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ISS adopts updates to Canadian Corporate Governance Policy for 2014

Institutional Shareholder Services (“ISS”) has adopted updates to its Canadian Corporate Governance Policy (“CCGP”), which will take effect for shareholder meetings held on or after February 1, 2014. ISS is a leading and influential proxy advisory firm that provides voting recommendations, primarily to institutional shareholders.

Most changes to the existing policy apply to both TSX and TSX Venture-listed companies, while others apply only to TSX-listed companies.

The changes applicable to both TSX and TSX Venture-listed companies are as follows:

  • Voting on Directors for Egregious Actions.  The CCGP provides that in extraordinary circumstances ISS will recommend a “Withhold” vote for directors individually, committee members or the entire board, due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities, failure to replace management as appropriate or egregious actions related to director(s)’ service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders.  The revised policy provides examples of risk oversight failures and specifically points out that companies must comply with applicable laws and regulations, including anti-bribery laws, and avoid actions that may result in companies being sanctioned or fined by regulators or a court.  Furthermore, the revised policy specifically provides that any amount of hedging the company’s stock by a director or executive officer will be considered a material risk oversight failure, because it severs the alignment of directors’ or executive officers’ interests with the interests of shareholders.
  • Board Responsiveness.  The revised policy makes it clear that ISS will recommend a “Withhold” vote for individual directors, committee members or the entire board of directors if at the previous board election, any director received more than 50% Withhold votes and the nominating committee has not required that the director leave the board after 90 days, or has not provided another form of acceptable response to the shareholder vote.  The revised policy also provides for such “Withhold” votes if the board of directors failed to act on a shareholder proposal that received the majority of votes cast in favour at the previous shareholders meeting.
  • Advance Notice Requirements.  The CCGP states that ISS will review proposals to adopt Advance Notice Policies on a case-by-case basis, supporting Policies that provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible.  Efforts to ensure full disclosure of a dissident shareholder’s economic and voting position in the company will be supported.  The revised policy requires the board of directors to have the authority to waive any provisions of the Advance Notice Policy that may provide nominating shareholders with legal recourse if denied access to the ballot.  Under the revised policy, ISS will recommend voting against an Advance Notice Policy if such Policy only permits the board to waive a portion of the advance notice provisions in its sole discretion or if the company requires any proposed nominee to deliver a written agreement that requires the proposed nominee to comply with all policies and guidelines of the company that are applicable to directors, which may impede the ability of such nominees, if elected, to effect positive change in respect of the board of directors and corporate governance of the company.
  • Re-pricing Stock Options and Extending Option Terms.  The CCGP states that ISS will generally recommend voting against proposals to re-price outstanding stock options.  The revised policy removes current exceptions to this general policy.  The revised policy also states that ISS will recommend voting against proposals to extend option terms.
  • Enhanced Shareholder Meeting Quorum for Contested Director Elections.  The revised policy states that ISS will generally recommend against new by-laws or amended by-laws that would establish two different quorum levels for electing directors, where a higher quorum level is required for shareholder meetings in which shareholders seek to replace the majority of the current board of directors.
  • Independence of Directors.  The definition of “independence” in respect of nominees for director has been clarified.  An “Inside Director” now specifically includes any current interim executive on the board of directors and any beneficial shareholder holding more than 50% of the outstanding voting rights, which may be aggregated to account for shares held by more than one member of a group, such as a family.  Changes to the definition of an “Affiliated Outside Director” now differentiate between a former or interim CEO, who would not be subject to a cooling off period, and other Non-CEO executives, who would be subject to a three year cooling off period under certain circumstances.  The revised definition of “Affiliated Outside Director” also clarifies that a former interim executive on the board of directors, other than a former interim CEO, may be deemed an “Affiliated Outside Director” in certain circumstances, and provides for additional criteria relating to participation or ownership of firms that provide professional services to the company and could therefore affect the independence of a director associated with such firms.

The changes applicable only to TSX-listed companies are as follows: 

  • Persistent Problematic Audit Related Practices.  The revised policy codifies ISS’ analytical approach, which would require members of the Audit Committee (and potentially the full board) to vote on a case-by-case basis if adverse accounting practices are identified that raise to a level of serious concern, such as accounting fraud, misapplication of applicable accounting standards, or material weaknesses identified in the internal control process.
  • Director Attendance and Overboarding.  Under the CCGP, ISS will provide cautionary language in its voting recommendations if (a) the director is a CEO and sits on more than two outside public boards in addition to his or her own company, or (b) if the director is an outside professional director and sits on more than six public company boards in total.  Under the revised policy, ISS will recommend “Withhold” votes for individual directors who are “overboarded” and have attended less than 75% of their respective board and committee meetings held within the past year without a valid reason for these absences.  In addition, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the company has not adopted a majority voting policy.  If the company has adopted a majority voting policy, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the pattern of low attendance existed in the prior year.
  • Executive Pay Evaluation.  In the revised policy, ISS has revised its methodology for comparing compensation against the peer group to better reflect long-term pay for performance alignment.  The revised policy also provides that ISS will evaluate issues related to executive pay on a case-by-case basis by considering poor disclosure practices and the board’s responsiveness to investor input on compensation issues.
  • Equity Compensation Plans.  The CCGP provides that ISS will recommend voting against discretionary non-employee director participation in management equity compensation plans, and this position will not change under the revised policy.  Under the CCGP and the revised policy, ISS will not recommend voting against a stock option plan that provides for non-employee director participation, provided that the plan stipulates that the number of stock options that may be granted to non-employee directors in the aggregate does not exceed 0.25 percent (for larger companies) to 1 percent (for smaller companies) of outstanding shares of the company and option grants to non-employee directors does not exceed $100,000 per director per year.  Recognizing that the role of non-employee directors has expanded substantially as a result of regulatory updates and shareholder engagement activity, the revised policy provides for different maximum limits on option-based and share-based (non option) equity compensation award grants to non employee directors.  Although the above noted limit on stock options continues to apply, the revised policy includes a new maximum of $150,000 per year in shares in the case of an equity plan that does not grant stock options.  Shares taken in lieu of cash director’s fees and a one-time initial equity grant upon a director joining the board will not be included in the maximum award limit.
ISS adopts updates to Canadian Corporate Governance Policy for 2014

CSA Will Not Implement NI 51-103

On July 25, 2013, the Canadian Securities Administrators (“CSA”) announced that they would not pursue implementation of National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (“NI 51-103”), which would introduce a regulatory regime aimed at streamlining the disclosure requirements for venture issuers.

Despite having support from several market participants, after reviewing NI 51-103, the CSA has decided that it will not implement the instrument in its entirety, but rather, would consider implementing some of the proposals that it contains. As required, any proposed amendments that the CSA considers will be published for comment.

CSA Releases Three-Year Plan

On July 9, 2013, the Canadian Securities Administrators announced a proposed three-year plan to create a nation wide harmonized securities regulation system aimed to protect investors against unfair practices, foster fair and efficient capital markets and reduce risks while preserving regional flexibility.

The CSA plans to implement the following initiatives in the next three years:

  1. Enhanced Retail Investor Protection: CSA aims to improve disclosure to investors, develop an avenue for investors to file and resolve complaints, and create an investor education campaign;
  2. Capital Raising by Small/Medium-Sized Enterprises and Exempt Market Initiatives: CSA will review and propose amendments to current exemption and disclosure rules for complex securitized products;
  3. Shareholder Democracy and Protection: CSA will review the Canadian proxy infrastructure, including proxy advisory firms, and current take-over bid regimes;
  4. Market Regulation: CSA will undertake a review of the order protection rule and market data fees, aim to develop a ratings regime, and form an OTC derivatives regulatory framework;
  5. Enhancement of Enforcement Effectiveness: CSA will aim to develop measures to share information across jurisdictions, increase access to surveillance tools and explore the possibility of a consolidated case management system;
  6. Enhancement of Information Technology: CSA will explore the development of a new national filing system to replace the current systems (e.g. SEDAR and SEDI) and the implementation of aggregated data repositories; and,
  7. Other Initiatives: CSA will aim to improve internal processes, as well as initiatives to streamline legislative amendments across jurisdictions.
CSA Will Not Implement NI 51-103

Canadian Coalition for Good Governance Releases 2013 Executive Compensation Principles

The Canadian Coalition for Good Governance (“CCGG”) recently released its 2013 Executive Compensation Principles (the “2013 Principles”), replacing the previous version originally published in 2009. The original principles were designed to provide enhanced guidance to boards and to promote compensation decisions aligned with long-term company and shareholder success. According to the CCGG, the 2013 Principles offer an updated take on the principles set forth in the original report to reflect the continued evolution of both compensation practices and regulatory disclosure requirements.

According to the CCGG, the 2013 Principles focus on the concept of “pay for performance” and “the integration of risk management functions into executive compensation philosophy and structure”. The 2013 Principles are organized around six key principles:

1) A significant component of executive compensation should be “at risk” and based on performance.

2) “Performance” should be based on key business metrics that are aligned with corporate strategy.

3) Executives should build equity in the company to align their interests with those of shareholders.

4) A company may choose to offer pensions, benefits and severance and change-of control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive.

5) Compensation structure should be simple and easily understood by management, the board and shareholders.

6) Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.

The CCGG notes that while Canadian disclosure obligations regarding executive compensation are limited to the “top five” executives at a company, boards should ensure that the above principles are used in determining company-wide compensation philosophy and structure.

Canadian Coalition for Good Governance Releases 2013 Executive Compensation Principles

TSX Requests Comments on Majority Voting Policy – Proposed Amendments to Part IV of the Company Manual

On October 4, 2012, the Toronto Stock Exchange (“TSX”) released a request for comments on proposed amendments to Part IV of the TSX Company Manual (the “Proposed Amendments”). The Proposed Amendments would require issuers listed on the TSX to have majority voting when electing directors at uncontested security holder meetings. As currently proposed, issuers may adopt a majority voting policy to comply with the requirement.

Under mandatory majority voting, security holders vote “for” or “against” each individual board nominee and only those directors who receive a majority of votes in their favour remain on the board. Typically, a majority voting policy provides that a director who receives a majority of “against” votes must immediately tender his/her resignation to the board of directors. The Proposed Amendments would require the board of directors to issue a news release disclosing: (i) the detailed results of the votes received for the election of each director; and, where applicable, (ii) whether a resignation was accepted and the board’s reasons for the decision.

As indicated by the Canadian Coalition for Good Governance, 39% of the listed issuers in the S&P/TSX Composite Index do not have majority voting. The TSX asserts that the Proposed Amendments will improve corporate governance standards, strengthening Canada’s international reputation.

Comments on the Proposed Amendments are being accepted until November 5, 2012. The TSX anticipates that the Proposed Amendments could become effective as of December 31, 2013.

TSX Requests Comments on Majority Voting Policy – Proposed Amendments to Part IV of the Company Manual

Toronto Stock Exchange Set to Strengthen Corporate Governance Requirements

On October 4, 2012, the Toronto Stock Exchange (TSX) announced that it has received notice of approval from the Ontario Securities Commission (OSC) to proceed with amendments to the TSX Company Manual (Manual) that aim to strengthen requirements relating to corporate governance. Specifically, the TSX will amend Parts I and IV of the Manual which specify rules pertaining to how a listed issuer elects its board of directors (Amendments).

The revised rules, which will become effective on December 31, 2012, will include the following requirements:

(a) to elect directors annually;

(b) to elect directors individually, rather than as a slate;

(c) to publicly disclose the votes received for the election of each director;

(d) to disclose if they have adopted a majority voting policy for uncontested director elections, and to disclose reasons in the event of lacking such a policy; and

(e) to disclose to TSX if a director receives a majority of “withhold” votes, if they do not have a majority voting policy.

“Toronto Stock Exchange is committed to further enhancing domestic and global confidence in Canada’s capital markets,” said Kevan Cowan, President, TSX Markets and Group Head of Equities, TMX Group. “These changes bring additional transparency to the board selection process and help to strengthen our markets’ reputation while aligning our practices to other major international jurisdictions.”

All applicants for listing on TSX after December 31, 2012 and applicants with listing applications in progress will be expected to demonstrate that they are in compliance with the Amendments, and if not, to explain the plan and time frame in which they will comply. All TSX listed issuers and applicants are expected to be in compliance with the Amendments by December 31, 2013, and will otherwise be considered to be in breach of the Manual.

Toronto Stock Exchange Set to Strengthen Corporate Governance Requirements

OSC Focuses on Improvements to the Director Election Process in its 2012 Annual Report

Shaira Nanji, articling student, assisted in the preparation of this article.

The Ontario Securities Commission (OSC) recently released its 2012 annual report (“Report”) which provides an update on the OSC’s intentions concerning potential reforms to the regulation of director elections. The Report discusses how to strengthen “shareholder democracy” and shareholder voting rights with regards to the uncontested director-elections process. The Report supports an earlier proposal made by the Toronto Stock Exchange (TSX) in September 2011 which suggested that:

• directors of listed issuers are elected individually and not by slate voting;

• listed issuers disclose the voting results from shareholders meetings (even if the vote was done by raising hands); and

• listed issuers disclose if they have a majority-voting policy when electing directors.

The TSX proposal also focuses on majority voting for director elections and includes a “comply or explain” disclosure-based regime. Since shareholder voting rights have a “significant impact on confidence in the capital markets,” the Report notes that these proposed initiatives will result in greater transparency and accountability of boards of directors. The OSC plans to work closely with the TSX to improve the director-elections process.

OSC Focuses on Improvements to the Director Election Process in its 2012 Annual Report

Board Minutes: Be Alert to Process Issues

This is the last post in my series dealing with suggestions for the corporate secretary when drafting board minutes. In this post, I deal with process issues relating to the protection of board minutes from unnecessary production.

For my post with an overview of all of the suggestions, click Writing Board Minutes for Peace of Mind. For my posts dealing with the first four issues in detail, click The “Front Page of the Newspaper” Test, Keep the Purposes Front and Centre, Draft to Minimize Unnecessary Production, and Draft to Protect Privilege and Confidentiality.

Circulation of Minutes

There are a number of process issues that can undermine a corporation’s attempt to protect corporate minutes from production. An obvious process issue is how broadly the minutes are circulated. If board minutes are widely circulated or routinely made available to third parties, then it should not be surprising if a court concludes that there is no confidentiality to protect, notwithstanding how many assertions of confidentiality and privilege are contained in the board minutes.

Confidentiality Designations

Another obvious but over-looked process issue arises because directors typically receive a significant amount of briefing material prior to a board meeting, which will later be appended to the board minutes. This material may include documents that are confidential or privileged. If the material is subject to third-party confidentiality obligations, consideration should be given to marking that material as “subject to confidentiality obligations.” If the material is privileged, the documents should be marked so that the claim for privilege is evident on the face of the document.

In-House Counsel as Corporate Secretary

A more complicated issue arises with the cross-appointment of in-house corporate counsel to the corporate secretary role. This is frequently the case, particularly in smaller organizations. However, this raises complications. For example, when in-house corporate counsel takes notes at the board meeting, it is not evident that these notes being taken in the role of a lawyer whom the board has asked to participate in or to monitor the meeting for the purpose of giving legal advice and, therefore, the notes are privileged. More likely, these notes are the notes of an officer of the corporation whose responsibility includes ensuring that minutes of the meeting are prepared and, therefore, without a claim to privilege.

It is prudent for in-house counsel to maintain two sets of notes when attending board meetings. Notes that are being taken as corporate secretary for the purpose, for example, of preparing or vetting the minutes, should be taken separately from those prepared for the purpose of following up on items as corporate counsel or as preparation for giving legal advice.

Draft Minutes and Notes

Another process issue concerns whether to retain draft minutes, the source notes from which the minutes are prepared, and notes prepared by directors. Very few of us are excellent note-takers.  A notation may reflect a private thought or capture only half of the thought.  The notes may simply be our way of paying attention and not meant to record accurately what occurred.  If available for production, these documents may be cast doubt on the accuracy, integrity and completeness of the board minutes.

Although routine destruction is a possibility, the corporation and its officers and directors must be careful not to engage in spoliation (the intentional destruction of evidence). Documents that are relevant to a litigious matter should be preserved as soon as litigation is reasonably anticipated. This may be before any demand is made or any claim is asserted.

There is no avoiding the reality that the destruction of notes and drafts is a sensitive topic and fraught with danger.  Even if innocently done, the destruction of notes and drafts can simply look bad.  A more practical approach is to avoid creating unnecessary notes and drafts in the first place.

The corporate secretary can avoid multiple drafts and source notes by using a template that prompts the corporate secretary to take notes that contain the appropriate details for the minutes (but without a blow-by-blow of the meeting).  This will require less revision to put into an appropriate form of minute of the meeting. There is also less chance of something being omitted innocently in the final minute due to editing that an adversary might seize on as evidence of manipulation of the board minute.

When dealing with a particularly sensitive matter, board members might be reminded that if they take notes, they should take care to prepare accurate and complete notes.  If the practice in such circumstances if for the minutes to be prepared and circulated shortly after the meeting for an initial review (and then inserted in the board packages at a later date for approval), directors may find it unnecessary to take personal notes since they will have the opportunity to conduct a review while the matter is fresh in their minds.  The contemporaneous preparation and review of the minutes can only serve to enhance their reliability.

Conclusion

There is no glamour in preparing board minutes and they are often put on the “back burner.” Apart from the statutory requirement in almost all Canadian jurisdictions to keep these records, board minutes are a critical piece of documentary evidence when there is a challenge to the conduct of directors. Careful preparation of board minutes is worth the effort. Moreover, with some care, the preparation of board minutes may also subsequently assist a litigator in persuading a court that the board minute or a portion of the board minute should be protected from disclosure either to the adversary or to the public in general.

Board Minutes: Be Alert to Process Issues

Board Minutes: Draft to Protect Privilege and Confidentiality

This is the fifth post in my series dealing with suggestions for the corporate secretary when drafting board minutes.  In this post, I discuss suggestions for drafting to protect privilege and confidentiality.  To access my first post containing an overview of all of the suggestions, click Writing Board Minutes for Peace of Mind.  For my posts dealing with the first three issues in detail, click The “Front Page of the Newspaper” Test, Keep the Purposes Front and Centre and Draft to Minimize Unnecessary Production.

Drafting to Assist the Litigator
Even though the corporate secretary should presume that minutes of board meetings may be produced in litigation, the corporate secretary can take steps to assist the company’s litigator in defending against production on the basis of privilege or confidentiality. The argument for protection against disclosure will be more persuasive if the minutes appear on their face to be privileged or confidential, since a judge may inspect the minutes before making a ruling.

Therefore, the most important of step is to ensure that the minutes contain the elements that satisfy the legal test for privilege or confidentiality. To do that, the corporate secretary should be familiar with and watchful for three types of privilege when preparing board minutes: (a) solicitor-client privilege; (b) litigation privilege; and (c) common law privilege.

Solicitor-Client Privilege
Solicitor-client privilege applies to confidential communications between a lawyer and his or her client for the purpose of seeking lawful legal advice. 

When external counsel attend a board meeting it is usually obvious that the advice given by external counsel is subject to solicitor-client privilege. However, the role of in-house corporate counsel at board meetings presents complications. It may not be obvious whether corporate counsel is providing legal advice or business advice, particularly if in-house counsel attends regularly in more than one capacity. For example, corporate counsel may report on an environmental compliance issue. It may not be obvious whether in-house counsel gave the report as part of legal advice or as the compliance officer of the corporation.

To enhance the likelihood that solicitor-client privilege will be recognized and maintained, consideration should be given to identifying in the minutes that the board “received confidential legal advice” from the lawyer (whether external counsel or in-house corporate counsel).

Another complication may arise because other persons are in attendance when the advice is being given, such as financial advisors or other invited guests.  It has been said that confidentiality is the sine qua non of solicitor-client privilege. With some exceptions (discussed below), the attendance of third parties may destroy a claim that the advice given was confidential.

If there are observers or other participants at the board meeting, those persons should be requested to absent themselves for the portion of the meeting dealing with the legal advice.  The board minutes should reflect that those persons were not in attendance during that portion of the meeting.

From time to time, the presence of observers or participants, such as financial advisors, may be necessary because they are part of the “team” dealing with the issue on which legal advice is being given. Courts in Ontario, at least, accept that privilege may not be lost in these circumstances.  It is prudent to get legal advice to see if the criteria for protecting privilege will be met.  As a general rule, if privilege is available, the board minutes should reflect the role of those third parties and why the board requested that those persons remain in attendance during the receipt and discussion of legal advice.

Litigation Privilege
Another important type of privilege is litigation privilege. Litigation privilege is a zone of privacy in which a litigant may prepare its case “without adversarial interference and without premature disclosure.” Every litigant (whether represented by a lawyer or not) is entitled to litigation privilege. Unlike solicitor-client privilege, litigation privilege covers non-confidential communications with third parties and documents of a non-communicative nature (such as draft argument and research). Litigation privilege will only attach to those documents and communications whose dominant purpose is to respond to actual or apprehended litigation.

The applicability of litigation privilege is usually clear once litigation has been commenced.  However, in the run-up to litigation, it is prudent to note that the board was considering an isuse that was apprehended to be litigious.  Be aware, however, that once litigation is contemplated, there are document preservation responsibilities for the corporation.

If litigation privilege is available, the minutes should reflect that the dominant purpose of the agenda item is to receive a confidential report from management regarding potential or actual litigation and for the directors to discuss and to prepare for or to respond to the litigation. If third parties are present, the purpose of their attendance should be noted. For example, financial or other advisers may be present to assist the directors with evaluating or preparing a response to the real or apprehended litigation.

Common Law Privilege
Common law privilege is a residual category of privilege from disclosure. It is available on a case-by-case basis after the court considers the following criteria:

(a) The communications originate in a confidence that they will not be disclosed.

(b) This confidence is essential to the full and satisfactory maintenance of the relationship between the parties.

(c) The relationship is one, which in the opinion of the community, ought to be sedulously fostered.

(d) The injury to the relationship by the disclosure of the communications is greater than the benefit gained in the litigation process.

Common law privilege may be available when the board is conducting an investigation, such as, for example, in response to a whistle-blower complaint.

The court exercises significant discretion when deciding whether common law privilege is available. Legal advice should be sought when dealing with matters such as an internal investigation arising out of a whistle-blower complaint or other matters that might attract common law privilege so that the corporate secretary has guidance on how to manage these types of activities.

The guidelines with respect to confidentiality and third-party participation discussed above in connection with solicitor-client and litigation privilege apply equally to common law privilege.  In addition, it would be prudent for the minutes to reflect the board’s consideration of the importance of confidentiality to the matter being addressed and the board’s concerns with respect to any breach of confidentiality. For example, if a third-party investigator is reporting to the board on an investigation, the board should consider (and the minutes should reflect) the importance of confidentiality to the integrity of the investigation and the harm that could occur to the organization and the investigation if confidentiality is not maintained, such as, for example, employees may be less willing to speak with the investigator about the potential misconduct of a colleague or supervisor if confidentiality is not assured.

Confidentiality or Sealing Orders
Another litigation issue that corporate secretaries should consider is the potential availability of a confidentiality order or a sealing order in the event that the minutes are required to be produced. In general, a confidentiality order restricts the persons with whom documents and information are to be shared and applies only to the parties and any specific third parties who are involved in the litigation process (such as experts). A confidentiality order will often contain a protocol requiring a standard form confidentiality agreement, restricting onward sharing of information, and requiring the destruction of the information when it is no longer necessary to be kept by the third party. A sealing order prevents records in the court file from becoming public. In Ontario, subsection 137(2) of the Courts of Justice Act provides the authority for a sealing order. Subsection 137(2) provides that the court “may order that any document filed in a civil proceeding before it be treated as confidential, sealed and not form part of the public record.” The trend has been for courts to restrict the availability of these orders, given the importance of the openness of judicial proceedings.

However, in many business-to-business contracts, organizations will require confidentiality agreements as an essential term of the relationship. These terms are so frequently required that they have become part of the boilerplate of most commercial agreements. At any given time, an organization may have in its possession, power and control, significant amounts of information received from contracting parties to whom the organization owes duties of confidence. Conversely, the organization may have placed significant confidential information into the hands of third parties who are restricted from using that confidential information for non-approved purposes so long as the information is not in the public domain. If the information is disclosed during discovery, it will be at risk of public disclosure in a court proceeding.

The Supreme Court of Canada has suggested that this type of obligation is one that might qualify as an “important commercial interest” worthy of protection by court order.  Again, this is an area in which the corporate secretary should get legal advice in advance of the board meeting.

As a general rule, board minutes should expressly identify that matters presented to the board or discussed by the directors are subject to third-party confidentiality obligations. If the matters being discussed are not subject to third-party confidentiality obligations but are of significant commercial interest, reference to the fact that what is discussed is material non-public information or a trade secret or a potential patent issue should be recorded in the minutes. If observers or participants are present, they should be reminded of their confidentiality obligations and this reminder should be recorded in the minutes.

Board Minutes: Draft to Protect Privilege and Confidentiality

Board Minutes: Draft to Minimize Unnecessary Production

This is the fourth post in a series on drafting board minutes.  In my first post, I outlined a number suggestions for the corporate secretary charged with drafting board minutes. In the second post, I discussed the “Front of the Newspaper” Test. In the third post, I discussed ”Keeping the Purposes Front and Centre.”  In particular, I commented on the importance of board minutes in litigation in that post.   In this post, I expand on the issue of board minutes in litigation by discussing how the corporate secretary might assist litigation counsel in limiting production of board minutes.

Discovery and Confidentiality

The discovery process during litigation is a major intrusion on (1) a corporation’s ability to protect the confidentiality of its data (and that of other individuals or entities with which it has contracted) and (2) the corporation’s ability to ensure orderly disclosure to the market in accordance with good business judgment and with securities laws.

For example, only one part of a board minute for a meeting may be relevant to litigation. However, very often the whole the board minute must be produced. As a result, sensitive or embarrassing information on unrelated matters may end up disclosed even though they are irrelevant to the issues in the litigation.

For example, minutes of a mining company might, for example, contain references to confidential information regarding labour relations, cost estimates, drilling results, community, aboriginal and governmental negotiations, reports on permitting, and discussions with potential suitors. In addition, board minutes may refer to confidential information obtained from another company under a confidentiality agreement. 

Much of the foregoing information may be irrelevant to the actual issues involved in the litigation.  It may also be be misleading without the context of other documents, prior board minutes or subsequent board minutes. The company may rely on a deemed undertaking of the other party not to use the information for any purpose other than the litigation.  However, there will be no restriction on the other party (short of court order or mutual consent) from filing the document as an exhibit in the legal proceedings.  If that should occur, the board minute will be available for anyone to review.

One of the problems for the corporate secretary is that courts in Canada have not universally accepted the ability of a litigant to ”redact” a document for relevance.  The process of obliterating a document to omit privilege parts (redacting) is well-accepted.  However, the same process of obliterating sensitive but irrelevant material has not become sufficiently accepted that the corporate secretary can rely on the availability of that practice when drafting board minutes.

Form of Board Minutes

The good news for the corporate secretary of a Canadian company is that there is significant legislative latitude with respect to the form of board minutes.  This allows for some creativity in severing minutes to minimize production of irrelevant information when dealing with sensitive issues.

The Canada Business Corporations Act, for example, provides that minutes, like all corporate records, may be maintained “in a bound or loose-leaf form or in a photographic film form, or may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device that is capable of reproducing any required information in intelligible written form within a reasonable time” (s. 22(1)). Apart from that broad requirement, the corporation is free to determine the structure and form of its board minutes.

The Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Newfoundland, Yukon, Northwest Territories, and Nunavut provisions are either identical or substantially the same. Nova Scotia limits the form of board minutes to bound or loose-leaf documents. Legislation in Prince Edward Island provides no guidance on the form of the minutes although reference to the books of the company suggests a printed form. The Québec Business Corporations Act requires that the “corporation must be able to reproduce, in intelligible form and within a reasonable time” the information contained in the records it is required to maintain under the statute (s. 37).

Accordingly, there is some latitude for corporate secretaries to devise record-keeping practices to ensure that sensitive, non-routine deliberations are recorded in separate stand-alone documents. One way to accomplish this is to call two or more meetings of the board to be held sequentially. This practice will be too cumbersome to be manageable as a general corporate governance practice. However, it might be considered when dealing with one or more highly sensitive matters. One meeting can deal with routine or non-sensitive items and then adjourned. Sensitive items may be dealt with sequentially in separate meetings called to order to deal with those specific items.  In this way, the meetings are stand-alone meetings with their own separate minutes. Only the minutes dealing with the relevant meeting should be produced in the litigation.

Another possibility is to draft minutes in such a way that there are main minutes and supplementary minutes. The main minutes would state that the next item on the agenda was, for example, a report on drilling results and a notation that confidential minutes for that portion of the meeting are kept separately in supplementary minutes. If corporate secretaries adopt a numbering system for corporate minutes, this should not create any difficulty in the organization of the board minute book. The downside to this approach is that a court could conclude that the separate minutes have been incorporated by reference and must be produced. However, referring to the confidentiality rationale for the separate minutes and the irrelevance of the separate minutes to the issues in the proceeding may assist the corporation in resisting production of irrelevant material.

These are not the only possibilities. Depending on the nature of the company’s business and the typical format of its board meetings, there may be other effective means of drafting to limit production.

Board Minutes: Draft to Minimize Unnecessary Production

Board Minutes: Keep the Purposes Front and Centre

In my first post in this series on board minutes, I set out five suggestions for the corporate secretary charged with drafting board minutes.  In a previous post, I discussed the first suggestion in more detail–the “Front of the Newspaper” Test.  In this post, I discuss the purposes of board minutes and then set out some suggestions for keeping those purposes in the foreground when drafting these important corporate records.

The Purposes

The primary purpose of board minutes is to function as a corporate record of the deliberations, decisions and resolutions of the directors. However, board minutes are not simply of relevance to the archivist or corporate counsel conducting a minute book review. From a litigation perspective, a board minute is documentary evidence of whether and how the directors fulfilled their duties to (1) manage or supervise the management of the business and affairs of the corporation, (2) act in the best interests of the corporation, and (3) exercise due care. As one judge has said, directors wishing to defend themselves against allegations of a breach of duty ought to be prepared to document their deliberations or conclusions. If directors do not do so sufficiently and accurately, they must accept that adverse inferences may be drawn against them.

Canadian courts are predisposed to be deferential to business decisions of directors. The so-called “business judgment rule” operates to shield the decisions of directors from microscopic examination with the benefit of perfect hindsight. However, the decisions of directors are still examined. In order for directors to claim the benefit of the business judgment rule, they should be able to demonstrate that their decisions have been made honestly, prudently, in good faith and on reasonable grounds.

Board minutes are a crucial contemporary record of the board’s decision-making process. If drafted appropriately, board minutes can be powerful documentary evidence that a decision was made prudently and on reasonable grounds and in the context of a sound process. Accordingly, board minutes should provide compelling documentary evidence to support the application of the business judgment rule. The minutes should demonstrate that:

  • The directors exercised their judgment in an informed and independent fashion.
  • The directors engaged in a process of analysis of the situation.
  • The directors acted with reasonable grounds to believe the decisions was in the best interests of the company.

How the Purposes affect the Content

Appropriately drafted board minutes will keep front and centre the purposes of (1) being an accurate and reliable corporate record and (2) establishing the prerequisites to the “business judgment rule”. To do this, board minutes should set out clearly the problem on which the board was deliberating, the range of options that the board concluded were reasonably available, the advice obtained from financial and legal advisors appropriately retained and consulted in the circumstances, information obtained from management, and consideration of any conflicts of interest.

Narrative detail is important in minutes to provide context for the directors’ decisions. However, this does not mean creating a verbatim transcript of what the directors discussed. The narrative detail should be a high-level summary of the matters discussed, with a focus on recording the board’s process, including such elements as the length of time, extent of consultations and information received by the directors during and prior to the board meeting. It is not sufficient to record that the board “had a detailed and lengthy discussion of the issues involved”. These types of minutes do nothing to facilitate record-keeping or to establish objective evidence of the board’s prudence and diligence.

Instead, board minutes with appropriate detail will provide a reader (who was not in attendance and who is unfamiliar with the activities of the board) with the following information:

  • The origin of any important issues before the board, if that is not be clear from the minutes of previous meetings.
  • The substance of the matters discussed with respect to those issues and a summary of any discussions that occurred informally between meetings.
  • Any questions asked of management, external consultants, advisors and experts, and the responses given by them.
  • The concerns raised by board members and the responses to those concerns.
  • The factors taken into account in arriving at the decision made by the board.
  • The specific decision made by the board and the text of any resolution.
  • Formalities with respect to the decision or resolution, such as who moved a motion and whether the vote was unanimous.
  • Any conditions, limitations or qualifications made with respect to the decision or to the power given to management to implement the decision.
  • Whether and when management was expected to report to the board with respect to the implementation of the decision.
  • The approximate length of time spent discussing the matter.

It is unnecessary in most cases for the minutes to address which director asked a particular question or had a particular concern. Ultimately, the board makes a decision as a body. If a director wishes to dissent from a decision, that dissent should be recorded. If the dissenting director requests it, a concise basis for the dissent may be entered into the minutes.

In the next post in this series, I will examine drafting suggestions to avoid unnecessary production in litigation.

Board Minutes: Keep the Purposes Front and Centre

Board Minutes: The “Front Page of the Newspaper” Test

In an earlier post, I summarized five suggestions for writing board minutes for peace of mind. In this post, I will discuss one of those suggestions in greater detail: Using the “Front Page of the Newspaper Test”. But first, let’s set the legal scene.

The Legal Scene

The Canada Business Corporations Act (“CBCA”) and, with one exception, all other business corporation statutes in Canada, prescribe that corporations maintain board minutes as part of the corporation’s records.

Maintaining minutes of board meetings would be prudent even if they were not statutorily required. Failing to accurately record the board’s deliberations in appropriate detail may lead to adverse inferences regarding whether directors have fulfilled their duties. Nevertheless, there is a natural tension between providing sufficient detail to avoid any adverse inference being drawn against the directors and a lingering apprehension that an innocuous record might, with hindsight, be twisted out of context in litigation.

The “Front Page of the Newspaper” Test

It goes without saying that board minutes must be accurate. However, in considering the level of detail, the format of the minutes and the words chosen to describe the business of the meeting, the corporate secretary should consider how the board minutes would look on the front-page of the newspaper.

The primary audience of board minutes is normally the directors, subsequent directors appointed to the board, and third parties conducting minute book reviews in connection with major transactions.

In the ordinary course, shareholders and creditors do not have an automatic right to inspect board minutes. Neither the CBCA nor any other Canadian business corporation statute requires a company to provide access to board minutes to shareholders, creditors or non-officer or non-director stakeholders. British Columbia is perhaps unique in that the British Columbia Business Corporations Act provides that the articles of the corporation might allow shareholders or other persons a right of access to board minutes.

However, from a litigation perspective, the primary audience will be the adversary in the litigation and, most importantly, the trier of fact in any judicial or arbitral proceeding. If litigation is commenced, board minutes are difficult to protect from disclosure if the minutes contain information that is relevant to the dispute. Canadian courts, particularly in Ontario, may be reluctant to accede to claims of confidentiality. It is well-entrenched in Ontario, for example, that corporate minutes do not enjoy any special protection in litigation from production and discovery. Moreover, and perhaps most problematic, some judges have ruled that redaction (deletion) of portions of documents, including minutes, for relevance is not permitted. This may mean that the whole of the board minute must be produced even if only a portion of it is relevant to the dispute.

Even outside of the litigation context, there are situations where board minutes may become producible. For example, board minutes might become producible under a personal information access request under privacy legislation to the extent that the board minute contains information about the requester.

In future posts, I will discuss how, in very limited cases, it may be possible to protect privileged or highly confidential commercial information and strategies to limit what is produced.

However, in many cases it may be very difficult to protect the minutes from public disclosure. If entered into the court record, they will be there for every competitor or interested person to read and to copy. Therefore, the “front page of the newspaper” test is the most prudent starting point when drafting and editing board minutes.

Board Minutes: The “Front Page of the Newspaper” Test

Electronic Delivery as a Standard (Not Yet)

Should Canada do better to become a leader of innovation in electronic communication with security holders, including the delivery of documents, given the apparent Canadian propensity to spend our time online?

According to a March 2011 Globe & Mail report, Canadians spend more time online than the residents of any other country.  It seems Canadians don’t just spend more time, Canadians spend almost double the average. 

Earlier this month, the Canadian Securities Administrators announced changes to National Policy 11-201, Delivery of Documents by Electronic Means.  The comment period yielded only eight submissions, suggesting, perhaps, that there is no great urgency to making electronic delivery the standard.

The changes to NP 11-201 are meant to alert market participants to e-commerce legislation and other laws that may affect the electronic delivery of documents, to simply the guidance regarding security holder consents, and to reduce technology-related references.  NP 11-201 applies to “prospectuses, financial statements, trade confirmations, account statements and proxy-related materials that are delivered by securities industry participants or those acting on their behalf, such as transfer agents.” 

NP 11-201 continues to provide that (subject to any other laws), electronic delivery will satisfy delivery requirements in securities legislation if each of the following are met:

 1. The recipient of the document receives notice that the document has been, or will be, delivered electronically.

 2. The recipient of the document has easy access to the document.

 3. The document that is received by the recipient is the same as the document delivered by the deliverer (that is, the document is reasonably secure from being tampered with during delivery).

 4. The deliverer of the document has evidence that the document has been delivered.

NP 11-201 cautions that if any one of these components is absent, the effectiveness of the delivery may be uncertain.

NP 11-201 also cautions that electronic commerce legislation may require the consent of a recipient to electronic delivery.  NP 11-201 also states that without express consent, it may be more difficult to demonstrate that the intended recipient had notice of, and access to, the document, and that the intended recipient actually received the document.  However, in simplifying guidance on consent requirements, the sample express consent form has been eliminated from NP 11-201.  This consent form had been identified by the Securities Transfer Association of Canada (STAC) as a barrier to increasing demand for electronic delivery.   

Given the consequences of a finding that documents required to be delivered under securities laws and regulations were not properly delivered, it is unlikely that we will see a great rush to electronic delivery with these changes to NP 11-201.  In addition, any concerted effort to move to electronic delivery must comply with Canada’s Anti-Spam Legislation (CASL), which is likely to come into force next year.

Five years has passed since the Task Force to Modernize Securities Legislation in Canada published commissioned research study by Professor Dimity Kingsford Smith regarding Importing the e-World into Canadian Securities Regulation.  Canada has not progressed very far in terms of developing electronic delivery as a standard method of delivery.  The question is why?

As STAC points out, the complexities of obtaining consent is part of the explanation.  This has been partially remedied by NP 11-201 .  The issue of establishing delivery is also part of the explanation.  The revision to NP 11-201 has clarified the issuer’s responsibilities to have internal processes showing that delivery was attempted.  However, NP 11-201 also requires that the issuer must attempt other delivery methods (presumably mail) if the issuer receives a delivery failure notification, notwithstanding consent to delivery by electronic means. 

Another issue might simply be that demand is not there for electronic documents delivered in currently available formats.  We must be cautious of drawing inferences but broad statistical evidence from Statistics Canada surveys suggests that the percentage of at-home internet users who report conducting investment research online has remained relatively stagnant from 2005 to 2009 with less than 1/3 reporting that they engaged in that activity.  Online bill paying, by contrast, grew throughout that period. 

The current inflexibility with respect to the form of the electronic version of documents might contribute to low take up of electronic delivery.  NP 11-201 permits flexibility in technical format.  However, electronic documents must essentially follow the prescribed forms for paper documents.  One of the great advantages of electronic documents is the ability to layer information so that the user can review information on a graduated basis.  If participants are limited essentially to an electronic version of a massive printed document, this curbs innovation as well as ease of use.

Of course, any move to electronic delivery as a standard must ensure that investors have access (and timely access) to equivalent information.  There are, after all, significant regional differences in home internet usage rates.  Home internet usage by residents of British Columbia was reported to be 16 percentage points higher than in New Brunswick according to an October 2011 Financial Post article.

Electronic Delivery as a Standard (Not Yet)

Writing Board Minutes for Peace of Mind

Board meeting minutes are statutorily required by nearly all business corporation statutes in Canada. More importantly, maintaining board minutes is prudent. Failing to accurately record the board’s deliberations with appropriate detail may lead to adverse inferences regarding whether directors have fulfilled their duties. Nevertheless, there is a natural tension between providing sufficient detail to avoid any adverse inference being drawn against the directors and a lingering apprehension that an innocuous record might, with hindsight, be twisted out of context in litigation. And, of course, drafting well-written and well-structured board minutes is time consuming!

Here are five litigation-driven suggestions that the corporate secretary may wish to consider when preparing minutes. In upcoming posts, I’ll dive deeper into each of these suggestions.

1. Use the “Front Page of the Newspaper” Test. There is no substitute for writing board minutes with a critical eye. As I’ll discuss in upcoming posts, the corporate secretary should not assume that the minutes will remain confidential if litigation ensues. Assume that the minutes will be read by an adversary and could be accessible to the public generally. This seems obvious but is often forgotten.

2. Keep the Purposes Front and Centre. Board minutes are a key record of the deliberations, decisions and resolutions of the directors. But more than that, they are documentary evidence of whether the directors have acted honestly, prudently and in good faith. Board minutes should demonstrate that the directors acted in the best interests of the company, made an informed decision in an independent fashion, had reasonable grounds for the decision, and conducted a reasonable analysis of the situation.

3. Draft to Minimize Unnecessary Production. Even though only one part of a minute of a meeting may be relevant in litigation, there is a good chance that the entirety of the board minute will be produced as a “document”. As I’ll discuss in upcoming posts, the flexibility provided by the business corporation statutes means that there are a number of strategies the corporate secretary can take to ensure that sensitive deliberations are recorded in separate documents.

4. Draft to Protect Privilege and Confidentiality. Well-drafted board minutes can assist litigators in seeking to protect portions of minutes from disclosure on the basis of privilege or confidentiality. It is important that the minutes reflect the criteria necessary for privilege or confidentiality. The corporate secretary should be aware of the test for solicitor-client privilege, litigation privilege, common law privilege and sealing orders for confidential information (each of which will be discussed in upcoming posts) and reflect those elements in the minutes.

5. Be Alert to Process Issues. Process issues can undermine the corporation’s attempt to protect board minutes. The cross-appointment of in-house counsel to the office of corporate secretary may result in the notes of counsel not being considered privileged. Retaining source notes or directors taking personal notes may result in alternative records of the meeting that can be used to challenge the accuracy, integrity and completeness of the board minutes. As discussed in our article, routine destruction is a possibility but the corporation and its directors must be careful to avoid spoliation of evidence if litigation is anticipated.

Writing Board Minutes for Peace of Mind