Preparing for the 2017 Reporting Season

Torys Quarterly: In With the New

Read our comprehensive coverage of the diverse range of considerations that the 2017 reporting season has in store for public companies.


The proliferation of data security breaches at public companies has put cybersecurity on the radar of securities regulators. Cybersecurity is identified as a priority in the 2016-2019 business plan of the Canadian Securities Administrators, and regulators globally have identified cybersecurity as a key risk to financial markets. Public companies, as part of their overall risk management programs, should have suitable prevention, preparedness and remediation plans in place and should be mindful in this context of the regulatory and stock exchange requirements to publicly disclose material information – including material cybersecurity information.

Canadian securities regulators plan to scrutinize companies’ cybersecurity disclosures more closely in 2017.

The risks of a cyber-breach—directed at the company’s systems or a third party’s systems to which the company is vulnerable—may include losses of customers or goodwill, revenue losses, the costs of investigation and remediation, legal damages or settlements, cyber-insurance costs, loss of investor confidence and others. Material events and uncertainties that are reasonably likely to affect a company’s business should be addressed in MD&A, and material cybersecurity risks should be addressed in the risk factors disclosure.

For guidance on cybersecurity risk management programs, public companies may consider the Cyber-Security Self-Assessment Guidance published by the Office of the Superintendent of Financial Institutions which governs Canadian banks and other federal financial institutions—who are often early adopters of governance best practices. Perhaps the most fundamental points in the IOSCO guidance are that an organization’s risk management programs, both internally and relating to relevant third parties, must encompass cybersecurity due diligence, and adequate financial resources and accountability for cybersecurity should be clearly established within the organization.


Majority Voting. Following shareholders’ meetings, TSX-listed companies must announce voting results by news release. TSX recently added a new requirement that, if a director fails to receive majority support, the news release must be e-mailed to TSX promptly at

DRIPs. TSX recently adopted detailed requirements for dividend and distribution reinvestment plans. See TSX Adopts Tailored Rules for DRIPs for details.

Gender Diversity Disclosure in Alberta. The Alberta Securities Commission reconsidered its position on gender diversity disclosure at the request of Alberta’s Minister of Finance. Alberta’s rules, applicable to TSX-listed, non-venture issuers, will be harmonized with the rules adopted in 2014 in Ontario and several other provinces.

New Alberta Fee Rule. Fees paid by reporting issuers in Alberta will be based on market capitalization, similar to the Ontario regime. Larger reporting issuers will have to pay significantly higher fees. See ASC rule 13-501 for details.

Non-GAAP Financial Measures

Securities regulators will be scrutinizing non-GAAP financial measures this year. The OSC has cautioned companies that regulatory action may be taken if non-GAAP financial measures are misleading and harmful to the public interest. The regulator has also stated that its new whistleblower program, which contemplates awards of up to $5M for robust, credible information, could play a role in helping identify misleading financial disclosures. Substantial media attention was given last year to a report published by Veritas Investment Research that was critical of market practices relating to non-GAAP measures. Non-GAAP measures were also highlighted in the Commonsense Corporate Governance Principles published by several leading asset managers, activists, public companies and pension funds in July 2016. That group affirmed the U.S. and Canadian regulatory requirement that non-GAAP measures may be used to explain and clarify a company’s financial performance but should not obscure GAAP results.

In light of the risks of liability and reputational harm, public companies should take a fresh look at how they present non-GAAP financial measures in 2017.

In a recent staff notice, the OSC’s Office of the Chief Accountant reminded companies that

  • non-GAAP financial measures should not be given inappropriate prominence compared to GAAP measures;
  • presenting numerous non-GAAP measures in MD&A increases the likelihood of confusing investors and obscuring material information; and
  • non-GAAP financial measures, including in press releases, must be reconciled to the most comparable GAAP measure (and the reconciliation should be referenced at the first presentation of the non-GAAP financial measure).

The U.S. Securities Exchange Commission is also scrutinizing non-GAAP financial measures, and SEC Chair Mary Jo White has stated that the SEC is poised to act, as indicated last year when charges were brought against the former executives of a U.S. public company for falsifying a key non-GAAP measure in earnings guidance. Although most Canadian companies are largely exempt from SEC rules on non-GAAP measures, the two jurisdiction’s rules overlap substantially, and the U.S. anti-fraud and civil liability provisions apply to all SEC-reporting companies as a general prohibition against misleading disclosure.

Retaliation Against Whistleblowers

In mid-2016, the OSC adopted its whistleblower program and anti-retaliation provisions were added to the Ontario Securities Act. If they have not done so already, public companies should review their relevant documents and internal policies—such as confidentiality and employment agreements and codes of ethics—because provisions that inhibit whistleblowing are prohibited as are reprisals against employees. See The OSC’s Whistleblower Program: What Employers Need to Know for details.

Publish What You Pay

The first reports by mining and oil and gas companies under ESTMA (Extractive Sector Transparency Measures Act) must be posted online and submitted to Natural Resources Canada by May 30, 2017 (for fiscal years ending December 31). See Deadline to Enrol Under ESTMA and New Publish What You Pay Requirements for details. The SEC’s similar “publish what you pay” rules for resource extraction companies will be effective in 2019. Canadian cross-border companies will be able to file their ESTMA reports with the SEC in satisfaction of the U.S. rules.

Key Canadian Policy Updates from ISS

  • Overboarded directors. Directors will be considered overboarded if they sit on more than four public company boards and their attendance record is below 75%. CEOs may only sit on one external public company board, again with a 75% attendance trigger.
  • Director compensation. ISS may recommend withhold votes against compensation committee members based on problematic director compensation practices, including excessive inducement grants or performance-based equity awards aligning directors’ interest with management’s.
  • Non-audit fees. Tax fees that are not directly related to tax compliance will be grouped with “other fees” for purposes of determining whether non-audit fees are excessive. If tax compliance fees are not separately disclosed, all tax-related fees may be treated as “other.” ISS will recommend a negative vote on ratifying the auditor and electing members of the audit committee if a company’s audit, audit-related and tax compliance/preparation fees, in aggregate, are less than the other fees paid to the auditor.
  • Shareholder Rights Plans. ISS’ policy on poison pills now reflects the 105-day minimum deposit period under securities laws.

Key Glass Lewis Canadian Policy Updates

  • Overboarding. Directors may receive a negative vote recommendation if they serve on more than five public company boards. For executive officers, a negative vote may be recommended if they serve on more than two public company boards. Note that Glass Lewis does not use an attendance trigger like ISS.
  • Say-on-pay. Glass Lewis may recommend voting against members of the compensation committee if they have not addressed shareholders’ concerns following a say-on-pay proposal that failed to receive majority approval.
  • Shareholder rights plans. Like ISS, Glass Lewis has updated its poison pill policy to reflect the 105-day minimum deposit period under securities laws.

Spotlight on the CBCA: Shareholder Meetings and Diversity Disclosure

The government of Canada tabled a bill in September 2016 to modernize the CBCA. Proposed regulations were published in December 2016. The timing for implementation is unclear as the bill has only passed second reading, so shareholder meetings in 2017 are unlikely to be affected. The reforms are aimed, in part, at reducing regulatory discrepancies between the CBCA and Canadian securities laws, TSX rules and certain international best practices. Below are the most significant changes that would impact public CBCA companies. No exemptions are currently proposed for venture issuers.

Diversity Disclosure

Disclosure about gender diversity, consistent with securities laws, would be required. Disclosure would also be required about whether a company has a policy addressing diversity categories other than gender. Many companies’ existing diversity policies already address race, ethnicity, sexual orientation and other diversity categories. No specific categories are prescribed under the CBCA reforms, but companies whose policies are restricted to gender diversity will have to expand their policies or explain why a broader policy has not been adopted.

Majority Voting

Majority voting would become mandatory in uncontested elections, and shareholders would be able to vote “for” or “against” each director. A director could not be elected without a majority of favorable votes, and the board would not have discretion to reinstate the director except in very limited circumstances (to fulfill Canadian residency requirements or to have at least two directors who are not officers or employees of the company). This would give shareholders of CBCA companies an option for influencing the composition of the board that is more powerful than the existing TSX rule under which a director receiving less than majority support must tender his or her resignation but the board may decline to accept it, citing “exceptional circumstances.”

Impact on Shareholder Engagement and Activism. Mandatory majority voting is most likely to be useful to shareholders in situations where a proxy contest to replace the whole board is undesirable or impractical. For example, shareholders could decide to vote against an underperforming director or against a group of directors that played a leading role in a troubling board decision—particularly if shareholders made previous attempts to engage with the company to address the issue(s) but were unsuccessful. However, any activism involving broad solicitation of more than 15 shareholders requires compliance with the proxy solicitation rules, including the preparation of a dissident circular, so a broad campaign to defeat a director through majority voting would seem unlikely. Shareholders with significant voting power have other options for influencing board composition, including nominating directors for election through the shareholder proposal mechanism or informally negotiating with the company to replace a board member.

Majority Voting vs. Proxy Access. The CCGG supports both mandatory majority voting and expanded proxy access, although the latter is not part of the current CBCA reforms. The CCGG’s proxy access model would permit significant shareholders to nominate up to three directors or 20% of the board without preparing a dissident circular. The nominees would be included in the company’s proxy circular and their names would appear alongside management’s nominees on the proxy card. Over 300 U.S. companies voluntarily adopted proxy access by-laws in 2015 and 2016, but the Canadian market has so far not followed suit. We expect both proxy access, which facilitates getting shareholder-nominated candidates on the board, and majority voting under the CBCA, which facilitates the removal of directors by shareholders, to be carefully assessed and debated by market participants in Canada over the next several proxy seasons.


The Authors

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