Discussion + Information on Governance in Canada
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Michael McCain and Governance at Maple Leaf Foods

On July 28, 2011, the Maple Leaf Foods’ board entered into a related party “material contract” with the Company’s CEO, Michael McCain, who later in December 2011 acquired personally the family’s 32% share ownership in Maple Leaf Foods. The board did not explain why the McCain family’s private and external reorganization of its share ownership in the Company required or justified the board effecting a “material change” in the public company. Under the McCain Governance Agreement, the board granted Michael McCain a most valuable right to corporate assets while a minority shareholder, namely, the right to board representation and access to the Company’s proxy. The board granted Michael McCain the right to cause the board to nominate for election as directors a number of McCain’s selected nominees proportionate to his share ownership from time to time. Reciprocally, Michael McCain agreed to vote his 32% block “for” the election of the board’s other nominees as Company directors in uncontested elections. While not a complete lockup of circular control, together with the board’s concurrent adoption of a ‘poison pill’, the McCain Governance Agreement created significant hurdles for those who may wish to challenge Michael McCain’s controlling influence over the Company’s strategy and business performance. The McCain Governance Agreement terminates only if the Company becomes bankrupt or if Michael McCain dies or acquires more that 50% of the Company’s shares. If he acquires 50% or more of the shares, he can then select and elect all the directors. While the board granted Michael McCain the privileged right to board representation while a minority shareholder, the board did not provide protection to the minority shareholders of Maple Leaf Foods if Michael McCain becomes a majority shareholder.

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Deficient Governance Model @ Research In Motion

Jim Balsillie was the Chairman of the Board and Co-CEO when Research in Motion Limited (“RIM”) went public in 1997. Balsillie resigned as Chair in March 2007 with the release of the report on the improper option granting and backdating practices that RIM had been engaged in for 10 years from 1996 to 2006. On May 17, 2007, RIM announced that: “Consistent with current best practices in corporate governance, the roles of Chairman and CEO have been separated.” An independent director was appointed as Lead Director, but a new and independent Chair of the Board was not appointed and the position remained vacant, notwithstanding the election of four new independent directors in 2007. As part of the penalties and sanctions approved by the OSC in settling the improper option practices, which the OSC called a “fundamental failure of governance”, Balsillie was forced to resign as a director of RIM in February 2009. A report on RIM’s corporate governance by an independent consultant that was mandated by the OSC recommended the separation of the Chair and the CEO. The office of the Chairman of the Board of RIM, however, remained vacant as the RIM board responded in April 2010 that the absence of an independent Board Chair did not adversely affect RIM’s “highly independent board structure”. Balsillie was reappointed to the board in May 2010. Notwithstanding RIM’s earlier public representations that the roles of Chairman and CEO were separated, the independent directors agreed, “as an appropriate and effective leadership structure”, to the appointment of Balsillie and Mike Lazaridis as Co-Chairs of the Board and Co-CEOs of the company on December 16, 2010. Investors and shareholders strongly objected to this unusual governance structure of dual and joint appointments as Co-Chairs and Co-CEOs and actively pressured for the separation of the roles of Chair and CEO and the appointment of a non-management and independent Chair. On January 22, 2012, RIM announced that Balsillie and Lazaridis had resigned these combined offices and a new independent, non-management Chair of the Board and a new President and CEO of RIM were appointed.

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OSC PROPOSALS FOR NO-CONTEST SETTLEMENTS

The OSC requested comments on its proposals to introduce a new No-Contest Settlement program whereby those accused of breaching securities law could consent to a settlement of the allegations “without admitting or denying” any wrongdoing. The Emerson Advisory comment letter acknowledged the benefits of additional remedies for the OSC’s enforcement arsenal to protect investors and to foster fair and efficient capital markets. Concerns to be addressed included: (1) what are the principles and standards to be applied in approving No-Contest Settlements negotiated by the OSC staff?; (2) should it be required that, in addition to being “in the public interest”, the settlement should be objectively fair, reasonable and adequate to the public?; (3) should No-Contest Settlements be approved where there is a reasonable expectation that the settlement would adversely affect the rights of investors who have suffered loss to seek redress in civil actions?; (4) as the OSC is a multi-functional integrated agency that investigates, prosecutes and judges securities violations, should No-Contest Settlements be approved by an independent administrative authority?; and (5) are the policies, processes and procedures of the OSC concerning the administration of No-Contest Settlements clear, open, public and transparent?

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RESEARCH IN MOTION – THE 10 YEAR OPTION GRANTING SCANDAL

From December 1996 to July 2006, Jim Balsillie, Dennis Kavelman (then CFO), Mike Lazaridis and certain other RIM officers and directors engaged in improper stock option granting practices, including backdating and repricing of executive, director and employee stock option awards.  Following an internal investigation, in May 2007, RIM restated its historical financial statements with a cumulative, non-cash, stock-based compensation expense of U.S. $248.2 million.  In the February 2009 settlement of the Ontario Securities Commission’s enforcement action, Balsillie, Lazaridis and Kavelman agreed that they engaged in option backdating and repricing and that the total “in-the-money” undisclosed benefit from the incorrect option dating practices was approximately $66 million.  They confirmed that they returned the improper financial benefits they received from the incorrectly priced options and undertook to contribute, in aggregate, $83.1 million to RIM and to pay administrative penalties and OSC costs totalling $9 million.

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FRANK STRONACH AND MAGNA’S ELIMINATION OF ITS DUAL CLASS EQUITY SHARES – WHAT’S THE BEEF?

In a major related party transaction between Frank Stronach and Magna International Inc. in 2010, Stronach’s controlling class of multiple voting shares were cancelled with a payment to Stronach valued at approximately US$ 1 billion. The transaction was denounced and vigorously opposed by large Canadian pension and investment funds lead by Ontario Teachers’ Pension Plan and CPP Investment Board. The challengers brought unsuccessful legal proceedings before the Ontario Securities Commission and the Ontario Superior Court of Justice and filed a failed appeal to Ontario’s Divisional Court. Notwithstanding (i) the unprecedented purchase price paid to Stronach to eliminate his controlling Class B Shares, (ii) the lack of a favourable recommendation to shareholders from Magna’s Special Committee, Chaired by Mike Harris, or from Magna’s Board of Directors, (iii) the absence of any fairness opinion from the independent financial advisor retained by the Special Committee, and (iv) the strong public opposition to the transaction from certain large shareholders and others, the arrangement was approved by a 75% vote of holders of Magna’s unaffiliated Class A Shares, who bore the bulk of the price paid to eliminate Stronach’s control. Following the overwhelming approval of shareholders, the Ontario Superior Court of Justice sanctioned the transaction in a “fairness” hearing, and its judgment was unanimously upheld by the Divisional Court on appeal.

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