lewis’ proxy voting and vote management services. Among other reasons, the partnership was formed in hopes of delivering value for Viewpoint clients by allowing them to “incorporate more nuanced proxy voting and referral-item triggers around ESG performance, even when there are no shareholder proposals on the ballot to address specific areas of interest.”

Requirements set by Regulators

Demand for enhanced ESG-related disclosure by Canadian regulators has also been increasing in the past few years, as environmental and social issues slowly make their way into Canadian politics.

Public issuers in Canada are familiar with CSA Staff Notice 51-333: Environmental Reporting Guidance, (Staff Notice) released by the Canadian Securities Administrators in 2010. The Staff Notice was intended to provide guidance to reporting issuers on existing environmental disclosure requirements under securities legislation. The Toronto Stock Exchange also released a Primer for Environmental & Social Disclosure (Primer) in 2014 that discusses mandatory disclosure requirements and voluntary reporting. The Primer identifies resources and benchmarks that issuers can access to improve how they measure and report economic, environmental and social performance.

The most recent development related to the governance aspect of ESG is the proposal to amend the Canada Business Corporations Act in Bill C-25, which includes requirements for public companies to disclose information with respect to the diversity of directors and senior management.[2]


Climate change, human rights and diversity in the workplace are becoming concerns that investors and regulators are increasingly aware of and interested in addressing. A growing number of investors are taking into consideration companies’ ESG profiles when making investment decisions and regulators are providing guidance to issuers on ways to meet disclosure requirements. As the importance of ESG to investors and regulators increases, so too does the importance of issuers’ ability to manage and deal with ESG issues affecting their businesses.

[1] For those interested in further analysis of investor efforts on addressing climate change, refer to our prior post on that topic.

[2] The proposed changes are discussed in more depth in this prior post.

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The author would like to thank Jenny Ng, articling student, for her assistance in preparing this legal update.

Regulators weigh in on ICOs

Issuers contemplating initial coin offerings (ICOs) would be wise to consider the recent decision of impak Finance Inc. (Impak) by the Autorité des marchés financiers’ and the Ontario Securities Commission. 

Background and Decision

Impak launched an ICO for impak Coin (MPK Tokens), which Impak describes as a cryptocurrency with a social purpose. The proceeds of the ICO are intended to fund the development of impak.eco, an online social network 100% dedicated to the “impact economy”.

Prior to the launch of its ICO, Impak submitted its proposed business model to the Canadian Securities Administrators regulatory sandbox, an initiative introduced earlier this year aimed at supporting fintech businesses which intend to offer innovative products, services and applications in Canada. It is presumed that after consultation with the securities commissions in Québec, Ontario and elsewhere, Impak decided to treat MPK Tokens as securities and offer them to the public pursuant to prospectus exemptions.

The regulators stated that, in the absence of discretionary relief, the “first trade” of MPK Tokens, being the use of MPK Tokens for payment to a merchant, would be a “distribution” requiring the filing of a prospectus or reliance on an exemption. The regulators then granted discretionary relief from the dealer registration requirement and the prospectus requirement in respect of the first trades of MPK Tokens, provided that Impak:

  • conduct know-your-client and suitability reviews and verify accredited and eligible investor status
  • not provide investment advice
  • deal fairly, honestly and in good faith
  • establish policies and procedures to manage the risks of its business, including cybersecurity and conflicts of interest


The treatment of MPK Tokens as securities has serious implications for Impak including the cost of preparing a form compliant offering memorandum, filings and related fees payable to the securities commissions, conducting KYC and suitability reviews, and the preparation of audited financial statements on an annual basis.

Canadian companies considering ICOs should read the Impak decision carefully and keep an eye out for any further direction on ICOs provided by the regulators in order to reduce the risk of non-compliant offerings.

For additional commentary on the Impak decision, please refer to our corresponding Legal Update.

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Activists knocking on the door

The Canadian Real Estate sector may be in for a shake-up. Reuters recently reported (here) that activists may be eyeing real estate investment trusts (REITs), and their approximate combined C$67 billion in market capitalization, as ripe targets for activist campaigns in light of: attractive prices, vulnerability in the market based on uncertainty surrounding the effects of interest rate shifts, and potential opportunities to unlock unrealized value.

In particular, with the Canadian REIT index down approximately 7% since August 2016, activists may ramp up efforts to target REITs for activist campaigns. Recent interest rate hikes may have the further effect of exacerbating vulnerability in the real estate sector and inciting further activist initiatives. Reuters attributes the appeal of REITs, as targets for activists, as a function of:

  • perceived corporate governance issues (including high management and board compensation);
  • underperforming stock results; and
  • recent successes in the REIT space for activist campaigns.

The potential uptick in activism may manifest in a number of ways. Capturing value in REITs that trade at a discount may be achieved by activists through various channels. By working constructively behind the scenes to generate value-enhancing solutions, activists may seek to close the gap between market price and net asset value by: boosting returns through asset sales, recapitalizing and consolidating, requisitioning shareholder meetings, or publicly announcing intentions to nominate alternative directors.

In Kingsdale Advisors’ annual Proxy Season Review for 2017, which we recently reported on (here), Kingsdale reported that the most active sector for proxy fights was the materials sector, followed by information technology and real estate. Shifting tides appear to be on the horizon for this historically robust corner of the Canadian economy. Further significant activity may be on the way.

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

Trends and predictions in Canadian proxy contests

Kingsdale Advisors (Kingsdale) recently released its annual Proxy Season Review for 2017. The report examines trends observed in 2017 and provides analysis on what the future may hold for Canadian proxy contests. The report also outlines strategic recommendations for Canadian companies.

Looking back – trends from 2017

  • Shareholder activism: alive and well. Kingsdale reports that despite a drop-off in the number of public campaigns so far in 2017 (21) as compared to 2015 (55) and 2016 (33), the number of public campaigns to-date demonstrates the continued prevalence of activism in Canada with respect to public companies. The report further notes that despite fewer public proxy fights this year, 70% of fights were won by activists with respect to some or all objectives. The success rate in 2016 was just 33%, down from 55% in 2015. Kingsdale attributes the increased levels of success to the following:
    • First, the increased scrutiny and selectiveness of activists at the front end before launching into activism;
    • Second, proxy advisors are more willing to endorse properly structured activist campaigns with positive voting recommendations; and
    • Third, activists may be more willing to accept a partial win when stock prices are up.
  • Compensation: Proxy Advisor scrutiny on the rise. This year Kingsdale tracked a record number of ‘against’ say-on-pay recommendations (18 from ISS and 12 from Glass Lewis). Of the 18 companies that received an ‘against’ recommendation by ISS, just four failed their votes. Kingsdale further noted that 2017 yielded the highest number of companies failing to reach the 75% ISS threshold for support. Kingsdale attributes this increase to two factors: an indication of shareholders’ increased activeness on pay issues, and the increase in total number of ISS recommendations. Kingsdale prescribes more board diligence as the primary means of addressing this uptick, to combat potential compensation controversies before they surface.
  • Key Governance Developments. Some key governance developments identified by Kingsdale include:
    • The emergence of virtual AGMs. Virtual AGMs have been taking place in the U.S. since 2009. However, they have been almost non-existent in Canada. ISS has announced that it is currently soliciting feedback on the use of virtual meetings as part of its 2018 policy survey;
    • The TSX released additional guidance regarding majority voting and advance notice policies for TSX-listed companies. According to Kingsdale, the TSX belief that current proxy advisor guidelines for the notification periods are acceptable, as they relate to advance notice, is particularly noteworthy. While the TSX noted several provisions that it considers inconsistent with advance notice policy objectives, Kingsdale expects these concerns to be formally reflected in the advance notice provision guidelines of ISS in the coming year; and
    • In light of recent proxy access proposals, Kingsdale advises that issuers should expect to receive proxy access proposals in the future.
  • What chilling effect? Despite widespread anticipation that the adoption of the new hostile takeover regime signalled the beginning of the end, seven hostile bids were launched since the rules came into effect on May 9, 2016. This represents the same number of hostile bids launched in 2014 and one more than the total number launched in 2015. The number of hostile bids has remained constant but the tactics employed by such bids have changed. Some keys to success under the new rules include: potential bidders approaching targets with win-win value propositions, entering hostile bid situations with larger numbers of shares locked up in advance and making cash offers.

Issues on the Horizon

Looking ahead, Kingsdale identifies several issues on the horizon for public companies:

  • Environmental, social and governance issues in the limelight. Environmental, social and governance (ESG) issues are increasingly on the radar of investors and ESG considerations can often drive investment decisions. Kingsdale warns that, given ESG trends, issuers should brace for increased demand of enhanced disclosure. Investors are increasingly confident that long-term sustainability can co-exist with long-term results. Issuers should expect more scrutiny on ESG issues from investors moving forward.
  • The Active Passive investor. Activist action need not necessarily be catalyzed by traditional short-term activists. Kingsdale notes that passive investors can no longer be considered passive when it comes to governance and voting and points to the increasing trend of withhold votes against directors on S&P/TSX Composite companies as a likely indicator that more index funds are willing to vote against directors on key governance issues. Institutional investors are directing more resources into building internal governance teams and actively engaging the companies they own to incite higher standards of corporate governance and transparency in reporting as a means of helping to create value.


The report closes with Kingsdale’s advice for the coming year, and emphasizes two points in particular:

  • Evolving role of proxy advisors. Kingsdale alerts issuers to the constantly evolving role of proxy advisors. In particular, Kingsdale notes that proxy advisors have been tightening their policies. In turn, this impacts the outcome of contested meetings, standard annual meetings and transactional meetings. Management should take note and spend time with governance advisors to anticipate proxy advisors’ concerns. Kingsdale predicts that the role of proxy advisors will continue to grow, particularly in respect of the importance of proxy advisors’ vote recommendations.
  • Friendly deals: a relic of time gone by. Kingsdale reports that straightforward friendly deals are a thing of the past. The routine merger or plan of arrangement now comes with increased risks and friendly deals are no longer the sure thing they once were. The increase in shareholder intervention in transactional matters is demonstrative. To ensure deals are more resilient, boards should know their shareholder base and the valuations put on the business. Another key tool to keep in the toolbox of boards is voting lock-ups. Should an activist emerge, the board should resort to a previously established contingency plan.

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

Defamation lawsuits as a defence to shareholder activism

Activist investors engaged in proxy fights typically mount aggressive public relations campaigns in order to undermine shareholder confidence in a target company’s performance and leadership, whether through social media, online forums or by using the more traditional PR channels. In response, target companies have turned to a number of defensive measures, many of which have been previously discussed on this blog. As part of their proxy defence playbooks, target companies may threaten or actively pursue legal action, such as by filing complaints with securities regulators or by suing for defamation.

Naturally, the decision to commence legal action must take into account a broad set of contextual factors and must not be made rashly—in many cases the potential risks associated with litigation may far outweigh any possible benefit. This is particularly true where a protracted defamation lawsuit may result in the airing of the company’s dirty laundry, or where management wants to resolve the issue quickly and discretely. Despite these risks, legal action may nonetheless be worthwhile, especially where management is confident in its position and does not anticipate a quick settlement of the issues. Not only does legal action increase the financial stakes for the activist investor, but it also provides management with another venue to tell their own side of the story.

So, what should target companies watch for when weighing the benefits and limitations of bringing a claim for defamation, and how can activist investors protect themselves from the threat of this type of legal action?

On the part of management, careful consideration must be given to factors including the probability of success in court, the reputational consequences of bringing legal action, the likelihood of embarrassing revelations being made public, and how legal action feeds into the broader defence strategy. In addition, Ontario and Quebec have recently adopted anti-SLAPP (which stands for ‘Strategic Litigation Against Public Participation’) legislation; a development that only adds to the complexity of this decision-making process. These statutes, which aim to prevent certain interest groups (typically large companies) from using strategic lawsuits as a weapon to silence or punish their detractors for communications made in the public interest, may be used by activist investors to challenge management defamation lawsuits. At this point, no activist investor has successfully used Canadian anti-SLAPP legislation to bar a defamation suit. However, target companies would be well-advised to keep a close eye on the future development of case law (such as the ongoing dispute in Thompson v. Cohodes, 2017 ONSC 2590).

For activist investors, the most important precaution to take is to carefully vet all communications before their public release. While the complexity of Anglo-Canadian law on defamation means that a full-blown discussion of the issues is not possible here, there are key points that activist investors should keep in mind. Perhaps most essential is that intent is irrelevant. The courts may find a statement to be defamatory even in the absence of any ill-will on part of the utterer. Activists should also be aware of the most common defence to a claim for defamation, namely the truth of the statement. Wherever an utterer can show their statement of fact to be substantially true, the plaintiff’s claim fails. Finally, activists should be careful to frame any comments as opinion based in fact and not as statements of fact. This may provide the activist with recourse to another commonly used defence to a defamation claim—the defence of ‘fair comment’, which protects utterers from commenting on matters of public interest.

There is no doubt that the competition for shareholder support will often lead to tense exchanges between target companies and their detractors, and that in the midst of these fights it can become difficult for either side to take the necessary precautions. But ultimately, the ability of a party to remain composed and to make well thought-out decisions with the help of its advisors will allow it to avoid becoming a party to costly litigation that is detrimental to its proxy fight strategy.

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The author would like to thank Felix Moser-Boehm, summer student, for his assistance in preparing this post.