On October 26, 2017, the Canadian Securities Administrators (“CSA”) published CSA Consultation Paper 52-404, Approach to Director and Audit Committee Member Independence (“Consultation Paper”). The purpose of the Consultation Paper is to encourage a discussion regarding the CSA’s approach to determining director and audit committee member independence and to solicit views on whether any changes should be considered. The Consultation Paper is being published for a 90-day comment period, ending on January 25, 2018.
The corporate governance regime Canada (“regime”) and the approach taken by the CSA to determine the independence of a director or an audit committee member (“approach”) has its beginnings with two important documents:
- The 1994 report sponsored by the Toronto Stock Exchange, Where were the Directors? (“Dey Report”) became the basis for the regime. The regime encompasses guidelines related to the exercise of independent judgement, including the composition of the board of directors (“board”) and the audit committee. Non-venture issuers must provide disclosure with reference to the guidelines within the framework of a “comply or explain” disclosure model, whereas venture issuers are subject to more basic disclosure requirements; and,
- Multilateral Instrument 52-110, Audit Committees and Companion Policy 52-110CP Audit Committees was adopted by the CSA in 2004, as the basis for the approach. Subsequent updates over the years have brought the approach to its current iteration. The approach used by the CSA is largely subjective, but it has elements, such as bright-line tests, that when applied do not permit a board to determine whether a director could reasonably be expected to exercise independent judgement.
Stakeholders have expressed concerns regarding the approach:
- the approach excluded individuals with the requisite expertise and judgement from being considered as independent members of a board or from being able to serve as audit committee members;
- the approach has limited the pool of individuals who could be considered independent to the detriment of certain issuers; and
- the approaches used in other jurisdictions, such as the UK, Sweden and Australia should be considered.
CSA Consultation Paper 52-404, Approach to Director and Audit Committee Member Independence, is available for download from the websites of participating member jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.