CANADA

By Michelle Tan

In the first quarter of 2004, Fairvest examined 41 mergers and acquisitions, two conversions into income trusts, 12 continuations under different jurisdictions, 31 private placements, two shareholder rights plans, 78 resolutions to adopt equity compensation plans, 36 resolutions to amend option plans and 10 resolutions to re-price options during this period. A relatively large number of companies (20) also proposed name- change resolutions. As is typical for this period, a large number of shareholder proposals (32) were submitted to the Canadian banks. Fairvest has published a summary of these shareholder proposals, including voting results, in our most recent issue of the Corporate Governance Review (CGR); copies of Volume 16 No. 2 are available to clients upon request.

Below is a summary of noteworthy governance news that occurred in Canada during the first quarter.

Expensing Options Becomes Mandatory

Effective Jan. 1, 2004, the Canadian Accounting Standards Board (AcSB) established a new rule requiring public companies to expense all stock-based compensation awards, including stock options granted to employees, executives, and directors. This is a revolutionary move, making Canada the first major jurisdiction in the world to require companies to expense their stock options. Prior to the new AcSB ruling, companies were given the choice to report their stock option values using one of two methods: the intrinsic value method or the fair-market value method. The intrinsic value method allowed the company to include footnotes in the company's notes to the financial statements, outlining how much the stock options were worth and what effect these options would have had if they had been expensed in the company's financial statements. The fair-value method determined the value of the options and incorporated them directly into the company's income statement as an expense.

New Corporate Governance Rules and Regulations

January was a busy month for the Ontario Securities Commission (OSC). Three major rules and regulations that specifically address corporate governance issues were released in their final draft. The three Instruments received Ministerial approval and came into force on Mar. 30, 2004.

National Instrument 52-108 Auditor Oversight is directed towards increasing the public's confidence in the integrity of financial reporting of reporting issuers, by promoting high quality, independent auditing. Reporting issuers will be required to have their auditor's report signed by a public accounting firm that is: i) a member of the Canadian Public Accountability Board (CPAB); and ii) in compliance with an restrictions or sanctions imposed by the CPAB.

Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings is expected to enhance investor confidence in the integrity of the Canadian capital market through the improved quality and reliability of company's annual and interim disclosure. Company CEOs and CFOs will be required to certify personally a number of different documents, including annual information forms, interim and annual financial statements, and interim and annual MD&As.

Multilateral Instrument 52-110 Audit Committees was designed to encourage companies to establish and maintain strong, effective, and independent audit committees with the end goal of ultimately fostering increased investor confidence in Canadian capital markets. Pursuant to the Instrument, all companies will be required to have an audit committee to which the company's external auditor must directly report. More specifically the audit commit will be responsible for: i) overseeing the work of the external auditor engaged in preparing an audit report; ii) pre-approving all non audit services to be provided to the company by the external auditor; and iii) reviewing the issuer's financial statements, MD&As, and annual and interim earnings press releases before they are publicly disclosed by the company.

In January, the OSC also released for comment their proposed Multilateral Policy 58-201 Effective Corporate Governance and Multilateral Instrument 58-101 Disclosure of Corporate Governance Practices.

Opposing Options

ATI Technologies Inc. proposed a restricted share unit plan that just squeaked by shareholders. Approximate numbers released by the company show that 69.4 million of the 115.3 million votes cast were in favor of the resolution at the company's annual meeting on Jan. 27, 2004. These findings indicate that roughly 40 percent of the shares voted were against the plan. Prior to the meeting, the Ontario Teachers Pension Plan Board had announced its intention to vote against the proposal, pointing to the potential dilution represented by the resolution at approximately 14.3 percent of the company's outstanding shares. ATI has faced serious criticism of its share incentive plans in the past. At last year's meeting shareholders were incensed at the company's proposal to increase the number of shares reserved under the stock option plan by approximately 12.5 million shares. As a result, the 2003 option plan amendment barely passed with only 54.2 percent of shareholders voting in favor of the resolution.

Controlling Shareholder Proposal

At the Shaw Communications Inc. annual meeting held Jan. 21, 2004, shareholders were presented a request in the form of a resolution from J. R. Shaw (the company's controlling shareholder) seeking the elimination of all authorized but unissued Class A common shares. While Shaw's articles specify that an unlimited number of Class A common shares are authorized for issuance at the discretion of the Shaw board, the amended articles would provide that no Class A shares may issued in the future without the prior approval of two thirds of the holders of the then outstanding Class A shares. As holder of 77 percent of the Class A shares, the Shaw family would gain firmer control over any future Class A share issuances. The Shaw proposal was virtually identical to one proposed at Rogers Communications Inc.'s 2003 AGM by its own controlling shareholder, Edward S. Rogers.