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.
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www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2015 | 11 directors and of the policy's reasonableness. In particular, the directors were not attempting to infl uence a proxy contest and would be seeking shareholder approval of the policy. PROXY CONTESTS: NOMINEE COMPENSATION e controversy over the future of director nominee compensa- tion, which fi rst took shape in the 2013 proxy battle between JANA Partners LLC and Agrium Inc., may be boiling down to a disclosure issue. JANA, a US activist hedge fund represented by Berl Nadler in Davies Ward Phillips & Vineberg LLP's Toronto offi ce, sought to elect fi ve of its nominees to potash giant Agrium's 12-person board. JANA's intention was to infl uence what it saw as a poor corporate strategy. Most signifi cantly, JANA objected to the retention of Agrium's retail and wholesale divisions under the same corporate umbrella, arguing that the company's share price did not adequately refl ect the value of the retail business. Accordingly, JANA wanted Agrium to sell the retail division, but was concerned that the board lacked the necessary retail experience. So JANA recruited three nominees with the perceived experience and two other high-profi le candidates. By way of inducement, JANA off ered an up-front cash payment to cover their time and eff ort. JANA also off ered further compensa- tion based on a percentage of the net profi ts that JANA might earn on the sale of its Agrium shares. If JANA did not sell the shares within three years, the percentage compensation would be paid as if it had done so. Agrium objected to the payments, labeling them a "golden leash" that made it impossible for JANA's nominees to be independent as they were eff ectively JANA's employees. "We believed and still believe that nominee compensation is inappropriate," says Walied Soliman in Norton Rose Fulbright Canada LLP's Toronto offi ce, who acted for Agrium. "It's partic- ularly inappropriate if the payments are aimed at achieving a stakeholder's objective while the nominees, if elected, will be exercising their duties in a fi duciary capacity." Still, Soliman concedes that it would be diffi cult to convince a court that such payments were illegal. "I don't think a court would give you that up front," he says. "But I do think that courts would be more open to questioning subsequent board decisions where a golden leash is in place." However, Agrium's position garnered considerable support in the institutional and government community. But Nadler says that it was the structured nature of the compensation rather than the lack of independence argument that attracted the support. "What resonated was the argument that the nominees had personal incentives to take short-term action rather than acting in the long-term best interests of the company," he says. "Had JANA's nominees received shares instead of cash, that perception might not have been as intense." As it turns out, Glass, Lewis & Co. and Institutional Shareholder Services Inc. (ISS), the leading shareholder advisory fi rms, didn't see eye-to-eye on the issue. Glass saw the payments as compromising the nominees' independence and as giving rise to a potential confl ict because the arrangements were short-term. ISS saw no adverse impact on independence, did not comment on the confl ict issues and endorsed two JANA nominees. e long-term versus short-term debate is hardly new. e long-termers argue that directors, as the corporation's stewards, must take the long view, especially in the face of opportunistic unsolicited bids or shareholder initiatives to focus on short-term returns. e short-termers argue that shareholders have the right to deal with their shares as they please, including standing up to boards that encumber these rights by invoking fi duciary duties. Still, at least 25 American companies have adopted a proposal from Wachtell, Lipton, Rosen & Katz, known as the "Lipton bylaw," which disqualifi es director nominees who receive compensation from any source but the company. But Nadler maintains the Lipton bylaw goes too far. "Most criticism of golden-leash arrangements has focused on the terms of the compensation, not the principle of compensating share- holder nominees," he says. "And recent experience suggests that eff orts by boards to prohibit the practice entirely are likely to meet resistance." Indeed, a er Provident Financial Holdings, Inc., a US-based bank holding company, passed what was essentially a Lipton bylaw, ISS recommended that shareholders at the November 2013 annual meeting withhold votes from three directors who had approved the bylaw. e Provident board survived the uncontested vote. But following the meeting, Provident disclosed that more than 30 per cent of the votes cast were withheld from the three directors. " e withhold vote was far in excess of that seen in prior Provi- dent shareholder votes," Nadler says. Despite the criticism of nominee compensation, Nadler believes that Provident provides a cautionary note. "Any eff orts by boards to prohibit the practice outright could reasonably be expected to be resisted by both proxy advisors and shareholders and to result in votes withheld in respect of the election of incum- bent directors who support such measures," he says. For his part, Soliman doesn't expect to see many more forays by activists into the golden-leash arena. " e institutional share- holder community came out pretty strongly against JANA on this point," he says. Nadler agrees that JANA's failure to elect any directors to Agrium's board may have a "chilling eff ect," but believes disclosure rules for compensated nominees would help deal with the problem. "Shareholders should be given the opportunity to decide who they want as directors," he says. "So a bylaw prohibiting compen- sation is a bad idea, but requiring disclosure is a good one." Julius Melnitzer is a legal affairs writer in Toronto. "The new [take-over bid] regime takes the sting out of the process by setting bright-line ground rules. While that makes things easier for bidders in some ways, it makes it harder in others." Alfred Page Borden Ladner Gervais LLP CORPORATE GOVERNANCE »