On March 29, 2007, the Canadian Securities Administrators (CSA) published for comment its proposed new executive compensation form and related amendments to National Instrument 51-102 - Continuous Disclosure Obligations (NI 51-102). The proposed executive compensation form is intended to replace the current Statement of Executive Compensation (Form 51-102F6). If the amendments to NI 51-102 are implemented in their proposed form, any venture issuer that does not send a management information circular to its security holders will, nonetheless, be required to file a completed Form 51-102F6 with securities regulatory authorities.
CSA anticipates that the new executive compensation disclosure rules will be in effect at the end of 2007 and issuers will be required to comply with the new form for financial years ending on or after December 31, 2007. New disclosure requirements will likely apply prospectively. Thus, an issuer with a December 31, 2007, year-end would make its 2007 disclosure on the new basis, but would not be required to restate information that was reported under the old Form 51-102F6.
In light of the time taken by CSA to consider the new SEC executive compensation disclosure rule and CSA's expressed desire to have this new form in effect by the end of 2007, it is unlikely that CSA will make substantive changes to the draft form in response to comments. Accordingly, issuers should become familiar with the proposed new form and begin assessing its impact on their current executive compensation disclosure.
While adopting a number of key features of the new SEC rule, CSA has done so in a less prescriptive manner than the SEC and has also attempted to be responsive to the differences between the Canadian and U.S. capital markets. The result is a modified SEC executive compensation disclosure rule. The following is a brief summary of the most significant proposed changes to the current form.
The current table is to be modified in six ways:
Modeled after the SEC's new requirements, the proposed Compensation Discussion and Analysis (CD&A) will explain the rationale for specific compensation programs for NEOs. Issuers must discuss six key principles:
Non-venture issuers will continue to be required to include a performance graph that illustrates cumulative total shareholder return over the last five most recently completed fiscal years compared to the cumulative return of at least one broad equity market index. However, non-venture issuers must now explain how the trend shown by their performance graph compares to the trend in the issuer's compensation to executives over the same period.
Issuers will also be required to: (i) disclose specific quantitative and qualitative performance-related factors for NEOs, unless disclosure of targets would result in competitive harm to the issuer; and (ii) practices related to granting options (including whether executives are involved in determining who is awarded options).
The CSA proposal contains two new tables disclosing information about equity and non-equity awards. One table will require information on outstanding options (number, exercise prices and expiry dates), the value of unexercised in-the-money options and outstanding stock awards (market value of non-vested shares or other rights at financial year-end). The other table will show the amounts realized by an NEO during the year from exercising option awards and from the vesting of stock and similar awards. Although CSA has opted for less detail in these two tables than the SEC, issuers will be encouraged to use the narrative discussion that follows the two tables to disclose any material terms of all awards, both equity and non-equity.
A new table will require disclosure of details of all defined benefit retirement plans, including the present value of the accumulated benefit. In addition, issuers must explain, in narrative form, the material terms of any deferred compensation or defined contribution plan relating to each NEO.
Another new requirement is detailed disclosure of estimated annual payments and benefits that NEOs would receive under various termination scenarios.
A new table will require disclosure of director compensation in a manner similar to the summary compensation table for executives.
As is currently the case, executive compensation disclosure will remain in the issuer's management information circular. Unlike the SEC, CSA is not requiring certification of any part of the executive compensation disclosure on the basis that the CD&A is a report of the board of directors or compensation committee of the board, rather than of the CEO or CFO.
Other than the performance graph requirement (from which they are exempt), venture issuers will be subject to the same form disclosure requirements as non-venture issuers.
Venture issuers that do not send a management information circular to securityholders will be required to file a completed Form 51-102F6 within 140 days of the issuer's financial year-end. In a related amendment, CSA proposes to amend MI 52-110 – Audit Committees and NI 58-101 – Disclosure of Corporate Governance Practices to reflect the proposed change to the definition of venture issuer (i) to remove all debt-only issuers from the definition and (ii) to include issuers whose securities are listed on the Alternative Investment Market of the London Stock Exchange (AIM) and the PLUS markets (formerly known as OFEX) operated by PLUS Markets Group plc.