Thursday February 13, 2014 was an important day for shareholder democracy in Canada. We know that athletes train many years in order to reach the Olympics, but the Canadian Coalition for Good Governance (CCGG) also has worked publicly and behind the scenes for many years to bring majority voting to Canada. Finally, last week the Toronto Stock Exchange (TSX) agreed to adopt a listing requirement effective June 30, 2014 pursuant to which TSX listed companies (other than those which are majority controlled) must adopt a majority voting policy which requires each director of a TSX listed issuer to be elected by a majority of the votes cast with respect to his or her election other than at contested meetings.
Posts Tagged ‘Canada’
This third annual edition of Governance Insights presents Davies’ analysis of the corporate governance practices of Canadian public companies over the course of 2013 and the trends and issues that influenced and shaped them.
We expect 2014 to be an active year for governance themes with greater calls for diversity on boards, a growing shareholder voice on “say on pay” resolutions, and further regulatory initiatives around proxy voting and the regulation of proxy advisory firms. We also anticipate continued discussion on shareholder activism and scrutiny of the tools and strategies used by issuers and shareholders.
While the number of women directors on U.S. public company boards has not risen dramatically since 2012, the issue of gender diversity on boards continued to gain momentum and global prominence over the last 12 months. Since we last discussed this issue, new legislative and non-governmental initiatives around the world have resulted in growing numbers of women directors and greater shareholder focus on board diversity and related disclosures. This issue is likely to become increasingly significant in 2014 and beyond, both in the United States and abroad.
Earlier this month, the European Commission moved a step closer to imposing a form of gender quota on major public companies in the European Union. Two committees of the European Parliament voted in favor of a proposal by the European Commission to require certain public companies to increase the representation of women on their boards. The proposed law applies only to large public companies, with no exceptions even for companies in which women compose less than 10 percent of the workforce, and, if adopted, provides for obligatory sanctions for failure to follow the proposed requirements.
The Managed Funds Association (“MFA”) and the Alternative Investment Management Association (“AIMA”) and have jointly submitted a comment letter with the Canadian Securities Administrators with respect to proposed changes to Canada’s block shareholder reporting regimes known in Canada as the Early Warning Reporting (“EWR”) system and the Alternative Monthly Reporting (“AMR”) system. The EWR and AMR systems are the Canadian equivalents to Schedule 13(d) and 13(g) disclosure in the United States.
The comment letter provides an extensive discussion of the importance of shareholder engagement and activist investing and the consequential benefits from such activity that accrue to all shareholders, as well as to target companies and the economy more generally. The letter submits that the CSA’s proposed tightening of Canada’s block shareholder reporting rules will stifle shareholder engagement and democracy and insulate incumbent managers from owners. The full text of the MFA and AIMA comment letter is available here: http://www.osc.gov.on.ca/documents/en/Securities-Category6-Comments/com_20130712_62-104_kaswellsj.pdf.
The changes to the EWR and AMRS regimes proposed by the CSA include:
As society increasingly faces governance challenges at all levels, there is a growing recognition of the need to take a longer term and more systemic view. Given the overwhelming incentives for myopic leadership (and action), our common law system—where courts respond to specific fact situations—may play a critical role. One avenue is likely through the concept of fiduciary duty—the legal obligation to act in the best interests of others.
The Supreme Court of Canada has been at the leading edge in developing a coherent view of the nature of fiduciary relationships and their consequences (largely through its recognition of a new class of fiduciary relationship between the Crown and Aboriginal peoples). The logic has permeated more broadly, with the Court focusing on the high degree of specialization and interdependence in society—where we increasingly rely on the services and expertise of strangers. This rise of “fiduciary society” is a classic non-zero-sum game, where we can all benefit but, if trust is eroded, the game fails (and everyone loses). Hence it is that values of trust and loyalty, shaped by “reasonable expectations”, have come to form the basis for the court’s broad standards.
This blog has repeatedly reported on the use of empty voting strategies at the Canadian telecommunications provider Telus Corporation. (see, e.g., here and here). Empty voting – that is, the strategic separation of economic risk from voting rights – has been considered by courts, regulators and academics over the past years in various forms. The latest account is the case of Canadian telecommunications company Telus, which became the target of US hedge fund Mason Capital. After a lengthy battle in various courtrooms, the dust has settled around this conflict. The Telus saga sheds new light on how empty voting structures are used by businesses in practice and supports calls for regulatory activity. In my recent paper, Empty Voting Revisited: The Telus Saga, I analyze the various instances of this important legal battle and develop regulatory implications.
About a year ago, we published A New Playbook for Global Securities Litigation and Regulation, in which we detailed dramatic changes in the global securities regulatory and litigation arena driven by various factors, including not only the financial crisis of 2007-2008, but also changes in tolerance in the United States to litigation brought by foreign investors against public companies listed on non-U.S. exchanges.
One year later, the regulatory environment continues to revamp with new rules being issued constantly in the United States to conform to the legislative mandates set forth in the Dodd Frank Act. The United Kingdom and European Union also seek to reinforce previous global initiatives to reform and strengthen the Pan-European financial markets.
What is more ever-present, however, is the marked increase in global enforcement activities by regulators in the United Kingdom, Canada, and the European Union, which are attempts to give teeth to the global financial reforms each jurisdiction felt necessary to potentially prevent a “repeat” of the financial crisis. This article seeks to address the increase in global securities enforcement activity and concludes that continued cooperation and coordination in enforcement activities will be required to seamlessly address the desire to strengthen global regulatory initiatives aimed at harmonizing and centralizing international securities regulation to create safer, more fundamentally sound financial markets for investors.
The Canadian Securities Administrators (CSA) recently proposed changes to Canada’s early warning regime for the disclosure of substantial blockholdings, including to lower the initial reporting trigger to 5% from 10%, to require disclosure no later than the opening of trading on the next business day, and to include equity equivalent derivatives and securities lending arrangements in the ownership calculation. Separately, the CSA proposed a new policy of greater flexibility as to rights plans, including in connection with unsolicited takeover bids. These proposals reflect sensible and necessary improvements to Canadian market regulation, to protect shareholders from the sorts of activist and takeover techniques and abuses that militate for changes in the U.S.’s Section 13(d) rules, and which, in the context of unsolicited takeover bids, the U.S. acceptance of rights plans have largely banished from the U.S.
Hedge funds first began engaging in the assertive form of shareholder activism for which they are renowned in the United States, and the United States is where hedge fund activism has become most firmly entrenched as part of the corporate governance landscape. Nevertheless, hedge fund activism is a global phenomenon, with companies in numerous countries being targeted. The United Kingdom, Japan and Canada are the three countries other than the U.S. where hedge fund activism has been most prevalent. The efforts of hedge fund activists in Britain and Japan have begun to capture the attention of academics (e.g. Iris Chiu, The Foundations and Anatomy of Shareholder Activism (2010) and John Buchanan, Dominic Chai and Simon Deakin, Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (2012)). In the case of Canada, however, little has been said about hedge fund activism in the academic literature. Correspondingly in “Hedge Fund Activism Canadian Style,” recently published on SSRN, I describe the emergence of hedge fund activism in Canada, identify the legal and economic variables that account for its rise to prominence and offer predictions on whether the trend will be sustained.
In our annual review of the topics shaping governance today, we consider the ideas that will trend in boardrooms across Canada for months and years ahead. The dominant theme is the shareholder. Directors need look no farther than the events of 2012 to convince them that shareholders have the power to seize the governance agenda.
We believe that the first response of boards to shareholder activism is changing dramatically in light of recent events. Our section on the Power and Influence of Canadian Shareholders looks at the experience of three issuers (Canadian Pacific, Research in Motion and Magna) confronted by shareholder demands for governance change. In each case, the shareholders used different tools to effect change, and in each case they were successful. Boards in 2013 will incorporate the lessons learned from these situations in considering their own response to shareholder concerns with their governance practices.