ISS Releases 2011 Canadian Proxy Voting Guidelines

Love ’em or hate ’em, the proxy advisory firms, including Institutional Shareholder Services, Inc. (ISS) in particular, have become increasingly influential in the outcome of shareholder votes and proxy contests in Canada. Canadian issuers ignore them at their peril. On several occasions in the recent past, Canadian issuers have been forced to amend resolutions they were placing before their shareholders at the request of ISS because they did not conform to ISS published proxy voting guidelines. Failure to obtain a favourable ISS recommendation would have resulted in the resolution either being defeated or being passed by an embarrassingly narrow margin.

On January 14, 2011, ISS released its 2011 Canadian Proxy Voting Guidelines which incorporate the 2011 Updates published in November 2010. These are the three most significant updates:

1) Amendments to By-Laws or Articles

ISS will vote against a proposed amendment to the articles or by-laws which raises corporate governance concerns such as "granting blanket authority to the board with regard to future capital authorizations or alteration of capital structure without shareholder approval." The 2011 Updates cite, as an example, blanket authority granting the board discretion to create or issue an "unlimited number of blank cheque preferred shares without prior shareholder approval."

2) Shareholder Rights Plan (SRP)

ISS will vote against an SRP where the definition of "Beneficial Ownership" includes reference to ownership by way of derivative instruments or if it includes a "Shareholder Endorsed Insider Bid" (SEIB) provision1.

3) Equity Compensation Plans

In cases where the cost of such a plan cannot be calculated using the "binomial model" due to a lack of historical data, ISS will apply a "dilution and burn rate" analysis, and will generally vote against the proposed compensation plan if dilution under all plans will be more than 10 per cent of outstanding shares or the historic burn rate for all plans has been more than 2 per cent per year.

1 Defined in a recently adopted SRP as a takeover bid by an insider that a majority of independent shareholders have endorsed by tendering their shares and which meets certain other criteria; the insider, therefore, has the ability to proceed with a takeover bid which qualifies either as a SEIB or as a "Permitted Bid", without triggering the SRP.