This bulletin provides public companies with the information they need to prepare for the 2024 proxy season through a review of the following five areas of recent regulatory and disclosure developments:

  1. an overview of proxy voting policy guidelines for 2024 issued by Institutional Shareholder Services (ISS) and Glass, Lewis & Co. ("Glass Lewis");
  2. an update on changes to the Toronto Stock Exchange (TSX) and the Canadian Securities Exchange (CSE) policies and procedures;
  3. an outline of recent and upcoming securities law changes;
  4. a summary of corporate law amendments; and
  5. a discussion of significant U.S. Securities and Exchange Commission (SEC) developments.

Fasken's Capital Markets and Mergers & Acquisitions practice group is also hosting its annual Proxy Season Preview on January 10, 2024 addressing current topics on the minds of leaders of public companies, featuring discussions on: (i) business & human rights and preparing for reporting requirements; and (ii) climate change and climate disclosure. For more information, including how to attend, visit the event registration page.

An Update on Proxy Advisory Firm Voting Guidelines

In advance of the 2024 proxy season, Glass Lewis and Institutional Shareholder Services (ISS) have published their 2024 benchmark policy guidelines.1

Notable features of Glass Lewis' policies include changes to its guidelines in respect of: (i) board accountability for climate-related issues; (ii) human capital management; (iii) cyber risk oversight; (iv) interlocking directorships; (v) audit financial expert designation; (vi) clawback provisions; (vii) executive ownership guidelines; and (viii) proposals for equity awards for shareholders.

Moreover, Glass Lewis clarified its amendments to its existing policies, namely: (i) nominating and/or corporate governance committees; (ii) governance following an initial public offering (IPO), spin-off or direct listing; and (iii) non-Generally Accepted Accounting Principles (non-GAAP) to Generally Accepted Accounting Principles (GAAP) reconciliation.

Notable features of ISS' policies include updates in respect of: (i) the coming into effect of the board policy on diversity for meetings on or after February 1, 2024; (ii) compensation regarding individual grants for TSX-listed companies; (iii) equity-based compensation plans regarding non-employee director participation for TSX-listed companies; and (iv) equity-based compensation plans for venture companies.

Glass Lewis: 2024 Benchmark Policy Guidelines

Summary of Changes for 2024

Board Accountability for Climate-Related Issues

Glass Lewis believes that companies that experience material exposure to climate risk based on their own operations should provide the climate-related disclosure recommended by the Task Force on Climate-Related Financial Disclosures (TCFD).2 In addition, the board of directors of such companies should have explicit and clearly defined oversight responsibilities for climate-related issues. Starting in 2024, Glass Lewis will apply this policy to S&P TSX 60 companies with such material exposure to climate risk3 and companies where emissions or climate impacts, or stakeholder scrutiny, represent a financially material risk.

Glass Lewis may recommend that shareholders vote against directors or chairs of the board of directors (or committee charged with oversight of climate related issues or the governance committee, as applicable) where such disclosures are absent or significantly lacking, or where the company has not properly managed or mitigated material environmental or social risks to the actual or threatened detriment of shareholder value. Where there is no explicit board oversight in respect of a company's environmental and social issues, Glass Lewis may instead recommend that shareholders vote against members of the audit committee. In making these determinations, Glass Lewis will review the situation, its effect on shareholder value, as well as any corrective action or other response made by the company.

Human Capital Management

Glass Lewis has updated its guidelines to state that in egregious cases where a board has failed to respond to legitimate concerns within a company's human capital management practices, which includes labor practices, employee health and safety, and employee engagement, diversity, and inclusion, Glass Lewis may recommend that shareholders vote against the chair of the committee responsible for providing oversight of the company's environmental and/or social issues, the chair of the governance committee, or the chair of the board, as applicable.

Cyber Risk Oversight

Glass Lewis has broadened its cyber risk oversight policy to express its belief that in situations where a cyber-attack has materially impacted a company, shareholders can reasonably expect periodic updates regarding the company's ongoing efforts to resolve and remediate the impact of the attack. Glass Lewis may recommend that shareholders vote against appropriate directors if it is determined that the board's oversight, response or disclosures concerning cybersecurity-related issues are insufficient or not clearly outlined to shareholders.

Interlocking Directorships

Glass Lewis' policy on interlocking directorships has been expanded to specify its consideration of both public and private corporations. Previously the guidance was silent regarding to which corporations it applies. In instances of top executives of companies serving on each other's boards, Glass Lewis may recommend voting against the election of a director at a company in which they serve as a non-executive director. This poses conflict of interest issues that should be avoided to promote shareholder interests above all else. In addition, Glass Lewis now specifies that it evaluates other types of interlocking relationships on a case-by-case basis and reviews multiple board interlocks among non-insiders (i.e. multiple directors serving on the same boards at other companies) for evidence of a pattern of poor oversight.

Audit Financial Expert Designation

Glass Lewis has updated the criteria used to designate a director as an "audit financial expert" and at a minimum, audit committees should have one member with demonstrable audit experience. Specifically, its expectations for company disclosure now include such director's experience falling under one or more of the following categories:

  1. a chartered accountant;
  2. a certified public accountant;
  3. a former or current CFO of a public company or corporate controller of similar experience;
  4. a current or former partner of an audit company; or
  5. having similar demonstrably meaningful audit experience.

Additionally, Glass Lewis now considers the audit financial expert designation separately from financial skills in its skills matrix when make voting recommendations, which considers only generalized financial professional experience beyond accounting or audit-specific experience.

Clawback Provisions

Glass Lewis has revised its clawback provisions policy to acknowledge that excessive risk-taking may not always lead to financial restatements but can still harm shareholder value. Glass Lewis believes that effective clawback policies should equip companies with the power to recoup an executive's incentive compensation when an executive has made problematic decisions or taken problematic actions. The ability to recoup compensation should be available regardless of whether the termination of the executive's employment was with or without cause. Under these circumstances, the company should offer its justification to shareholders if it chooses not to recover compensation and disclose any alternative measures pursued instead, such as exercising negative discretion on future payments.

Executive Ownership Guidelines

To ensure that executives are acting in shareholders' best long-term interests, companies should disclose their executive ownership requirements in the compensation discussion and analysis section of their proxy circulars to explain how the various types of outstanding equity awards are included or excluded from the ownership level calculation. Glass Lewis will take issue with the inclusion of unearned performance based full value awards and/or unexercised stock options in determining whether executives have met such requirements, without sufficient rationale.

Proposals for Equity Awards for Shareholders

Glass Lewis has expanded its position on frontloaded awards to require shareholders, who are also recipients of the proposed frontloaded award, to either abstain from voting or to cast a non-vote. The rationale is that the vote of a large shareholder can materially affect the passage of the proposal. There are potential conflicts of interest when vote outcomes can be heavily influenced by the recipient of the award. A required abstention vote or non-vote for an equity award proposal in these situations can help to avoid such conflicts and will be positively viewed by Glass Lewis in making their recommendation. The structure, disclosure, dilution and provisions related to the individual award will also be assessed for their alignment with long-term shareholder interests.

Clarifying Amendments

Nominating and/or Corporate Governance Committees

Glass Lewis has separated the previous "Nominating and Corporate Governance Committee Performance" section into individual sections for "Nominating Committee Performance" and "Corporate Governance Committee Performance" to clarify its expectations for each committee in cases where they are not combined.

Governance Following an IPO, Spin-Off or Direct Listing

Glass Lewis has expanded its section on how it examines governance following an IPO, spin-off or direct listing. Glass Lewis notes that it generally refrains from issuing voting recommendations on the basis of corporate governance by providing a one-year grace period giving the company sufficient time to comply with all relevant regulatory requirements and to meet such corporate governance standards. However, Glass Lewis will review the terms of the applicable governing documents of companies listed within the past year in order to determine whether shareholder rights are being severely restricted indefinitely. In such cases, Glass Lewis may recommend that shareholders vote against members of the governance committee, or the board chair (in the absence of a governance committee), as boards that approve highly restrictive governing documents have demonstrated that they may subvert shareholder interests following the IPO.

Additionally, Glass Lewis has clarified that where a board implements a multi-class share structure in respect of an IPO, spin-off, or direct listing within the past year, Glass Lewis will generally recommend that shareholders vote against the chair of the governance committee chair or the most senior representative of the major shareholder up for election, if the board:

  1. did not also commit to submitting the multi-class structure to a shareholder vote at the company's first shareholder meeting following the IPO; or
  2. did not provide for a reasonable sunset of the multi-class structure (generally seven years or less).

Non-GAAP to GAAP Reconciliation

Glass Lewis' discussion of its approach to the use of non-GAAP measures in executive incentive programs has been expanded to highlight the necessity for thorough and transparent disclosure in proxy statements to help shareholders reconcile between non-GAAP results used for incentive payout determinations and reported GAAP results. The absence of such enhanced disclosure for significant adjustments will impact Glass Lewis' assessment of the quality of disclosure and factor into the overall recommendation.

ISS: Proxy Voting Guidelines Benchmark Policy Changes

Summary of Changes for 2024

Board Racial and Ethic Diversity

The main update to the ISS benchmark policy guidelines is the coming into effect of the board policy on diversity that was previously announced in 2022. For meetings on or after February 1, 2024 for companies in the S&P/TSX Composite Index (approximately 230 issuers) ISS will generally recommend a vote against or withhold vote from the chair of the nominating committee or chair of the committee designated with the responsibility of a nominating committee, or the chair of the board of directors if no nominating committee has been identified or no chair of such committee has been identified, where: (i) the board has no apparent racially or ethnically diverse members4; and (ii) the issuer has not provided a formal, publicly-disclosed written commitment to add at least one racially or ethnically diverse director at or prior to the next annual meeting. ISS will also evaluate on a case-by-case basis whether to recommend a vote against or withhold for additional directors at issuers that fail to meet the policy over two years or more.

Compensation and Equity-Based Compensation Plans (TSX-Listed Companies): Individual Grants and Non-Employee Director Participation

ISS has removed legacy language regarding a percentage limit related to non-executive directors ("NED") option grants (previously 0.25 percent to 1 percent of the outstanding shares), as it no longer reflects market practices. With respect to NED participation in equity compensation plans, the policy provides that the maximum annual individual NED limit "should not exceed $150,000 across all equity compensation plans in aggregate, of which no more than $100,000 of value may comprise stock options."

TSX-Listed Companies

ISS has also removed the legacy language regarding a percentage limit when analyzing an equity compensation plan proposal, as it no longer reflects market practices.

Equity-Based Compensation Plans (Venture Companies)

ISS has added the circumstance, for vote withhold for the continuing compensation committee members, when companies have adopted an equity plan without seeking shareholder approval at the annual general meeting following its adoption.

Updates From the TSX and CSE

TSX

Pricing of Public Offerings Standards

The TSX made amendments to Section 606 of its Company Manual, which regulates public offerings' pricing standards and circumstances where private placement rules (Section 607) apply to such offerings. The amendments, effective April 20, 2023, remove the previous list of broad factors considered in the TSX's decision-making process with respect to determining a bona fide public offering, particularly around offering price discounts and the related unwritten criteria. The amendments set out when the TSX will consider a prospectus offering to be a bona fide offering and when it will apply the private placement rules, including rules as to the maximum dilution and discount to share price that will be permitted without prior shareholder approval.

The TSX now considers "broadly marketed" offerings as offerings with: (i) at least 50 purchasers; or (ii) extensive exposure to Canadian investment dealers, to be bona fide. For a "broadly marketed" prospectus offering, where there is no insider participation, the TSX will generally accept the offering price of the securities regardless of the discount amount. In cases where there is insider participation in a "broadly marketed" prospectus offering: (i) if the offering price is equal to or less than a 15% discount to the closing price, the TSX will generally accept notice of the prospectus offering where insiders participate up to their respective pro rata interest and the TSX will apply its private placement rules to any portion of insider purchases exceeding their respective pro rata interest in the issuer; and (ii) where the offering price exceeds a 15% discount to the closing price, the TSX will apply its private placement rules to all insider purchases. Where a prospectus offering has not been broadly marketed, the TSX will apply the private placement provisions of the Company Manual to the offering.

The TSX also published Staff Notice 2023-0002 to provide guidance on pricing a prospectus offering or private placement where there has been recent disclosure of material information. In such cases, the standard five-day volume-weighted average price may not be appropriate, so the TSX will not include pre-dissemination trading in the calculation of market price. Instead, the TSX will typically expect market price to be assessed based on: (i) in a prospectus offering, the closing price of the most recently completed trading session; and (ii) in a private placement, the one-day volume-weighted average trading price, in both cases reflecting one clear trading session post-dissemination of the material information.

Guidance on Voting Agreements

On February 27, 2023, the TSX published Staff Notice 2023-0001 providing guidance in respect of voting agreements whereby a securityholder is required to vote, or cause to be voted, any voting securities that it holds, or over which it exercises control or direction as directed by management or in favour of one or more management proposals (a "Voting Agreement").

The TSX reviews Voting Agreements to assess their impact on an issuer's control. Material effects on control could arise when any holder or group influences a shareholder vote. The determination of whether a Voting Agreement materially affects control involves a factual analysis considering various issuer-specific factors. Transactions significantly impacting an issuer's control will result in requiring disinterested shareholder approval.

The TSX will generally accept a Voting Agreement if either: (i) the issuer has received disinterested shareholder approval for the Voting Agreement; or (ii) the Voting Agreement permits a covenanting shareholder not to take part in a shareholder vote. If any of the conditions are not met, the TSX will consider the below factors to ascertain whether the Voting Agreement would have a material effect on control of the issuer and require disinterested shareholder approval:

  1. the proposed term of the Voting Agreement;
  2. whether the Voting Agreement leads to a block which could affect the outcome of a vote;
  3. how the Voting Agreement is being entered into; and
  4. the effects to the covenanting shareholder for breaching the Voting Agreement.

Notwithstanding the foregoing, Voting Agreements that are typically not assessed by the TSX are those that are: (i) entered into by an issuer independent of a treasury issuance of listed or convertible securities to the covenanting shareholder or its affiliates; or (ii) not linked, directly or indirectly, to a transaction that is otherwise reviewable by TSX under Part V or Part VI of the Company Manual.

CSE

Amendments to the CSE Listing Policies

On April 3, 2023, significant amendments to each of the CSE listing policies came into force. Noteworthy amendments relevant to CSE listed issuers and issuers applying to be listed on the CSE include: (i) qualifications, requirements and financial reporting obligations for non-venture issuers that would apply to CSE listed issuers designated by the CSE as "NV Issuers"; (ii) requirements and provisions for listing special purpose acquisition companies; and (iii) additional corporate governance requirements for all CSE listed issuers, including shareholder approvals, and specific requirements related to shareholder rights plans and security-based compensation plans.

The amendments have implemented significant changes for listed issuers and issuers considering listing on the CSE. For further discussion, please see Amendments to the CSE Listing Policies.

Securities Law Updates

CSA Proposes Permanent Exemptions for Well-Known Seasoned Issuers

On September 21, 2023, the Canadian Securities Administrators (CSA) announced proposed amendments to National Instrument 44-102 Shelf Distributions ("NI 44-102") which are contained in CSA Notice and Request for Comment. The proposed amendments provide a permanent expedited shelf prospectus regime for well-known seasoned issuers ("WKSIs") in Canada, the benefits of which are aimed at reducing unnecessary regulatory burden for WKSIs and thereby fostering capital formation in the Canadian public markets. The public comment period expired on December 20, 2023.

Since January 4, 2022, WKSIs have been able to rely on a set of harmonized blanket orders5 that provided exemptions from certain base shelf prospectus filing requirements, mainly the requirement to file a preliminary base shelf prospectus. This provided WKSIs with a streamlined procedure to put a base shelf prospectus in place and have quicker access to capital markets. The securities commissions have had an opportunity to evaluate the appropriateness of the eligibility criteria and other conditions, consider feedback from various stakeholders and determine how best to implement a Canadian WKSI regime through these permanent rule amendments.

Summary of Proposed Amendments

While the proposed amendments generally mirror the rules of the existing blanket orders in place, the CSA has introduced the following notable changes in the proposed amendments:

  • The requirement to file and receive a receipt for a preliminary prospectus would not apply to a distribution under a WKSI base shelf prospectus. A receipt is instead deemed to be issued. In addition, instead of requiring the payment of fees that would otherwise be due on filing a preliminary short form prospectus, some jurisdictions may adopt specific fees for WKSI base shelf prospectus filings in parallel with the proposed amendments.
  • Upon the filing of or amendment to a WKSI base shelf prospectus in compliance with all requirements, a receipt would be deemed to be issued in all jurisdictions in Canada where the prospectus has been filed. This receipt is generally effective for a period of 37 months from the date of its deemed issuance, subject to the requirement for the issuer to reassess its qualification to use the WKSI regime annually.
  • The proposed amendments would contain an annual confirmation requirement. An issuer that has filed a WKSI base shelf prospectus would need to confirm whether it continues to qualify as a WKSI on an annual basis and evidence that fact by including a statement in its annual information form or by filing an amendment to its WKSI base shelf prospectus. If an issuer no longer qualifies as a WKSI, the issuer would be required to publicly announce that it will not distribute securities under a prospectus supplement to the WKSI base shelf prospectus and withdraw the WKSI base shelf prospectus.
  • Under the proposed amendments, an issuer's "qualifying public equity", which must be at least $500 million, is defined as the aggregate market value of the issuer's listed equity securities, excluding securities held by affiliates or reporting insiders of the issuer, and is calculated using the simple average of the daily closing price of the issuer's equity securities on a short form eligible exchange for each of the trading days on which there was a daily closing price for the 20 trading days preceding the date of calculation (which must be within 60 days of the date of filing the WKSI base shelf prospectus). The definition was refined to exclude securities held by "reporting insiders". The CSA believes that excluding securities held by reporting insiders from the calculation is appropriate and provides a better approximation of an issuer's qualifying public equity.
  • An issuer that files a WKSI base shelf prospectus must have been a reporting issuer in at least one jurisdiction in Canada for the previous three years. The proposed amendments increase the seasoning period to address the concern that an issuer that has been a reporting issuer for only 12 months may not have a sufficient continuous disclosure record, market following or history of participation in the capital markets to justify participation in the WKSI regime.

CSA Provides Update on Proposed Continuous Disclosure Reforms

The continuous disclosure reforms proposed by the CSA in May 2021 are, for now, on pause. On October 3, 2023, the CSA announced it had postponed the implementation of the reforms, originally scheduled for publication in September 2023 and entry into effect in December 2023. The reason is the CSA's intended parallel implementation of the continuous disclosure reforms with the modernized electronic delivery model, an initiative first announced in 2020. For further discussion, please see our bulletin, " Good Things Come to Those Who Wait: CSA Postpones Continuous Disclosure Reform to Dovetail With Modernized Delivery."

Listed Issuer Financing Exemption Guidance

On June 1, 2023, the CSA published Staff Notice 45-330 which provides answers to some of the 'frequently asked questions' on the listed issuer financing exemption (the "LIFE Exemption") adopted by all securities regulatory authorities in Canada in November 2022.6 The LIFE Exemption permits reporting issuers listed on a Canadian exchange to raise the greater of $5,000,000 or 10% of the issuer's market capitalization to a maximum total dollar amount of $10,000,000 in a 12-month period by distributing securities to investors without a prospectus.

The notice includes key issues and questions asked by market participants and the CSA's preliminary observations on offerings using the LIFE Exemption to date. Such findings include, among others:

  • Issuers that are in default of securities legislation requirements or issuers that are a reporting issuer but do not have listed equity securities currently trading on a Canadian exchange cannot use the LIFE Exemption.
  • The LIFE Exemption is not available in situations where an issuer lacks sufficient funds to continue operations and achieve its objectives or if an issuer does not reasonably expect to have available funds for a period of 12 months following the distribution.
  • An issuer can close an offering under the LIFE Exemption in multiple tranches, subject to the maximum amount that can be raised in a 12-month period. If the issuer needs to raise a minimum offering amount in order to have available funds to meet its business objectives and liquidity requirements for a period of 12 months, the issuer will need to raise this minimum offering amount in the first tranche closing.
  • Provided all the conditions of the LIFE Exemption are met, an issuer can use the exemption to distribute flow-through shares and charitable flow-through shares.
  • In the opinion of the CSA, the LIFE Exemption cannot be used to distribute broker warrants or issue securities for debt.
  • The LIFE Exemption could be used for a bought deal offering if it is conducted in such a way that the actual purchaser has all the rights contemplated under the exemption and will be named in the report of exempt distribution. In this case, the series of trades made to the actual purchaser would be viewed as a series of transactions incidental to a distribution and all treated as a single ongoing distribution. However, if the underwriter were to end up having to purchase any left-over securities, the expectation from the CSA is that distribution would instead be made using the underwriting exemption under section 2.33 of National Instrument 45-106 Prospectus Exemptions. In addition, the issuer and underwriter would have to make sure that any marketing of the offering complies with the conditions of the exemption so that no solicitations occur prior to the issuance and filing of the news release and filing of the completed offering document.

SEDAR+ Launch

The CSA transitioned from the current System for Electronic Document Analysis and Retrieval (SEDAR) platform to an all-new web-based platform called SEDAR+. The shift to SEDAR+ will be implemented in phases. The first phase occurred on July 25, 2023, which replaced a number of issuer-related filing systems, including SEDAR, the National Cease Trade Order Database, the Disciplined List, and certain filings currently made through the Ontario Securities Commission's (OSC) electronic filing portal and the British Columbia Securities Commission's eServices system. Future phases will address additional filing requirements applicable to reporting insiders (System for Electronic Disclosure by Insiders), registrants (National Registration Database and National Registration Search), regulated entities including exchanges and self-regulatory organizations, and derivatives market participants. There have been no updates from the CSA as to when these additional phases may be implemented.

CIRO – The New Self-Regulatory Organization of Canada

Effective January 1, 2023, Canada's investment regulatory bodies, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), amalgamated into a new all encompassing regulatory body. On June 1, 2023, the new self regulatory organization changed its name to the Canadian Investment Regulatory Organization (CIRO).

The purpose behind creating a single self-regulatory organization was to continue to deliver value for investors, regardless of where they live, how many assets they have or their level of investing sophistication, foster an innovative and competitive industry to ensure there are investment opportunities and value propositions for existing and evolving Canadian investor needs, make it easier for dealers and their advisors to serve Canadians, regardless of region, firm size or business model, reduce duplicative regulatory burden and complexity, particularly for those running separate IIROC and MFDA platforms, as well as those in Québec, and reduce barriers for current single-platform dealers looking to expand their business models.

CSA Revisits Short Selling in Canada

On November 16, 2023, the CSA and CIRO, released Staff Notice 23-332, which discussed the results and responses of its previously published Staff Notice 23-329 on December 8, 2022 to provide an overview of the existing regulatory landscape surrounding short selling, provide an update on current related initiatives and request public feedback on areas for regulatory consideration. The CSA and CIRO received 23 comment letters from a range of stakeholders and there was no consensus on the appropriate regulatory regime for short selling. Some commenters believed the current rules governing short selling were adequate and needed only minor amendments, if any, while others believed that more substantial amendments were needed. Only one commenter believed short selling should not be allowed. Several commenters urged regulators to consider the impact of the move to a T+1 settlement cycle next year on any regulatory initiatives.

The CSA advised that while no specific changes to regulatory provisions are being proposed at this time, staff will further review whether any changes may be appropriate in the Canadian context. CIRO is actively considering ways to clarify and support its existing requirement to have a reasonable expectation to settle a short sale trade on the settlement date. Subject to CIRO board approval, proposals are expected to be published for comment in early 2024. Furthermore, in early 2024, the CSA and CIRO plan to create a working group tasked to examine short selling issues within the Canadian market.

CSA Exemption Relating to Proxy Requirements for Uncontested Director Election

On January 31, 2023, the CSA released Coordinated Blanket Order 51-930 which provides an exemption for Canada Business Corporations Act ("CBCA") incorporated reporting issuers from National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102") proxy voting rules, specifically for uncontested director elections, following CBCA amendments effective August 31, 2022. Previously, NI 51-102 required issuers to specify that securities be voted "For" or "Withhold" in the form of proxy for an uncontested election of directors. The CBCA amendments required a "For" or "Against" choice for each nominee, mandating a majority "For" vote for election, causing confusion for affected reporting issuers. CBCA incorporated reporting issuers are exempt from the NI 51-102 requirement provided they comply with the CBCA amendments. The blanket order will cease to be effective on the earlier of the following: (i) July 31, 2024, unless extended by the CSA; and (ii) the effective date of an amendment to NI 51-102 that addresses substantially the same subject matter as the blanket order.

CSA Proposes to Broaden Diversity Disclosure Rules and Related Corporate Governance Guidelines

On April 13, 2023, the CSA proposed two diversity disclosure approaches, the first focusing on gender and the second encompassing broader diversity measures. This issue has divided securities regulators in various Canadian provinces and territories, with certain regions supporting the gender-focused approach while others endorse the broader approach. This divergence reflects the absence of a national securities regulator in Canada. The proposed changes aim to elicit substantial corporate governance disclosure from numerous Canadian public companies, focusing on board nomination, renewal processes, and diversity incorporation. The two approaches, termed "Form A/Policy A" and "Form B/Policy B," primarily differ in their diversity disclosure mandates, while aligning on board nomination and renewal disclosures. Form A emphasizes flexibility for issuers, focusing on diversity beyond women based on identified groups chosen by the issuer, while Form B mandates data reporting on specific designated groups, aligning more closely with existing CBCA rules. The proposals intend to equip investors with comprehensive information on board and executive diversity, with both forms emphasizing written policies (or if none, explain), objectives, and targets (or if none, explain) for maintaining diversity.

The public comment period, which ended on July 12, 2023, sought feedback on preferences between Form A and Form B, concerns about disclosure, challenges for CBCA issuers, and the mandate of data disclosure beyond women. The outcomes of this proposal could shape a uniform approach across Canada or potentially create fragmented disclosure regimes across jurisdictions. For more information please refer to our bulletin, "A Look Into the CSA's New Diversity Disclosure & Related Corporate Governance Proposals."

CSA Reports Annual Trends in Representation of Women on Boards

On October 5, 2023, the CSA published Multilateral Staff Notice 58-316 and reported the ninth consecutive year of a gradual increase in the proportion of women holding board seats at public companies in Canada. The report, summarizing the disclosures of 602 issuers, noted progress in women's representation on boards, albeit at a slow pace. Key findings include a 27% representation of women on boards (up from 24% the previous year), although women in executive roles like CEOs and CFOs have not seen significant increases. Notably, 89% of issuers have at least one woman on their board, and 8% have a woman as board chair. Additionally, 71% of issuers have a woman in an executive officer position. While changes are gradual, the disclosure requirements aim to increase transparency regarding the representation of women on boards and in executive officer positions, as well as the approach that issuers take in regard to such representation. These disclosure reviews build upon the two diversity disclosure approaches proposed by the CSA on April 13, 2023, as discussed above.

Corporate Law Updates

OBCA

Transparency Register

As of January 1, 2023, significant amendments to Ontario's Business Corporations Act ("OBCA") came into force and require many private corporations to maintain a register of individuals with significant control over the corporation. The CBCA requires such a register and all Canadian jurisdictions apart from Alberta, Yukon, the Northwest Territories and Nunavut require similar registers. For further discussion, please refer to our bulletin, "New Transparency Register Requirements for Ontario Private Corporations."

Virtual Shareholder Meetings

On October 1, 2023, amendments to the OBCA came into force, which in part replace the legislative framework implemented in response to the COVID-19 pandemic for virtual processes that expired on September 30, 2023. The amendments aim to codify the temporary virtual regime used during COVID-19 and harmonize meeting and record-keeping requirements for Ontario corporations.

The notable amendments are as follows:

  • Virtual meetings and virtual voting: The amendments enhance virtual processes including establishing that corporations governed by the OBCA may hold virtual or hybrid meetings unless the corporation's constating documents establish otherwise and provided it enables all persons entitled to attend the meeting to reasonably participate.
  • Notices and record-keeping: The amendments facilitate the increased sending of notices and other documents to directors, shareholders, members, and the corporation by electronic means when appropriate. Corporations may, but are not required to, store their records by electronic means. They may also facilitate the electronic and remote examination of records.

Since the onset of the pandemic, virtual shareholder meetings have become the norm, with many companies holding virtual-only meetings in the last several proxy seasons. Institutional shareholders, and proxy advisory firms, traditionally favour in-person or hybrid meetings as there is an advantage for in-person shareholder meetings, such as better shareholder engagement and participation.7 Despite the ability for public companies incorporated in Ontario to continue to host virtual-only meetings, as a best practice, shareholders should be consulted, and issuers should review relevant securities law disclosure requirements to ensure compliance.

CBCA

Transparency Register

Since June 2019, private corporations governed by the CBCA have been required to create and maintain a register of individuals with significant control (the "ISC Register"). The purpose of the ISC Register is to increase corporate transparency to assist with combatting tax evasion, money laundering and terrorist financing. On May 4, 2023, the federal government amended the regulations to provide additional exemptions to wholly-owned subsidiaries of public companies from maintaining an ISC Register and clarifying the rules on what constitutes 'reasonable steps' to ensure their ISC Registers are accurate, complete and up-to-date. For further discussion, please see our bulletin, "Much Ado About Not So Much – Federal Draft Regulations on Transparency Registers for CBCA Corporations."

The federal government also introduced new legislation that will create a federal register on individuals with significant control that will be searchable by the public. Presently, every private CBCA corporation must maintain and review at least annually an ISC Register disclosing all individuals with significant control over the corporation. The information in the ISC Register is currently only available to tax and police authorities, certain regulatory agencies, shareholders and creditors. As of January 22, 2024, private corporations will have to file the information contained in their ISC Register with Corporations Canada. In addition, once the legislation, which received royal assent on November 3, 2023, is proclaimed into force, the new federal register will be made available to the public. For each private CBCA corporation, members of the public will be able to obtain the information on an individual with significant control including their name, residential address, address for service, dates when the individual became or ceased to be an individual with significant control, and a description of how they are an individual with significant control, including, as applicable, a description of their interests and rights in respect of shares of the corporation. For further discussion, please see our bulletin, "Measure for Measure – Federal Government to Create New Public Transparency Register for Private Federal Business Corporations."

Important SEC Developments

Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies

On July 26, 2023, the SEC adopted Rule Number 33-11216 requiring the disclosure of material cybersecurity incidents and cybersecurity risk management, strategy, and governance by U.S. domestic and foreign private issuers (excluding Canadian issuers reporting under the multijurisdictional disclosure system). While these rules do not directly impact most Canadian issuers, they set a precedent for timely reporting and materiality assessments that could influence Canadian disclosure practices. In Canada, the CSA previously published Multilateral Staff Notice 51-347 – Disclosure of cyber security risks and incidents in 2017 which provided an overview of issuers' current practices regarding disclosure of cyber security issues, and guidance on proper disclosure of cyber security risks and actual cyber attacks going forward.8 The recent adoption of these amendments by the SEC may gradually shape Canadian approaches to cybersecurity disclosures.

The new SEC rules mandate prompt reporting of material cybersecurity incidents, outlining specific timelines and content for disclosures on Form 8-K. They will require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. An Item 1.05 Form 8-K will generally be due four business days after a registrant determines that a cybersecurity incident is material. The disclosure may be delayed if the United States Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety and notifies the SEC of such determination in writing.

The new rules also require disclosure in their annual report on Form 10-K, which will require registrants to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, as well as the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents. The rules will also require registrants to describe the board of directors' oversight of risks from cybersecurity threats and management's role and expertise in assessing and managing material risks from cybersecurity threats.

The final rules became effective on September 5, 2023, with the Form 10-K disclosures being due with annual reports for fiscal years ending on or after December 15, 2023 and the Form 8-K disclosures being required starting December 18, 2023. Smaller reporting companies will have an additional 180 days before they must begin providing the Form 8-K disclosure.

While Canadian issuers, including those under the multijurisdictional disclosure system, are not subject to these specific SEC rules, the global trend toward tighter cybersecurity disclosure and reporting could influence their approach to compliance and reporting standards. These regulations set a benchmark for transparency and might encourage Canadian issuers to align their practices more closely with these rules over time to meet investor and regulatory expectations.

Beneficial Ownership Reporting Rules

The previously proposed rules regarding beneficial ownership were adopted on October 10, 2023 to be effective February 5, 2024 under Rule Number 33-11253. The amendments update Regulation 13D-G to require market participants to provide more timely information on their positions to meet the needs of investors in today's financial markets.

Among other things, the amendments: (i) shorten the deadline for initial Schedule 13D filings from 10 days to five business days and require that Schedule 13D amendments be filed within two business days; (ii) generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (the filing deadlines differ based on the type of filer); (iii) clarify the Schedule 13D disclosure requirements with respect to derivative securities; and (iv) require that Schedule 13D and 13G filings be made using a structured, machine-readable data language. Further, the rules provide guidance regarding the current legal standard governing when two or more persons may be considered a group for the purposes of determining whether the beneficial ownership threshold has been met, as well as how, under the current beneficial ownership reporting rules, an investor's use of certain cash-settled derivative securities may result in the person being treated as a beneficial owner of the class of the reference equity securities. This change may prevent investors, particularly activist investors, from building hidden positions.

Canadian reporting issuers that are also U.S. reporting companies, including Canadian companies relying on the multijurisdictional disclosure system, are subject to both the Canadian and U.S. regimes and will be affected by these amendments. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024, while compliance with the structured data requirement for Schedules 13D and 13G will be required starting on December 18, 2024.

Perhaps spurred by the SEC's ongoing review of the beneficial ownership rules on derivatives, the CSA also included this as a review initiative in its 2022-2025 Business Plan released on June 27, 2022. The CSA stated it would review the early warning reporting regime to consider, among other things, the appropriate current scope of disclosure requirements concerning equity derivatives and the sufficiency of the current disclosure and timing requirements concerning acquirers' "plans and future intentions". It would also consider the use of equity derivatives under the take-over bid regime and the five percent market purchase rule for bidders while a take-over bid is outstanding.

SEC Approves Clawback Listing Standards for NYSE & NASDAQ

On October 26, 2022 the SEC implemented Section 10D of the Securities Exchange Act of 1934 directing securities exchanges to adopt listing standards that require all issuers who have any class of securities listed on a U.S. stock exchange to develop, implement and disclose clawback policies that provide for the recovery of erroneously awarded incentive-based compensation to current or former executive officers. On June 9, 2023, the SEC approved the NYSE's and Nasdaq's proposed clawback listing standards with NYSE listed and Nasdaq listed issuers being required to adopt compliant clawback policies no later than December 1, 2023.

The compensation clawback rules are triggered if the issuer is required to prepare an account restatement due to material non-compliance with financial reporting requirements. While the CSA does not require companies to have a clawback policy, Canadian companies listed on a U.S. stock exchange will have to satisfy the Canadian disclosure requirements outlined in Form 51-102F6 to disclose the details of their clawback policy9 and file a copy of the clawback policy as an exhibit to the SEC annual report on Form 10-K, Form 20-F or Form 40-F.

SEC and OSC on Artificial Intelligence

There have been growing concerns about the potential for artificial intelligence (AI) to concentrate risk within the financial system due to the reliance on a few foundational models, leading to possible market crashes. The SEC, and to a certain extent, the OSC, are working on initiatives with respect to capital markets and AI. In April 2023, the Investor Advisory Committee recommended the SEC establish an ethical AI framework, emphasizing bias testing in investment advisory firms' computer code for asset allocation recommendations. Proposed Rule Number 34-97990 released on July 26, 2023 aims to tackle conflicts of interest stemming from AI use in securities dealings by setting out a stringent process for evaluating, testing, and documenting the use of AI technologies, broadly defined to cover various predictive and guiding functions. Firms must eliminate or neutralize conflicts of interest arising from these technologies' interactions with investors and prioritize investor interests over their own. The proposal mandates regular testing, evaluation, and potential development of 'explainability' features within complex algorithms. The SEC sought comments on the proposed rules until October 10, 2023.

On October 10, 2023, the OSC published Artificial Intelligence in Capital Markets Exploring Use Cases in Ontario, a report delving into AI's role in the province's capital markets. Grant Vingoe, OSC CEO, emphasized AI's transformative potential and the need to understand its impact on various market processes and stakeholders. The report highlights AI's current use cases, benefits, and challenges, focusing on risk management, governance, and the potential for misuse. Vingoe stressed the importance of collaboration among regulators, market participants, and innovators to support responsible innovation. The OSC introduced OSC IdeaHub, inviting feedback from capital market participants on AI's influence, aiming for a proactive stance in technological innovation. Pat Chaukos, Director of the OSC Innovation Office, echoed the call for collaboration, emphasizing the importance of shaping fair, efficient, and future-ready AI innovation beneficial to investors and market participants.

On AI governance, the OSC found that as market participants increasingly rely on AI, they note that traditional governance approaches are insufficient in addressing its unique risks, such as lack of transparency, heavy reliance on different types of data, quality of data and bias in model selection. The development and adoption of AI governance frameworks that emphasize trusted AI principles and the explainablility of models, as well as the incorporation of AI risks into risk management frameworks, will hopefully promote broader responsible AI adoption in capital markets. The OSC noted that continued collaboration between federal and provincial governments, securities regulators and financial services regulators is needed to develop consistent regulation. Many market participants offer a wide array of services that fall under different regulatory bodies. Therefore, dialogue and collaboration are critical to facilitate responsible AI adoption in Canada.

Conclusion

As the landscape for corporate disclosure and governance continues to evolve in 2024, the beginning of the year serves as a useful time to take note of updated guidance published by proxy advisory firms, namely, ISS and Glass Lewis, as well as the evolving nature of amendments to corporate and securities laws in order to prepare for the upcoming 2024 proxy season.

Fotonotes

1. See the full policy changes for Glass Lewis at 2024 Benchmark Policy Guidelines and ISS at Proxy Voting Guidelines Benchmark Policy Changes for 2024.

2. See the TCFD final report at Recommendations of the Task Force on Climate-Related Financial Disclosures.

3. This generally includes companies in the following Sustainability Accounting Standards Board-defined industries: agricultural products, air freight & logistics, airlines, chemicals, construction materials, containers & packaging, cruise lines, electric utilities & power generators, food retailers & distributors, health care distributors, iron & steel producers, marine transportation, meat, poultry & dairy, metals & mining, non-alcoholic beverages, oil & gas, pulp & paper products, rail transportation, road transportation, semiconductors, and waste management.

4. ISS notes that aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity. Racial or ethnic diversity is defined by the Government of Canada in Employment Equity Act, S.C. 1995, c. 44 as: Aboriginal peoples (persons who are Indigenous, Inuit or Métis) and members of visible minorities (means persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).

5. Certain blanket orders for various provinces remain in effect until the effective date of an amendment to NI 44-102 that provides similar exemptions, while others have been extended to various set dates. For further discussion, see our bulletin, "Extension of the Streamlined Prospectus Process for Well-Known Seasoned Issuers."

6. For a discussion on the LIFE Exemption itself, see our bulletin, "Canadian Securities Administrators Create an Exemption to Allow Listed Companies to Issue Freely Tradable Securities Without a Prospectus."

7. See for example comments made by the CEO of the Canadian Coalition for Good Governance in The Globe & Mail on May 21, 2023, "Say no to virtual-only shareholder meetings – they let companies duck accountability", and by Glass Lewis in their 2024 Benchmark Policy Guidelines on page 56.

8. For further discussion, please see our bulletin, "Canadian Securities Regulators' Expectations Regarding Cybersecurity Disclosures."

9. Disclosure is required with respect to "policies and decisions about the adjustment or recovery of awards, earnings, payments, or payables if the performance goal or similar condition on which they are based is restated or adjusted to reduce the award, earning, payment, or payable".

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