Outlook for 2022 proxy season
Andrew Burke, Colleen Keyes, Gavin Stuttard and David Slipp
As clients prepare for the upcoming proxy season, COVID-19 continues to impact our business and personal lives. Consequently, companies may need or decide to hold shareholder meetings in spring 2022 in a wholly-virtual or in-person/teleconference hybrid format, similar to last year. Stewart McKelvey’s guide to virtual shareholder meetings outlines the key considerations.
In preparing for the 2022 proxy season, clients should be aware of some of the regulatory developments and institutional investor guidance that are likely to impact disclosure to, and interactions with, shareholders. This update highlights what is new in the 2022 proxy season and other pending developments in relevant securities regulation.
What’s new in institutional investor commentary?
Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), two companies that provide guidance to institutional investors on how to vote at shareholders’ meetings of publicly-traded companies, have each released updates to their Canadian guidelines for the 2022 proxy season.
Both sets of guidelines focus on several key areas including board gender diversity and environmental and social governance (“ESG”) disclosures and related matters. This year, Glass Lewis is also expanding its policies relating to unequal voting classes and small committees. Companies, especially those with a significant percentage of their shares held by institutional shareholders, should review and consider these updates as they plan for their upcoming annual general meetings.
Board gender diversity
Both ISS and Glass Lewis continue to recommend that votes be withheld from the chair of the nominating committee at companies where gender representation is deemed too low. For S&P/ TSX Composite index companies, ISS will recommend withholding votes where (i) the board is not comprised of at least 30% women and (ii) the company has not disclosed a formal gender diversity policy, or where such policy does not reflect their commitment to achieve at least 30% women on the board prior to the next annual general meeting .
In respect of companies that are TSX listed but not on the S&P/TSX Composite index, ISS will recommend withholding votes from the chair of the nominating committee if the company has not disclosed a formal written gender diversity policy and there are no women on the board. Newly public companies, companies that have transitioned from the TSXV within the past year, and companies with fewer than five directors, will be exempt from this policy.
Starting this year, Glass Lewis has expanded its gender diversity policy to include all “gender diverse” persons, being women and persons that identify with a gender other than male or female. Glass Lewis will recommend that votes be withheld for the chair of the nominating committee of a company if there are fewer than two gender diverse directors and that that votes be withheld for the entire nominating committee of a board with no gender diverse director. Boards with fewer than two gender diverse directors will be flagged as a concern. Glass Lewis will require companies listed outside of the TSX and/or boards with six or fewer directors to have at least one gender diverse director before it recommends supporting the chair of the nominating committee.
Glass Lewis confirms that it will continue to review disclosure of diversity considerations, targets, and timelines when determining recommendations, and may refrain from recommending that shareholders withhold votes if there is sufficient rationale or disclosure on plans to address lack of gender diversity.
ESG and egregious actions
Glass Lewis is continuing to raise its standards on disclosure relating to board-level oversight of ESG issues. Last year, Glass Lewis began recommending shareholders vote against the chair of a governance committee of an S&P/TSX 60 company if its disclosure did not address how the board approaches ESG issues. This year, Glass Lewis will expand that policy and note a lack of ESG disclosure as a concern for S&P/TSX Completion index companies. Starting in 2023, Glass Lewis will generally recommend that votes be withheld against the chair of the governance committee of companies in the S&P/TSX Completion index who fail to provide explicit disclosure concerning the board’s role in overseeing ESG issues.
ISS’s ESG policy is more lenient, assessing companies (and ESG proposals) on a case-by-case basis, considering industry practice, adverse legal judgments or settlement, and large or serial fines or sanctions from regulatory bodies.
In addition, ISS continues to recommend withholding votes from directors under extraordinary situations arising due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities, failure to replace management as appropriate and egregious actions related to a director’s service on other boards that raise doubt about the director’s ability to serve on the company’s board.
Unequal voting rights
In its 2022 guidance, Glass Lewis has also specified that it will now recommend that votes be withheld from the chair of the governance committee of a company with a multi-class share structure and unequal voting rights unless the company has disclosed a reasonable plan to phase out such unequal rights. Glass Lewis takes the position that a reasonable plan to equalize voting rights would generally take no longer than seven years.
Size of key committees
Glass Lewis defines a company’s “key committees” as its audit, compensation and nominating and/or governance committees. Accordingly, beginning in 2022, it will recommend that shareholders vote against the chair of any key committee if that committee consists of two or fewer directors. This policy will apply to all issuers on any Canadian stock exchange.
ISS does not have a published policy on committee size, but does consider the size of the board as whole in the context of the size and operations of the issuer to ensure proper governance and appropriate diverse representation.
What’s new from securities commissions?
Guidance on voluntary non-GAAP financial disclosure
On August 25, 2021, National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (“New Rule”) came into effect across the country. The New Rule imposes additional obligations on companies in Canada who disclose financial measures that do not conform to Canadian generally accepted accounting principles (“GAAP”) in their continuous disclosure documents.
Non-GAAP financial measures are historical data and forward-looking projections that either exclude elements of conventional GAAP calculations or include components that the most directly comparable GAAP measures do not. They cannot be included in the issuer’s primary financial statements (which include its statement of financial position and statement of cash flows).
The New Rule does not limit any particular non-GAAP financial measures or impose restrictions on specific industry segments, but instead formalizes and compiles previous staff guidance regarding its inclusion in documents that are intended to be, or are reasonably likely to be, made available to the public.
The New Rule is largely consistent with past guidance provided by the Canadian Securities Administrators (“CSA”), so many companies will only have to make small adjustments to their current disclosure patterns. However, with the formalization of these principals into a national instrument, companies should strictly adhere to the provisions of the New Rule to ensure they remain on-side of their continuous disclosure obligations going forward.
Exemption for well-known seasoned issuers from certain prospectus requirements
On December 6, 2021, the CSA published temporary exemptions from certain base shelf prospectus requirements for qualifying well-known seasoned issuers (“WKSIs”) through blanket orders issued by the securities regulator in each Canadian jurisdiction. The exemptions are intended to reduce the regulatory burden on WKSIs and permit these companies to file a final base shelf prospectus without first filing a preliminary prospectus for review by the company’s principal regulator.
In order to qualify as a WKSI, a company must have either (i) an outstanding public float equal to or greater than $500,000,000, or (ii) distributed at least $1,000,000,000 of non-convertible securities under a prospectus for cash in the last three years.
A company’s public float is determined in accordance with National Instrument 71-101 – The Multijurisdictional Disclosure System and is equal to the aggregate market value of the securities of the company held by non-affiliated persons, calculated by multiplying the number of such securities by the market price.
Narrowing of prospectus exemptions and registration requirements for syndicated mortgages
Since July 1, 2021, all jurisdictions in Canada have implemented changes to National Instrument 45-106 – Prospectus Exemptions and National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (together, the “Amended Rules”) related to the distribution of syndicated mortgages.
Under the Amended Rules, a syndicated mortgage is a mortgage in which two or more persons participate, directly or indirectly, as a lender in the debt obligation that is secured by the mortgage. This broad definition extends beyond conventional syndicated mortgages used for the purchase of land, and can apply to other financing transactions where there is a mortgage security being granted by the borrower as part of a broader security package.
Prior to the changes to the Amended Rules, borrowers could avoid prospectus requirements when distributing syndicated mortgages by relying on an exemption for mortgages or the private issuer exemption. Some provinces allowed brokers to avoid the registration requirements if they were licensed under provincial mortgage broker legislation. These exemptions are now no longer available for syndicated mortgages under the Amended Rules.
The Amended Rules will leave borrowers under syndicated mortgages with the options of relying on one of the accredited investor exemptions, the offering memorandum exemption or the minimum amount investment exemption as the most likely prospectus exemptions applicable when distributing a syndicated mortgage. For those choosing to rely on the offering memorandum exemption, the Amended Rules require newly prescribed disclosures specific to syndicated mortgages and the value of the real property, including certification by a qualified appraiser independent of the borrower.
Many, but not all, of the securities regulators across Canada have introduced exemptions to the Amended Rules for qualifying syndicated mortgages made by licenced mortgage brokers and the distribution of syndicated mortgages to permitted clients through licensed mortgage brokers.
What’s on the horizon for securities regulation?
Proposed changes to annual and interim disclosure obligations
Last year, the CSA solicited feedback on proposed changes to non-investment fund reporting issuers’ annual and interim financial statements, management discussion and analysis (“MD&A”), and where applicable, the annual information form (“AIF”). These proposed changes are intended to reduce duplication between these forms and consolidate certain annual/interim requirements into a new type of disclosure document: the annual disclosure statement and the interim disclosure statement, respectively. The comment period for the proposed changes ended on September 17, 2021 and the CSA is now in the process of reviewing and considering the comments and proposed changes it has received. Stewart McKelvey will provide further details on this development as and when available.
Proposed regulation of climate-related disclosure
On October 18, 2021, the CSA published and requested comments on a new proposed national instrument: National Instrument 51-107 – Disclosure of Climate-related Matters. The introduction of this instrument recognizes that focus on climate-related issues has grown in recent years both in Canada and internationally. The CSA aims to provide for consistent, comparable and decision-useful information for market participants when considering how climate issues will influence their investments. These new disclosure requirements are intended to improve access to global markets by aligning Canadian practices with other countries, assist investors to make informed decisions, facilitate an “equal playing-field” through comparable and consistent disclosure, and reduce costs and market fragmentation in respect of these disclosures. This rule is not expected to come into force prior to December 31, 2022 and will be phased-in over one year for non-venture issuers and over three years for venture issuers. The comment period for the proposed changes was scheduled to end on February 16, 2022. Stewart McKelvey will provide further details on this development as and when available.
This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Securities group.
Click here to subscribe to Stewart McKelvey Thought Leadership.