With the 2015 Proxy Season close at hand, Glass, Lewis & Co., LLC (Glass Lewis) and Institutional Shareholder Services Inc. (ISS) recently released their updated Canadian proxy voting guidelines. Changes and clarifications have been made to their guidelines in such areas as advance notice policies and by-laws, shareholder rights plans and majority voting.
Advance Notice Policies and By-Laws
An increasing number of public issuers have adopted advance notice by-laws as a means of preventing stealth proxy contests. We expect this trend to continue.
ISS and Glass Lewis will generally support advance notice policies or by-laws which do not unreasonably restrict the ability of dissident shareholders to nominate directors to the board or have an adverse effect on the nomination process that is outside the stated goals of the advance notice policy or by-law. In 2015, the following features may be viewed negatively by ISS and Glass Lewis:
- excessive maximum notice periods (ISS: now any maximum notice period; Glass Lewis: a 70-day limit);
- the policy or by-law does not provide for a new notice period when the annual meeting has been postponed or adjourned (Glass Lewis and ISS);
- the requirement that more information must be provided about a dissident nominee than is required for management nominees or than is necessary to fulfill the requirements for a dissident proxy circular (ISS); or
- the requirement that information provided by the dissident nominee need not be included in the issuer’s shareholder communications, such as the management information circular (ISS).
In addition, ISS will now withhold votes from individual directors, committee members or the entire board where a board of directors has adopted an advance notice policy or by-law which has not been included on the voting agenda at the next shareholder meeting.
Shareholder Rights Plans
The use and regulation of shareholder rights plans in Canada has been the subject of much discussion recently. Glass Lewis has indicated that it will generally support a “limited” poison pill to achieve a specific goal, such as the closing of an important merger if the rights plan has the following elements:
- a triggering threshold of not lower than 20%;
- the offer is not required to be all-cash;
- the offer is not required to stay open for more than 90 business days;
- the offeror is permitted to amend the terms of the offer or reduce the offer;
- there is no requirement for a fairness opinion;
- there is a low or no premium requirement; and
- shareholder approval is required for directors to amend material provisions of the plan.
As of June 30, 2014, uncontrolled TSX-listed issuers must now have majority voting policies for uncontested elections.
For uncontrolled companies listed on the TSX, Glass Lewis will now recommend withholding votes from all members of the company’s governance committee until majority voting has been adopted.
Former CEOs and “Independence”
Under ISS’ previous policy, a former CEO board-member would forever be classified as an “affiliated outside director”, regardless of how many years had passed since the director had stepped down from his or her CEO position. Recent shareholder-friendly changes in the Canadian landscape, such as majority voting and separating the positions of CEO and Chair, have given shareholders greater ability to curb practices that are against their interests.
Due to these changes, ISS has decided that a former CEO will generally be considered “independent” after a five-year cooling-off period has expired from their time as CEO. The former CEO will be classified as an independent director unless certain factors exist, such as being a founder of the company or his or her participation in related party transactions, that could reasonably call into question a director’s independence from management.
Private Placement Issuances
ISS has revised its guidelines regarding private placement issuances, indicating that it will take into account these general factors in determining whether to recommend a particular private placement:
- whether other resolutions are bundled with the issuance;
- whether the rationale for the private placement issuance is disclosed;
- dilution to existing shareholders’ position:
issuance that represents no more than 30 percent of the company’s outstanding shares on a non-diluted basis is considered generally acceptable;
- discount/premium in issuance price to the unaffected share price before the announcement of the private placement;
- market reaction: the market’s response to the proposed private placement since announcement; and
- other applicable factors, including conflict of interest, change in control/management, evaluation of other alternatives.
In addition, ISS has clarified that it will now generally vote to approve a private placement if it is likely the issuer will otherwise file for bankruptcy or the auditor or management has stated that the issuer will have going concern issues.
Article and By-Law Amendments
ISS will generally not support an article or by-law amendment that may negatively impact shareholders’ rights or diminish independent and effective board oversight, including an advance notice requirement that includes one or more requirements that could have a negative impact on the interests of shareholders and is outside the disclosed purpose of the requirement. This would suggest that a “voting pill” would not likely be supported by ISS.
Furthermore, ISS will generally not support amendments that grant the board the authority to alter a company’s authorized capital such as “blank cheque” preference shares.