Comparison of Corporate Governance to Nasdaq Requirements
As a “foreign private issuer” under the Exchange Act, the Company is permitted, pursuant to Nasdaq Stock Market Rule 5615(a)(3), to follow its home country practice in lieu of certain Nasdaq corporate governance standards provided that it discloses and describes the differences between its corporate governance practices and those required by Nasdaq. Below we describe the differences between the Nasdaq Stock Market Rules and the applicable home country requirement. References to a “Rule” below are references to the referenced rule in the Nasdaq Stock Market Rules.
The Company is incorporated under the Business Corporations Act (Ontario) and its Common Shares are listed and posted for trading on the TSXV, based in Canada. As such, the Company is a ‘reporting issuer’ under applicable Canadian securities laws. As a Canadian, TSXV-listed “reporting issuer,” the Company’s home country requirement with respect to corporate governance standards and practices refers to certain instruments prescribed by the applicable Canadian securities regulators in the provinces in which the Company is a ‘reporting issuer’ acting collectively as the Canadian Securities Administrators (“CSA”), as well as certain policies of the TSXV. Specifically, the applicable framework includes: (i) National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”) of the CSA, (ii) National Policy 58-201 – Corporate Governance Guidelines (“NP 58-201”), (iii) National Instrument 52-110 – Audit Committees (“NI 52-110”) of the CSA, and (iv) Policy 3.1 – Directors, Officers, Other Insiders, Personnel and Corporate Governance (“Policy 3.1”) of the TSXV.
Meeting of Board of Directors: Rule 5605(b)(2) requires that “Independent Directors” (as defined by Nasdaq) must have regularly scheduled meetings at which only such “Independent Directors” are present. There is no home country requirement to have, and the Company does not have, mandated regularly scheduled meetings of its independent directors. However, its independent directors hold meetings without management present as deemed necessary from time to time. The Company’s Corporate Governance & Nominating Committee and its Compensation Committee Charters provide that the Chairs of each Committee must be an independent director, and a majority of its members must be independent.
Content of Audit Committee Charter: Rule 5605(c)(1) requires that the formal written audit committee charter of an issuer specifies the audit committee’s responsibility for ensuring its receipt from the outside auditors of a formal written statement delineating all relationships between the auditor and the Company, actively engaging in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor and for taking, or recommending that the full board take, appropriate action to oversee the independence of the outside auditor. The home country NI 52-110 requirements are substantially the same, and, additionally, National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) of the CSA requires that the current version of the Company’s Audit Committee Charter be disclosed to shareholders on an annual basis. The Company’s Audit Committee Charter requires the Committee shall assess the independent auditor’s performance, qualifications, and independence and pre-approve all audit services as well as any non-audit services to be provided by the independent auditors.
Audit Committee Composition: Audit Committee Composition Rule 5605(c)(2) requires that each issuer certifies that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. This differs from the home country requirement which, pursuant to NI 52-110, requires each member of the audit committee to be, or be in the process of becoming, “financially literate” based upon a defined standard. Additionally, NI 52-110 and Policy 3.1 require that the audit committee be comprised of at least three members, a majority of which are not officers, employees of control persons of the Company or its associates or affiliates. The Company’s Audit Committee Charter reflects these requirements and further mandates that all members shall satisfy the applicable independence and experience requirements of the laws governing the Company, the applicable stock exchanges on which the Company’s securities are listed (including Nasdaq upon listing of the Common Shares) and applicable securities regulatory authorities. Each member of the Committee is also required under the Committee’s charter to be financially literate as such qualification is interpreted by the board of directors in its business judgement, and as a result, among other financial and accounting related qualifications possessed by such members, as of the date hereof the Company is in compliance with applicable Nasdaq Rules regarding Audit Committee Composition.
Content of Compensation Committee Charter: Rule 5605(d)(1) requires that the formal written compensation committee charter of an issuer specifies that the compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration the specific factors enumerated in Rule 5605(d)(3)(D). The home country requirement is less prescriptive, as NP 58-201 sets out suggested non-binding guidelines only. NP 58-201 suggests that the Company “should” have a formal compensation committee, which committee “should” have a formal written charter with specified content, and that the compensation committee “should” have specified delineated responsibilities. The Company’s Compensation Committee Charter provides that the Committee has the authority to retain, at the Company’s expense, independent legal, financial and other advisors, consultants and experts to assist the Committee in fulfilling its duties and responsibilities and does not require the Committee to first consider the factors enumerated in Rule 5605(d)(3)(D).
Compensation Committee Compensation: Under Rule 5605(d)(2), subject to limited exceptions, the compensation committee must be composed of at least two members, each of whom must be an independent director. The home country requirement is less prescriptive, as NP 58-201 sets out suggested non-binding guidelines only and Policy 3.1 gives discretion to the Company to determine the means by which management compensation “should” be approved by only independent directors. NP 58-201 suggests that the compensation committee of the Company “should” be comprised entirely of independent directors, while Policy 3.1 requires that the Company must adopt whichever procedures it sees fit to ensure that all employment, consulting or other compensation arrangements between the Company and any director or senior officer are considered and approved by independent directors. The Company’s Compensation Committee Charter provides that the Company’s Compensation Committee will consist of at least three directors. A majority of the members will meet the criteria for independence as established by applicable laws and the rules of stock exchanges upon which the Company’s securities are listed. Each independent director must be free of any relationship which could, in the view of the board, reasonably interfere with the exercise of a Committee member’s independent judgement.
Nomination Committee Composition: Under Rule 5605(e), director nominees must either be selected, or recommended for a board of directors’ selection, either by: (i) Independent Directors constituting a majority of the board’s independent directors in a vote in which only Independent Directors participate; or (ii) a nominees committee comprised solely of Independent Directors. The home country requirement is less prescriptive, as NP 58-201 sets out suggested non-binding guidelines only. NP 58-201 suggests that the Company “should” have a formal nominating committee that “should” be comprised of only independent directors. The Company’s Corporate Governance & Nominating Committee Charter provides that the board will appoint at least three (3) directors to the Company’s Governance & Nominating Committee.
Proxy Solicitations: Under Rule 5620(b), a listed company that is not a limited partnership must solicit proxies and provide proxy statements for all meetings of shareholders, and also provide copies of such proxy solicitation materials to Nasdaq. The Company solicits proxies in accordance with applicable rules and regulations in Canada, including the Business Corporations Act (Ontario), the Company’s incorporating statute, and the rules and policies of the TSXV. The content of proxy solicitation materials sent to shareholders is prescribed by NI 51-102. The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act, and the equity securities of the Company are accordingly exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Exchange Act.
Shareholder Meeting Quorum Requirement: Rule 5620(c) provides that the minimum quorum requirement for a meeting of shareholders is 33 1/3% of the outstanding common voting shares. The Company follows the requirements under applicable Canadian corporate law with respect to quorum requirements, which allows the Company to specify a quorum requirement in its by-laws. Pursuant to the Company’s by-laws, a quorum for any meeting of shareholders is two holders of shares entitled to vote at a meeting of shareholders, whether present in person or represented by proxy.
Shareholder Approval Requirements: Rule 5635 requires that shareholder approval be required for the Company to issue securities in connection with certain events, such as the acquisition of shares or assets of another company, a change in control of the company, the establishment of or amendments to equity-based compensation plans for employees, rights issues at or below market price, certain private placements, directed issues at or above market price and the issuance of convertible notes. Neither Canadian securities laws, Canadian corporate law nor the requirements of the TSXV require shareholder approval for such transactions, except where such transactions constitute a “related party transaction” or “business combination” under Canadian securities laws or where such transactions are structured in a way that results in significant dilution, a change in the business of the Company or a reverse take-over of the Company, or where the TSXV requires the shareholder approval for the establishment of or amendments to equity-based compensation plans.
NASDAQ Board Diversity Rule: Rule 5605(f) requires that the Company have, or explain why it does not have, at least two members of its board of directors who are “diverse” as defined under NASDAQ rules. The Company currently has no directors who qualify as “diverse” under such rules. Rule 5605(f)(5) provides certain phase-in periods for newly listed companies which were not previously subject to diversity requirements similar to Rule 5605(f). The TSXV does not currently mandate or impose similar “diversity” requirements regarding the composition of listed companies’ boards of directors; however, Form 58-101F1 – Corporate Governance Disclosure of NI 58-101 requires the Company to disclose whether it has adopted a written policy relating to the identification and nomination of women for director and executive officer positions, the content of any such policy, an explanation for why, if it has not done so, what consideration is given to the level of representation of women in such processes and the number and proportion of women in director and officer positions of the Company. The Company is currently in compliance with Form 58-101F1 – Corporate Governance Disclosure of NI 58-101. Similar to other issuers newly listed on the Nasdaq, the Company is not currently subject to the diversity rules of Rule 5605(f), but will become subject to such rules after the applicable phase-in period listed in Rule 5605(f)