The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
Issue link: https://digital.carswellmedia.com/i/218955
EXECUTIVE COMPENSATION THE EXISTENCE of the oppression remedy provides an alternative and likely simpler means for a shareholder to seek redress for a failed say on pay vote. DISTINCTIONS BETWEEN CANADA AND THE UNITED STATES There are a few important distinctions between Canada and the United States that warrant consideration in assessing the litigation risk of failed say on pay votes. The most obvious is that say on pay is not mandatory in Canada. This means that Canadian companies and directors would not have the same regulatory restrictions and protections afforded to their American counterparts. For example, as previously mentioned, in Goodyear the court held that section 951 of the Dodd-Frank Act made clear that say on pay does not impose any additional fiduciary duties on directors. The lack of a say on pay regulatory regime creates uncertainty as to the requirements a Canadian company must adhere to when adopting say on pay voting. Another important distinction is the different approach to derivative lawsuits by Canadian and American courts. In most states in the United States, as discussed in the aforementioned Goodyear case, to bring a derivative lawsuit, a plaintiff must demonstrate "demand futility." However, in Canada, this procedural hurdle is absent. The specific requirements to bring a derivative lawsuit vary amongst the different federal and provincial statutes, but generally Canadian courts will grant approval of the commencement of a derivative lawsuit if satisfied that a plaintiff is acting in good faith, has given notice to the corporation and the corporation has refused to proceed with the action, and the action is in the best interests of the corporation. Canadian companies should note that procedural requirements may be less burdensome than in the United States and may mean that say on pay lawsuits are easier to bring for litigants in Canada. The final, and perhaps most important, distinction between Canada and the United States is the existence of the oppression remedy in Canada. The oppression remedy allows a shareholder to bring a claim against a corporation if the corporation's actions disregard the shareholder's reasonable expectations and unfairly impacts the shareholder's interests. While simple mismanagement of a corporation is likely insufficient to establish oppression, mismanagement severe enough to jeopardize the value of the corporation is oppressive (see: Koehnen, "Oppression" at page 121). Although the type of mismanagement needed to undermine the value of a corporation varies, when mismanagement relates to charging management compensation without proper approval that is not based on objective criteria, or when large increases in compensation 42 | LEXPERT • December 2013 | www.lexpert.ca are approved during times of financial difficulty, a court may find the compensation oppressive. Unsurprisingly, an oppression claim was advanced in Unique Broadband Systems, as UBS's executive compensation had increased dramatically, despite the company's poor financial performance. The court provided little discussion of the oppression claim, as the enhanced compensation package had already been set aside based on the finding of breached fiduciary duties. However, had the executive compensation plan not been set aside, it is likely UBS' compensation decisions would have been oppressive. This is because, as the court explicitly stated, the 40 cents value per unit of the SARs cancellation plan "was not arrived at by any true objective means." Companies and directors should be aware of the wide discretion afforded to courts when remedying oppression claims. If shareholders can successfully prove that compensation is oppressive, a court may set aside such compensation, or take other steps necessary to remedy the oppression. As courts are able to fashion flexible and creative remedies, it is difficult to predict, with any degree of certainty, the outcome of a given oppression claim. Given that mismanagement of executive compensation, as occurred in Unique Broadband Systems, can support an oppression claim, it is not a stretch to imagine shareholders arguing that approval or continuation of an executive compensation plan in the face of a failed say on pay vote is evidence of oppressive conduct. While a failed say on pay vote by itself would likely be insufficient to sustain an oppression claim, it can serve as a factor for a court to consider when faced with such a claim by a shareholder. The existence of the oppression remedy therefore provides an alternative and likely simpler means for a shareholder to seek redress for a failed say on pay vote, and creates an additional factor directors must consider when assessing say on pay risk. MINIMIZING LITIGATION RISK The fact that the representative plaintiff was the same Natalie Gordon in both the Goodyear and Symantec cases discussed above is no coincidence. Enterprising counsel may attempt to bring opportunistic (and profitable) litigation in the face of a failed say on pay vote using a cherry-picked representative plaintiff. Canadian companies should be wary of this risk: in addition to the potential cost of litigation, the legitimate business and operational activities of a company may be disrupted, and the company and its directors may suffer reputational harm as a result of these lawsuits. The following are some steps Canadian companies can take to minimize potential litigation risk: > Consider whether a say on pay vote is appropriate for the company, and what the likely outcome of a say on pay vote will be. > Avoid making definitive statements regarding the outcome and potential actions to be taken as a result of a say on pay vote. > Ensure that proxy disclosure complies with applicable corporate and securities laws and is clear and precise. Proxy disclosures should be clear that any shareholder vote on compensation is advisory in nature and not binding on the corporation. > Keep directors informed of the litigation risk associated with say on pay votes. > Ensure that any performance-based compensation is tied to clearly articulated performance criteria.