Discussion + Information on Governance in Canada
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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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MAJORITY VOTING – LETTER TO TSX SUPPORTING MAJORITY VOTING DISCLOSURES

The Toronto Stock Exchange (“TSX”) requested comments on proposed amendments requiring its listed companies to elect directors annually and individually (not by slate) and to disclose whether the issuer has adopted a majority voting policy for uncontested director elections.  Emerson Advisory endorsed the majority voting disclosure policy and other recommended proposals.  Emerson Advisory also commented that there should be additional disclosure of the principles and policies that the board of directors would apply in responding to a resignation of a director who received a majority of ‘withheld’ votes and that prompt disclosure should be required of why the board did not accept the resignation if it so decided.  The Emerson Advisory comment letter noted: “If the board of directors has an unlimited, overly broad or arbitrary discretion whether or not to accept the resignation of a director who fails to receive a majority of the votes cast in an uncontested election, the vote of the shareholders electing directors becomes merely advisory and the majority voting policy is ineffective and illusionary.”

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MAPLE LEAF FOODS INC. – DIRECTOR “INDEPENDENCE” AND DISCLOSURE

Dissatisfied with its partnership with the Wallace McCain family that had controlled Maple Leaf Foods Inc. since 1995, Ontario Teachers’ Pension Plan terminated the shareholders’ agreement and sold its 36% interest in Maple Leaf Foods in 2010. West Face Capital Inc., a hedge fund, acquired a 11.35% interest and publicly challenged the Wallace McCain family’s controlling influence over the Board of Directors. In the turmoil, it was disclosed for the first time that Purdy Crawford, the Lead Director, was also a director of McCain Capital Corporation, the private company owned by and through which the McCain family exercised its controlling influence over Maple Leaf Foods, and that Mr. Crawford had other relationships with the McCain family and Maple Leaf Foods. West Face Capital challenged the “independence” of Purdy Crawford as the Lead Director on the Board.

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