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The 2014 AGM Season – A Look Ahead


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In this presentation, Dentons' Michael Stephens discusses the upcoming 2014 AGM Season with a focus on the following topics:
- Shareholder Activism,
- Characteristics of Canadian Shareholder Activism; and,
- Canadian Solutions to Shareholder Activism.

Published in: Business, Technology
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The 2014 AGM Season – A Look Ahead

  1. 1. The 2014 AGM Season – A Look Ahead Presented by Michael Stephens November 26, 2013
  2. 2. Shareholder Activism Ascendency of Canadian Shareholder Activism • shift in the corporate balance of power • shareholders are willing and able to seize the governance agenda • boards should stay alert to shareholders concerns and respond actively • boards must engage with dissidents – ignore them at your peril Canadian Pacific (watershed moment in Canadian proxy battles) • the largest proxy contest in Canadian history • Pershing (holding 14.2%) concerned about CP’s CEO and financial performance • CP board refused to engage and refused demand for two board seats • Pershing won proxy support for their proposal to change the CP board 2
  3. 3. Shareholder Activism Cont’d Ascendency of Canadian Shareholder Activism • Lessons from Canadian Pacific • Stay Tuned In - Boards must keep in touch with shareholder sentiment and be aware that shareholders are now fully conversant with tools and tactics required to effect change and accountability in the face of disappointing results • Stay Engaged - Boards can no longer simply decline to engage with dissidents • Stay Realistic - Past support from shareholders does not imply future support come what may 3
  4. 4. Characteristics of Canadian Shareholder Activism Targets • TSX-V companies are historically the primary targets of proxy contests • Since 2012 proxy season steady rise number of TSX-listed companies Dissidents • Past 3 years, over 50% of dissidents were non-institutional investors, including founders and existing or former management • In 2012, surge in number of foreign-based (non-Canadian) dissidents • Past 3 years, dissidents appear to have slight edge over management in achieving at least one board seat for a dissident 4
  5. 5. Characteristics of Canadian Shareholder Activism Cont’d Proxy Battle Process • Companies must be prepared for proxy contest at any time, even by ambush! • Historically few ambush contests in Canada • Dissidents generally prohibited from soliciting proxies unless an information circular is furnished to shareholders • Exemptions from “general rule” • Dissident soliciting proxies from 15 or fewer shareholders • Dissident may solicit proxies by public broadcast, speech or publication - rarely used • Dissident not required to file circular at least 21 days prior to meeting which allows dissident to tailor circular to respond to management circular – but sooner circular is filed, sooner dissident can solicit proxies • To avoid ambush, adopt an advance notice by-law or policy 5
  6. 6. Characteristics of Canadian Shareholder Activism Cont’d Role of Proxy Advisory Firms • Proxy advisory industry in Canada dominated by ISS and Glass Lewis influence on both institutional and retail investors • Proxy battles are on rise in Canada — from just five in 2003, to 14 in 2011, to 25 through September 2012 • Institutional investors look to recommendations of proxy advisory firms to form voting decisions • Approximately 32% of shares for companies listed on TSX are held by institutional investors • Canadian Securities Administrators concerned that proxy advisory firms have become de facto corporate governance standard setters 6
  7. 7. Characteristics of Canadian Shareholder Activism Cont’d Recent Relevant Changes to ISS Proxy Voting Policy • “Overboarding” • Overboarding added to the existing attendance criteria for TSX-listed issuers • ISS currently issues withhold recommendation on a director if attended fewer than 75% of board and committee meetings held within past year without valid reason and has shown pattern of low attendance in prior years • ISS considers director to be overboarded if sits on more than six boards or serves as CEO of public issuer and serves on two or boards • ISS estimated that roughly 25% of directors for all TSX-listed issuers were overboarded in 2012 • Board Responsiveness • Policy of board responsiveness to address a board’s failure to act on a majority of withheld votes from director nominees and failure to act on majority shareholder proposals • Canadian market expectations - give shareholders with ability to effect board change • ISS will generally give withhold recommendation to directors, committee members or even members of the entire board if 50% or more withhold votes in previous year’s board election for a director - not required to step down; no acceptable response to vote; and/or failure to address causes of vote 7
  8. 8. Canadian Solutions to Shareholder Activism Advance Notice Provisions • U.S. companies have advance notice by-law provisions - Canadian companies have historically have not • By June 2013, 518 Canadian companies had adopted or proposed adoption of advance notice provisions • Northern Minerals Investment Corp. v. Mundoro Capital Inc. – board policy adopted requiring advance notice of intention to make director nominations dissident sought declaration that such policy was unenforceable – but court concluded policy was reasonable and served valid purpose • Advance notice provisions should be in amendments to corporate by-laws or articles in order to be enforceable beyond question • In Canada, generally require notice be within 30 to 65 day period prior to meeting • Forces dissidents to “show their cards” early - deny ability to ambush 8
  9. 9. Canadian Solutions to Shareholder Activism Cont’d Advance Notice Policies of Proxy Advisory Firms • ISS • ISS established a Canadian policy on proposals to adopt advance notice provisions • ISS policy generally supportive of such proposals and commits ISS to providing vote recommendations on a case-by-case basis. • ISS will support proposals that provide a reasonable framework for shareholders to nominate directors • No more than 65 days and not less than 30 days to allow sufficient notice for company, regulatory, and shareholder review • 2014 Canadian proxy voting policy – board should have ability to waive provisions • Glass Lewis • Glass Lewis updated its Canadian proxy voting guidelines in respect of advance notice provisions • Glass Lewis will generally support policies not less than 30 and not more than 65 days prior to date meeting • Glass Lewis recognizes increased burden placed on small shareholders, but such costs are minimal compared with potential negative impact resulting from overhaul of company’s incumbent board 9
  10. 10. Canadian Solutions to Shareholder Activism Cont’d Enhanced Quorum By-Laws – A New Line of Defence? • Canadian Oil Sands Limited recently adopted an enhanced quorum by-law • Requirement that when composition of a majority of board is at stake, more than 50% of outstanding shares are involved in electing directors • ISS generally insists on at least 25% of shares for quorum - many Canadian companies have quorum as low as 10% • Change of whole board is drastic consequence - such fundamental impacts to business should reflect wishes of sizable number of shareholders • Cannot be used to finally defeat a change of majority of board - because a failure to meet quorum requirement would in maximum 65 day adjournment • 65 day adjournment should give company and dissident sufficient time to engage • Enhanced quorum can be used in conjunction with an advance notice by-law provision - complementary and serve similar function 10
  11. 11. Canadian Solutions to Shareholder Activism Cont’d Enhanced Quorum By-Laws – A New Line of Defence? Cont’d • Glass Lewis • Glass Lewis support the concept of enhanced quorum by-law • Glass Lewis agreed that enhanced quorum better protect shareholder interests • ISS • ISS 2014 Canadian proxy voting policy – now generally recommends a vote against an enhanced quorum by-law which has the effect of creating a higher voting threshold on any item • Even in circumstances where enhanced quorum by-law proposed is not designed to block potential votes in favour of a majority change of board, ISS specifically queries rationale in light of costs of rescheduled meetings and potential board entrenchment issues • Given power of proxy advisory firms recommendations – enhanced quorum bylaws may not survive their infancy 11
  12. 12. Thank You Michael Stephens Associate, Dentons Canada LLP 604.622.5179
  13. 13. The preceding presentation contains examples of the kinds of issues that corporations could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique. 13