In the New Year the attention of many Canadian public companies will turn to the completion of their annual filings required under applicable Canadian securities legislation. And for most this will include preparation of their proxy materials for their AGMs. Canadian securities legislation requires Canadian public companies to include in their proxy materials prescribed disclosure about the company’s executive compensation disclosure practices. Directors and officers of Canadian public companies, and compensation committee members in particular, should be aware that the Canadian securities administrators have recently implemented amendments to the executive compensation disclosure requirements for Canadian public companies that will be applicable for the upcoming AGM season. The stated purpose of these amendments, according the Canadian Securities Administrators, is to “provide investors with enhanced information on the key risks, governance matters and compensation practices” of Canadian public companies that “will allow investors to make better informed voting and investment decisions”.
Some of the key substantive changes are:
- Risk Management – Canadian public companies will be required to disclose whether the board of directors, or a committee of the board, considered the implications of the risks associated with the company’s compensation policies. If the implications were considered, the company will be required to disclose:
- the extent and nature of the board of directors’ or committee’s role in the risk oversight of compensation policies;
- any practices the company uses to identify and mitigate compensation policies and practices that could potentially encourage an executive officer or another individual at a principal business unit to take inappropriate risks; and
- any identified risks arising from the company’s compensation policies and practices that are reasonably likely to have a material adverse effect on the company.
- Compensation Committee – Canadian public companies will be required to describe any policies and practices adopted by the board of directors to determine the compensation for the company’s directors and executive officers. If the company has established a compensation committee, the company will be required to:
disclose the name of each committee member and, in respect of each member, state whether or not the member is independent or not independent;
disclose whether or not one or more of the committee members has any direct experience that is relevant to his or her responsibilities in executive compensation;
describe the skills and experience that enable the committee to make decisions on the suitability of the company’s compensation policies and practices; and
describe the responsibilities, powers and operation of the committee.
- Benchmarking – If the company uses any benchmarking in determining compensation or any element of compensation, it will be required to clearly state the benchmark and explain its components and describe why the benchmark group and selection criteria are considered by the company to be relevant.
- Performance Goals (Non-GAAP Measures) – If applicable, Canadian public companies are required to disclose performance goals or similar conditions that are based on objective, identifiable measures, such as the company’s share price or earnings per share. However, the amended rule now specifically states that, if the company discloses performance goals or similar conditions that are non-GAAP financial measures, the company must explain how the company calculates these performance goals or similar conditions from its financial statements.
- Performance Goals (Disclosure Exemption) – The company is not required to disclose performance goals or similar conditions in respect of specific quantitative or qualitative performance-related factors if a reasonable person would consider that disclosing them would seriously prejudice the company’s interests. But the amended rules now specifically states that, for the purposes of this exemption, a company’s interests are not considered to be seriously prejudiced solely by disclosing performance goals or similar conditions if those goals or conditions are based on broad corporate-level financial performance metrics which include earnings per share, revenue growth, and earnings before interest, taxes, depreciation and amortization. Further, if a company decides not to disclose specific performance goals on the basis that such disclosure would “seriously prejudice the interests of the company” it must now explicitly state that it is relying on an exemption from disclosure and explain why such disclosure would seriously prejudice the company’s interest.
- Hedging – Canadian public companies will be required to disclose whether an executive officer or director is permitted to purchase financial instruments designed to hedge against a decrease in the market value of equity securities granted as compensation or held, directly or indirectly by the executive officer or director. In light of this disclosure requirement, companies may want to adopt policies prohibiting hedging by executive officers and directors.
- Compensation Consultants and Advisors – If a compensation consultant or advisor has, at any time since the company’s most recently completed financial year, been retained to assist the board of directors or the compensation committee in determining compensation for any of the company’s directors or executive officers, the company will be required to include certain prescribed information with respect to, among other matters, the identify of that compensation consultant or advisor, the relationship of such compensation consultant or advisor to the company, its directors and officers, and all fees paid to such compensation consultant or advisor in the last 2 years.
If you would like to discuss the executive compensation disclosure requirements for Canadian public companies, please do hesitate to contact one of the “Corporate Finance” lawyers in the “Business Law” group at SNC Law.