In our inaugural Research Report: Canadian Governance Highlights from the 2013 Proxy Season, we broke the news about a massive wave of companies adopting advance notice provisions for director elections. Since then, the number of Canadian issuers who have adopted or proposed adoption of such provisions has more than doubled, and as of September 30, 2014, approximately 1242 issuers, or over 1/3 of all issuers listed on the TSX and TSX Venture Exchange, have adopted such provisions. Last year we noted that the vast majority of issuers adopting advance notice provisions were smaller issuers, mainly listed on the TSX Venture Exchange and predominantly engaged in the mining industry. While the median advance notice issuer still meets those characteristics, the number of larger issuers, including TSX issuers, who are adopting advance notice provisions continues to increase and a growing percentage are outside of the mining industry. At the same time as advance notice provisions have become increasingly common place, experience in dealing with such provisions has prompted institutional shareholders and proxy advisory firms to reconsider aspects of the standard formulation of advance notice provisions in Canada. Adoption of Advance Notice (#) # OF ADOPTERS 2014 (AS OF SEPT. 30, 2014) 2013 2012 & EARLIER 0 200 400 600 800 1000 1200 1400 53 868 1242Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 11 WHAT ARE ADVANCE NOTICE PROVISIONS? Advance notice provisions require shareholders to provide notice to the corporation if they wish to propose nominees to the board of directors. The length of notice varies, but shareholders are generally required to notify the corporation of proposed nominees 30 to 65 days prior to an annual meeting of shareholders. Where an issuer provides less than 50 days notice of the date of its annual shareholder meeting, the deadline for providing advance notice is 10 days following the date public notice of the meeting was given. The notice must include information about the nominator and the individual(s) being nominated that is required to be disclosed in a dissident proxy circular, although some formulations of advance notice provisions require that additional information also be provided. HOW ARE ADVANCE NOTICE PROVISIONS BEING ADOPTED? The vast majority of issuers have adopted or proposed advance notice provisions in the form of changes to their constating documents, with 47.3% adopting or proposing the provision as a standalone by-law or including it in the corporation’s general by-laws, 27.6% of issuers seeking approval of the provision in their articles, and 1.7% of issuers including an advance notice provision in their declaration of trust or trust indenture. Approximately 295 issuers, representing about 23.4% of those issuers which have adopted or proposed advance notice provisions, have chosen to do so by way of a board policy without amending their constating documents. This approach offers the advantage of providing maximum flexibility to the board of directors to make subsequent changes in line with changing Issuers Implementing as Policy Only versus Changes to Constating Documents (%) VIA CHANGE TO CONSTATING DOCUMENTS – BY-LAWS VIA CHANGE TO CONSTATING DOCUMENTS – ARTICLES VIA CHANGE TO CONSTATING DOCUMENTS – DECLARATION OF TRUST OR TRUST INDENTURE POLICY ONLY 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 2014 2013 2012 & earlier PERCENTAGE (%) YEAR 13.5 47.7 36.5 2.3 1.3 1.8 28 45.7 24.9 23.6 67.3 7.3 VIA CHANGE TO CONSTATING DOCUMENTS – BY-LAWS VIA CHANGE TO CONSTATING DOCUMENTS – ARTICLES VIA CHANGE TO CONSTATING DOCUMENTS – DECLARATION OF TRUST OR TRUST INDENTURE POLICY ONLY 0 10 20 30 40 50 60 70 80 90 100 2014 2013 2012 & EARLIER PERCENTAGE (%) YEAR 13.5 47.7 36.5 2.3 1.3 1.8 28 45.7 24.9 23.6 67.3 7.3Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 12 practice. In some cases, issuers have adopted this approach in order to take immediate action in an attempt to dissuade a dissident shareholder. In other cases, issuers may have taken this approach due to concerns about their ability to obtain the necessary level of approval where their constating documents require approval by a special majority of 66 2/3% of the shareholders voting. Support for adopting advance notice provisions as a board policy lies in the decision of the Supreme Court of British Columbia in Northern Minerals Investment Corp. v. Mundoro Capital Inc. In 2012, the court reached the somewhat surprising conclusion that under B.C. corporate law, a board of directors could, without shareholder approval, adopt a provision that adversely affects a shareholder’s right to nominate individuals to be considered for election as directors. The decision was not subsequently appealed and, as a result, the validity of advance notice provisions adopted in the form of a board policy without shareholder approval has not been considered by the B.C. Court of Appeal. The Mundoro decision was restricted to B.C. corporate law and it is not surprising that few issuers outside British Columbia have adopted advance notice provisions solely as a board policy. Of the 295 issuers which adopted or proposed advance notice provisions only as a board policy, 270 (or 91.5%) are governed by B.C. laws and only 25 (or 8.5%) are governed by the laws of another jurisdiction. The decision to adopt advance notice provisions solely as a board policy is also becoming less common, with just 13.5% of those advance notice issuers in 2014 choosing to take that approach, compared with 28% in 2013. Similarly, even where a trust indenture or declaration of trust provides broad authority to the board of trustees to amend it, few income trusts rely on such authority. Only one (4.5%) of the 22 income trusts which have adopted advance notice provisions have done so without first obtaining unitholder approval. Issuers implementing advance notice as only a policy incorporated in B.C. vs. other jurisdictions in Canada (%) In its 2015 Canadian proxy voting guideline updates, ISS stated that where an advance notice policy has been adopted by the board but has not been submitted to a shareholder vote at the next shareholder meeting, it will generally withhold from voting on individual directors, committee members or the entire board as appropriate. 91.5% B.C. 8.5% OTHEROver One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 13 CHARACTERISTICS OF ADVANCE NOTICE ISSUERS Adoption of advance notice provisions is still mostly a B.C. phenomenon. Nearly half (49%) of adopters, or 608 issuers, are incorporated in B.C. The remaining adopters are incorporated federally (200 issuers, or 16.1%), in Ontario (217 issuers, or 17.5%), in Alberta (176 issuers, or 14.2%), in Quebec (25 issuers, or 2%), in Yukon (8 issuers, or 0.6%), in New Brunswick (2 issuers, or 0.2%), in Manitoba (3 issuers, or 0.2%) and in Saskatchewan (3 issuers, or 0.2%). Advance Notice Adopters per Jurisdiction (#) 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50 0 0 50 100 150 200 250 300 350 400 450 500 550 600 650 ADVANCE NOTICE ISSUERS PER JURISDICTIONS ADVANCE NOTICE ISSUERS PER JURISDICTIONS (#) PERCENTAGE (%) 49% 608 176 217 25 16 200 14.2% 17.5% 16.1% 2% 1.3% ONTARIO QUÉBEC FEDERAL OTHER B.C. ALBERTA ONTARIO QUÉBEC FEDERAL OTHER B.C. ALBERTA PERCENTAGE (%) 608 176 217 25 16 200 ONTARIO QUÉBEC FEDERAL OTHER B.C. ALBERTA 608 176 217 25 16 200 ONTARIO QUÉBEC FEDERAL OTHER B.C. ALBERTA 50 100 150 200 250 300 350 400 450 500 550 600 650Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 14 Market Capitalization of Adopters (#) Market Capitalization of Adopters (%) 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 0 100 200 300 400 500 600 700 800 900 1000 0 100 200 300 400 500 600 700 800 900 1000 0 50 40 30 20 10 100 200 300 650 2012 2013 2014 & earlier YEAR 651 272 63 39 44 3 120 8 42 < $100 M $100 M - $1 B > $1 B YEAR MARKET CAPITALIZATION ADOPTERS (#) 0 100 200 300 400 500 600 700 800 900 1000 272 63 39 651 120 44 42 8/3 < $100 M $100 M - $1 B > $1 B 2014 2013 2012 & earlier 0 50 40 30 20 10 100 200 300 400 500 600 700 2014 (AS OF SEPT. 30, 2014) 2012 2013 & EARLIER YEAR 651 272 63 39 44 3 120 8 42 < $100 M $100 M - $1 B > $1 B MARKET CAPITALIZATION ADOPTERS (#) Adopters tend to be predominately smaller companies. Issuers having a market capitalization of less than $100 million represent 77.7% of adopters, 15.4% of adopters have a market capitalization between $100 million and $1 billion, and 6.9% have a market capitalization of over $1 billion. The proportion of larger issuers adopting advance notice provisions has increased year-over-year. Approximately 10.4% of issuers who adopted an advance notice provision in 2014 had a market capitalization of more than $1 billion, compared with about half that number in 2012 and 2013. Large cap issuers that have adopted or proposed advance notice provisions in 2014 include Suncor Energy Inc., Sun Life Financial Inc., Goldcorp Inc., Alimentation Couche-Tard Inc., and Encana Corporation. > $1 B 77.7% 15.4% 6.9% < $100 M $100 M - $1 B > $1 BOver One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 15 Approximately 63.8% of advance notice issuers are listed on the TSX Venture Exchange, while 31.4% are listed on the TSX. However, adoption by TSX listed companies is becoming more common. In 2014, 34.6% of issuers who adopted or proposed advance notice provisions were listed on the TSX, compared with only 30% in 2013. By September 30, 2014, approximately 26.3% of all TSX listed companies and 40.2% of all TSX Venture Exchange issuers had adopted or proposed an advance notice provision. TSX listed issuers are more likely to adopt advance notice provisions by amending their constating documents rather than simply adopting a board policy. Approximately 84.8% of TSX listed issuers which adopted or proposed advance notice provisions did so by amending their constating documents, compared to 72.1% of the TSX Venture Exchange advance notice issuers, which adopted or proposed to adopt advance notice provisions by amending their constating documents. TSX versus TSX Venture Exchange Issuers (%) TSX TSX VENTURE OTHER 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 2014 2013 2012 & EARLIER PERCENTAGE (%) YEAR 34.6 58.9 6.5 4 5.4 30 66 29.1 65.5 TSX TSX VENTURE OTHER 0 10 20 30 40 50 60 70 80 90 100 2014 2013 2012 & earlier PERCENTAGE (%) YEAR 34.6 58.9 6.5 4 5.4 30 66 29.1 65.5Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 16 The largest number of advance notice issuers is engaged in the mining industry representing 58.6% of advance notice issuers, followed by oil & gas issuers (15.6%), technology companies (4.7%), investment banking firms (4.1%), and biotechnology companies (2.9%). There are however, important differences between 2013 and 2014. A significant number of technology companies have adopted advance notice provisions and they represented 7.3% of issuers who adopted or proposed advance notice provisions in 2014, compared with 3.7% in 2013. Conversely, the number of mining companies who adopted or proposed advance notice provisions in 2014 decreased to 50.8% of advance notice issuers, down from 62.3% in 2013. Advance notice issuers are increasingly evident among a broader range of industries – with issuers from the renewable energy, chemicals and media industries, among others – adopting and proposing advance notice provisions in higher numbers year over year. 0 10 20 30 40 50 60 70 2013 2014 Mining Oil & Gas Technology Investment Banking Biotechnology Renewable EnergyChemicals Media Other 0 10 20 30 40 50 60 70 RENEWABLE ENERGY CHEMICALS MEDIA OTHER BIOTECHNOLOGY INVESTMENT BANKING TECHNOLOGY OIL & GAS MINING PERCENTAGE (%) 50.8 62.3 58.2 2014 (AS OF SEPT. 30, 2014) 2013 2012 & EARLIER 15.1 12.7 7.3 4.4 5.4 3.1 2.7 3.6 1 0.1 1 1.8 15.6 9.3 16.4 0.5 1.6 1.7 3.7 3.8 1.8 16 RENEWABLE ENERGY CHEMICALS MEDIA OTHER BIOTECHNOLOGY INVESTMENT BANKING TECHNOLOGY OIL & GAS MINING AVERAGE PERCENTAGE (%) 0 10 20 30 40 50 60 58.6 15.6 4.7 4.1 2.9 0.4 1.6 0.7 11.5 58.6% MINING 1.6% CHEMICALS 0.7% MEDIA 0.4% RENEWABLE ENERGY OIL & GAS 15.6% OTHER 11.5% TECHNOLOGY 4.7% INVESTMENT BANKING 4.1% BIOTECHNOLOGY 2.9% ADVANCE NOTICE ISSUER BY INDUSTRY (%) Industry Comparison: Advance Notice Issuers (%)Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 17 SUPPORT FOR ADVANCE NOTICE PROVISIONS For those issuers reporting on the level of shareholder support for their adoption of advance notice provisions, the average approval rate was 90.7%. Support has gradually declined each year, with the average approval rate dropping below the 90% threshold in 2014. However, there are a number of reasons to believe that the average level of support is actually lower. The reported approval rates came almost exclusively from TSX listed issuers, since TSX Venture Exchange issuers do not generally publicly file their voting results. But not all TSX issuers disclosed the percentage of support received, with about 1/5 of them opting instead to disclose only whether the measure had passed or failed. Of those issuers which disclosed percentage support levels, six companies failed to receive shareholder approval of their advance notice provision (Bioniche Life Sciences Inc., Equal Energy Ltd., Petrominerales Ltd., Stantec Inc., Baja Mining Corp., and PetroBakken Energy Ltd.), although two such companies (Baja Mining Corp. and Lightstream Resources Ltd. (formerly PetroBakken Energy Ltd.)) subsequently passed the resolution at their next shareholder meeting. In addition, at least five issuers, including Interfor Corporation (formerly International Forest Products Limited), Dominion Diamond Corporation, PolyMet Mining Corp., Callinan Royalties Corporation, and Vitran Corporation Inc., withdrew their advance notice provision resolution prior to the meeting. Shareholder experience with advance notice provisions in 2013 and 2014 resulted in institutional shareholders and proxy advisory firms re-examining the standard form of advance notice provision in Canada. Advance notice provisions are intended to provide protection against the possibility of potential directors being nominated at a shareholder meeting without prior notice to the company or its shareholders. While intended as a defensive measure, some companies have applied their advance notice provision offensively, for example, by delaying their shareholder meeting while insisting that shareholders comply with a notice deadline based on the original meeting date rather than the revised one. As a result, Level of Support for Advance Notice Provisions (%) AS OF SEPT. 30, 2014 0 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 2012 & EARLIER 2013 2014 89.4 91.3 93.5 AVERAGE PERCENTAGE (%) AS OF OCT. 31, 2014 0 10 20 30 40 50 60 70 80 90 100 2012 & EARLIER 2013 2014 89.4 91.3 93.5 AVERAGE PERCENTAGE (%)Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 18 Partners REIT had adopted its advance notice provision without seeking unitholder approval, relying on general authority under its Declaration of Trust. Justice Wilton-Siegel determined that in light of the finding that the notice was in compliance with the advance notice provision it was not necessary to consider Orange Capital’s argument that the failure to obtain unitholder approval invalidated the advance notice provision. Other aspects of advance notice provisions that ISS considers to be “potentially problematic and unsupportable by Canadian institutional shareholders” include: • a deadline for submitting director nominations that is less than 30 days before an annual meeting. In situations where the meeting is scheduled for a date that is less than 50 days after notice of the meeting is given, a deadline of 10 days after the first public announcement of the meeting is acceptable; • restrictions on the ability of the board of directors to waive the requirements of the advance notice provision; • the stipulation that as a pre-condition to a nominee’s eligibility they must agree in advance to comply with certain policies or guidelines of the company; • supplemental disclosure requirements that the nominator must comply with, and statements that the corporation is not required to disclose information received; and • other provisions that “have a negative impact on shareholders’ interests and deemed outside the purview of the stated purpose of the advance notice requirement.” Ontario Teachers’ Pension Plan, ISS and others began voting against advance notice provisions unless the issuer removed from their proposed advance notice provision language stating that in no event shall any adjournment or postponement of a meeting of shareholders or the announcement thereof commence a new time period for the giving of advance notice. We do not expect institutional shareholders or ISS to change their position, although in June 2014, Justice Wilton-Siegel overruled an issuer which on the basis of such language sought to deny a shareholder from submitting nominees. In Orange Capital, LLC v. Partners Real Estate Investment Trust, Orange Capital’s notice of its nominees for trustees of Partners REIT was rejected by Partners REIT as being untimely under their advance notice provision because it was not given sufficiently in advance of the originally scheduled date for the meeting. However, Justice Wilton-Siegel concluded that Orange Capital was in compliance with the advance notice provision stating: “Advance notice policies are intended to be a shield to protect shareholders or unitholders, as well as management, from ambush; they are not intended to be a sword in the hands of management to exclude nominations given on ample notice or to buy time to develop a strategy for defeating a dissident shareholder group.”Over One-Third of Canadian Listed Issuers Have Adopted Advance Notice Provisions Planning for 2015: A 2014 Canadian Proxy Season Retrospective 19 GOVERNANCE PRACTICES Advance notice provisions impact the ability of shareholders to decide on the composition of the board of the issuer in which they have invested. Given this potentially significant impact, the lack of transparency surrounding the adoption of such provisions by some issuers is surprising. We found a significant number of issuers that did not advise shareholders or unitholders of the adoption of an advance notice provision until many months later. In some cases, the first indication that there had been a change was disclosure in the proxy circular seeking shareholder or unitholder approval of the measure adopted many months earlier. In cases where issuers first adopted an advance notice provision in conjunction with a continuance, arrangement or amalgamation, the proxy circular did not always highlight the adoption of an advance notice provision as being a significant change for shareholders. We also noted that a number of issuers were not always clear on whether they were ratifying a policy or amending their constating documents, sometimes using the terms policy, by-laws or articles interchangeably. If the goal of advance notice provisions is to ensure that there is an orderly nomination process to enable shareholders and unitholders to make informed choices regarding nominees to the board, transparency and clarity regarding the adoption of advance notice provisions is necessary. CONCLUSION The speed at which corporate Canada decided to adopt advance notice provisions is extraordinary. They have gone from rare to commonplace with over 1/3 of Canadian exchange listed issuers now having adopted such provisions. While the rate of adoption slowed in 2014, the increase in the number of larger issuers and the diversity of their industries shows that this trend has not yet run its course.