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EXECUTIVE COMPENSATION GUIDE
for Canadian Officers and Directors
STIKEMAN ELLIOTT LLP
EXECUTIVE COMPENSATION GUIDE
for Canadian Officers and Directors
Second Edition
Canadian companies and those with connections to Canada face
continued challenges with respect to executive compensation.
Public and private companies alike are putting more resources
than ever before into developing executive compensation plans
that are attractive and tax-efficient while aligning executive and
corporate interests and remaining consistent with a focus on
shareholder value.
This revised Second Edition of Stikeman Elliott’s Executive
Compensation Guide reviews the common legal issues that
typically arise in the context of executive compensation, including
issues relating to securities law, employment law, taxation,
pensions law and intellectual property. The guide is designed
to help Canadian and international companies and their boards
identify the main challenges to focus on as they develop executive
compensation plans and policies. We hope that you and your
company will find it useful.
To request print copies of this publication, please contact
[email protected].
This publication is a general overview intended for informational purposes only. It does not
constitute legal advice and its distribution to you does not create, continue or revive a lawyerclient relationship. Executive compensation issues are highly fact-specific and decisions with
potential legal implications should be taken with the advice of counsel who is/are qualified in
the relevant jurisdiction(s) and thoroughly familiar with your circumstances. We welcome your
comments on this publication and how we could make it more useful for you in the future.
© 2014 STIKEMAN ELLIOTT LLP |
www.stikeman.com
Contents
Introduction.................................................................................1
PART 1
General Considerations.................................................................... 3
General Corporate Law Issues.............................................................. 5
Issues Relating to Employment Agreements....................................... 5
The “Consideration” Requirement..................................................... 6
Termination of Employment .............................................................. 8
Restrictive Covenants......................................................................... 9
Modifications of Terms of Employment............................................ 12
Confidential Information and Intellectual Property.......................... 12
Confidential Information .................................................................. 14
Intellectual Property ......................................................................... 14
Policies and Reminders..................................................................... 15
PART 2
Special Considerations for Private Companies........................ 17
Structuring Effective Stock Option Plans.......................................... 19
Setting the Exercise Price................................................................. 20
Manner of Exercise........................................................................... 21
Termination of Stock Options........................................................... 21
Providing for a Change of Control................................................... 22
Shareholder Agreements.................................................................. 22
Securities Law Compliance for Private Companies........................... 23
PART 3
Securities Law Considerations...................................................... 25
Stock Options (Private and Public Companies)................................. 27
Disclosure and Governance (Public Companies)............................... 29
Proxy Advisory Firms and Institutional Shareholders
(Public Companies).............................................................................. 31
PART 4
Tax Considerations.......................................................................... 35
Introduction.......................................................................................... 37
Salary, Wages and Cash-Based Plans................................................. 37
Stock Options....................................................................................... 38
Restricted Share Units......................................................................... 40
Deferred Share Units........................................................................... 41
Share Appreciation Rights.................................................................. 41
Cross-Border Plans............................................................................... 43
PART 5
Retirement Plans.............................................................................. 47
APPEndICES
Executive Compensation disclosure for Public Companies ........... 53
Compensation Discussion and Analysis......................................... 53
Summary Compensation Table ...................................................... 55
Incentive Plan Awards .................................................................... 57
Pension Plan Benefits..................................................................... 58
Termination and Change-of-Control Benefits................................ 58
Director Compensation ................................................................. 59
TSX and TSX-V Stock Exchange Rules for Equity Compensation........ 60
TSX................................................................................................. 60
TSX-V ............................................................................................. 62
Glossary............................................................................................... 67
Stikeman Elliott’s Executive Compensation Group ........................ 75
Introduction This guide is intended to clarify some of the legal issues
that affect decisions about the compensation of corporate
executives. Whether a company is publicly traded or privately
held, it will need to balance the objectives of attracting, retaining
and motivating highly qualified executives with shareholder
concerns, tax implications, government regulation and the
overarching goal of connecting pay to performance. Depending
on a number of factors, including the size, complexity and nature
of the business, executive compensation may be comprised of a
combination of salary and short-term and long-term incentives
that include bonuses, perquisites, pension benefits and equity
and non-equity incentive plans. One of the major concerns of
almost any business is finding a mix of incentives that will attract
and retain the right type of talent while keeping the interests of
the company and its leadership aligned.
In the current climate, no discussion of executive compensation
would be complete without a reference to the close scrutiny
that regulators and other market participants have been paying
to compensation philosophy and practices, including bonuses,
termination payments and other elements of executive pay
packages. The recent regulatory focus on discouraging excessive
or inappropriate risk, particularly in the financial sector, has also
led to something of a cultural shift in compensation philosophy.
A number of international regulatory developments, including
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank”) in the U.S., have also had an impact on Canadian
companies, either directly or indirectly, as market participants
attempt to keep pace with trends in the global marketplace.
Reforms under Dodd-Frank include:

More emphasis on compensation committee independence; S TI k EMA n Ell IOTT ll P
1
Heightened attention to the possibility of conflicts of
interest involving compensation consultants; and

Increased pressure on companies to demonstrate a
relationship between executive pay and performance.1

While specific legislation such as Dodd-Frank is often directly
applicable primarily or exclusively to public companies, the
climate of increased public scrutiny reflected by such legislative
efforts is impacting both public and private organizations as they
make their executive compensation decisions.
Overview
This publication is divided into five parts: Part 1 includes a
discussion of the significant factors that come into play when
dealing with compensation generally, including confidentiality,
protection of intellectual property, and restrictive covenants,
as well as matters to consider when negotiating employment
agreements. Parts 2 and 3 focus on additional issues of relevance
to private and public companies, including stock option plans and
related securities law issues. Parts 4 and 5 discuss some of the
tax and pension considerations associated with the most common
forms of compensation. The discussion of public companies is
further supplemented by Appendix A, which sets out a detailed
summary of the executive compensation disclosure that is
required under Canadian securities laws, and by Appendix B,
which sets out those rules of the TSX and TSX-V that apply to
equity compensation arrangements. At the end of the publication
is a Glossary that explains key concepts mentioned in the text.
1
Say-on-pay was originally intended for financial institutions under the Troubled Asset
Relief Program (“TARP”) in 2009. It was extended under Dodd-Frank to all companies
subject to proxy rules of the U.S. Securities and Exchange Commission, requiring them to
hold a non-binding say-on-pay vote at least every three years. While not yet mandatory
in Canada, say-on-pay is a growing trend among Canadian public companies and forms a
key component of their ongoing efforts to enhance shareholder engagement on executive
pay issues. Industry Canada has raised say-on-pay as part of the public consultation on
amendments to the Canada Business Corporations Act, R.S.C. 1985, c. 44 (“CBCA”),
announced in late 2013. Previously, in Staff notice 54-701 – Regulatory Developments
Regarding Shareholder Democracy Issues, the Ontario Securities Commission also indicated
that it was considering the development of, among other things, regulatory proposals
relating to say-on-pay. See also the website of the Shareholder Association for Research
and Education (“SHARE”) in Canada, which tracks Canadian public companies that have
adopted say-on-pay at < http://www.share.ca/services/shareholder-engagement/current­
engagement-topics/executive-compensation/ >.
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PART 1
General Considerations S TI k EMA n Ell IOTT ll P
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General Corporate
Law Issues
Executive compensation packages are generally subject to the
oversight of the board of directors, or a committee thereof,
as a matter of Canadian corporate law. Decisions relating to
executive compensation or employment will accordingly have
to be consistent with the general fiduciary duty and duty of
care that apply to all board members under Canada’s business
corporations statutes.2
Issues Relating to Employment
Agreements
While an employment agreement is partly for the benefit of the
employee, important provisions to the benefit of the employer
can be included as part of the quid pro quo for the compensation
that is being offered. To take two examples that are particularly
relevant to executives, an employment agreement can
provide useful clarification about the treatment of executive
compensation in the event of termination of the executive’s
employment and can also include additional protections such as
restrictive covenants in favour of the employer. The employer
should also consider whether provisions regarding intellectual
property (as discussed below) are appropriate, given the nature
of the executive’s work, in order to protect the company’s
interest in its IP.
Many Canadian employers enter into written employment
agreements with employees to allow them to specify the terms of
employment. In the common law jurisdictions (i.e. all provinces
2
BCA, ss. 102, 122 and 125. See UPM-Kymmene Corp. v. UPM-Kymmene Miramichi
C
Inc. (2002), 214 D.L.R. (4th) 496, 2002 CanLII 49507 (Ont. S.C.J.), paras. 116-159. See
also In re Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005).
STIKEMAN ELLIOTT LLP
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and territories other than Quebec), employment agreements can
also enable the parties to opt out of the common law requirement
of reasonable notice of termination of employment – an imprecise
concept that, as discussed below, frequently gives rise to disputes
over entitlement to compensation on termination of employment.3
A written employment agreement is also an opportunity for the
employer to obtain specific covenants from an employee, such as
restrictive covenants with respect to non-competition and nonsolicitation, in addition to those that may be implied at law.4
See “Confidential Information and Intellectual Property”,
below, for more information on confidentiality and intellectual
property issues, which are often significant considerations in
executive employment agreements.
The “Consideration” Requirement
In Canada, in order to enter into a valid and enforceable employment
agreement, there must be sufficient consideration for the contract.
The word “consideration” in this context is a common law concept
referring to something of value that the employer gives the executive
in exchange for the executive’s promise to the employer, by which
that promise is transformed, in the eyes of the law, into a legally
enforceable contractual commitment.
Briefly stated, the idea underlying the doctrine of consideration
in this context is that an employer will not generally be able to
enforce a promise received from an employee with respect to his
or her employment if the employee does not receive something
of value (the “consideration”) in return for that promise. The
doctrine of consideration is not typically problematic where – as
is usually the case – an employment agreement is negotiated
and entered into prior to the commencement of employment
(the consideration in such a scenario would generally be the
employment itself). Satisfying the consideration requirement can
3
4
It should be noted that, in the province of Quebec, employees cannot validly renounce
in advance their right to receive reasonable notice in the event of the termination of their
employment without cause.
note that employees who are held to be fiduciaries may have some obligations
post-employment. See, for example, Canadian Aero Service Ltd. v. O’Malley, [1972]
S.C.R. 592 at 613 with respect to the post-employment appropriation of corporate
opportunities by directors and executives. See also RBC Dominion Securities Inc. v.
Merrill Lynch Canada Inc., 2008 SCC 54, [2008] 3 SCR 79.
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be trickier, however, when an employment agreement is entered
into with an existing employee or where new terms are added to an
existing employment agreement. The reason is that, in Canada, the
continuation of existing employment does not constitute sufficient
consideration. As a consequence, where the individual is already
employed, the employer must generally provide a new benefit (i.e.
one to which the employee would not otherwise have been entitled)
in order to establish consideration for the employee’s agreement to
enter into an employment agreement (or for his or her agreement
to the creation of new obligations under an existing agreement).
The new consideration can include the introduction of a bonus or
incentive compensation, for example, and may be modest.
Consideration issues could arise with respect to executive
compensation in a number of scenarios. For example, when a
business is acquired, the acquiror may wish to make changes
to the terms of employment of the target’s executives. If
those changes will be adverse to the executive, the issue of
consideration will generally need to be addressed. Another
issue relating to the adequacy of consideration arises from the
granting of options as consideration for an employment contract.
The question is whether such options are “things of value” for
the purposes of the consideration doctrine. Unfortunately, little
has been said by Canadian courts on this point. One decision
from the Ontario Superior Court of Justice, Nortel Networks Corp.
v. Jervis, addressed the issue of consideration and, in so doing,
made the following statement regarding a grant of stock options:
In this case, there was a benefit conferred to Mr. Jervis,
at a cost to Nortel, accepted in return for a promise to
comply with certain terms attached to the benefit. I
conclude there was consideration.5
It is significant that, in Nortel, the grant vested immediately
and the individual did derive a benefit in the form of cash upon
exercise of his options. While there is therefore some support for
the view that where there is no pre-existing duty to grant options
or any other form of equity, such a grant can be viewed as proper
consideration, there is a risk that where there is delayed vesting
5
Nortel Networks Corp. v. Jervis, 2002 CanlII 49617 (On SC), para. 27, per Rivard J.
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and/or the options have no intrinsic value6 at the date of the
grant, a court may be inclined to find that no consideration had
actually been given to the employee by such an option grant.
Therefore, while a grant of options or other equity can constitute
consideration, it is possible that a court would require that there
be an actual benefit to the employee in order for it to be clear
that the grant satisfies the consideration requirement.
Termination of Employment
As mentioned above, employment agreements are useful tools
for establishing an employee’s entitlements upon termination of
employment. In Canada, unlike certain jurisdictions in the United
States, the concept of “at will” employment does not exist. Instead,
an employee is entitled to “reasonable notice” of the termination of
his or her employment. The common law courts have consistently
held that reasonable notice lies within a range between the
minimum standards set out under the relevant employment
standards statutes and 2 years.7 What is “reasonable” depends
upon a consideration of all of the relevant factors in each particular
case. These factors typically include the type of work done and
the degree of expertise or training involved, length of service,
age of the employee, his or her compensation level, availability
of alternative employment, custom in the trade or business
regarding termination, and the circumstances surrounding the
hiring of the employee (for example, whether he or she was
recruited directly for the position).
6
7
As opposed to “time value”.
Under Ontario’s Employment Standards Act, 2000, S.O. 2000, c. 41, Part XV,
reasonable notice (or pay in lieu) is generally required with respect to those employed
for 3 months or more and is defined (at a minimum) as one week for those employed
for less than one year, two weeks for those employed for at least one but fewer than
three years, and thereafter one week for each completed year of service up to eight,
after which eight weeks’ notice (or pay in lieu) is generally the minimum statutory
requirement in all cases. The notice periods under British Columbia’s Employment
Standards Act, R.S.B.C. 1996, c. 113, Part 8, are generally the same. Quebec’s An
Act respecting labour standards, R.S.Q. c. n-1.1, Division VI, Alberta’s Employment
Standards Code, R.S.A. 2000, c. E-9, Division 8, Saskatchewan’s The Labour Standards
Act, R.S.S. 1978, c. l-1, Part 7, and Manitoba’s The Employment Standards Code,
CCSM, c. E110, Division 10, take a similar approach, although in those provinces the
minimum notice period increases at a slower rate, generally reaching eight weeks only
after the tenth year of employment. In Manitoba, however, the notice requirement
generally applies as of the thirtieth day of employment rather than after the third
month. Other Canadian jurisdictions have similar provisions. As the statutes mentioned
in this note may contain exceptions or make special provision for certain types of
employment, the above should be considered as a guide to general principles only.
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As this multiplicity of factors suggests, assessing reasonable
notice is not an exact science. Accordingly, establishing an
executive’s entitlement upon termination ahead of time,
in the employment agreement, can spare the parties from
having to enter into difficult
negotiations on the subject at
The employment
the time of termination, when it
agreement can
can be more difficult to come to
be very useful
agreement. These challenges can
in avoiding
be magnified in the case of an
executive compensation package,
disputes insofar
which typically involves larger
as it sets out the
sums and may include a variety of
components of
compensation types. Among other
things, the employment agreement
the severance
can be very useful in avoiding
package
disputes insofar as it sets out the
components of the severance package. That is because, in the
normal course, unless otherwise specified in the employment
agreement, an employee is entitled to be “kept whole” during
the notice period. In other words, he or she can expect a
continuation of all benefits, perquisites, bonus entitlements and
entitlements under any equity incentive plans.8 Accordingly, it
is advantageous for the relationship between a company and its
executive to be governed by an employment agreement that
stipulates the specific entitlements that may be terminated
or continued during the notice period. Equity incentive plans
should also be clearly drafted in order to seek to ensure that
the executive’s vesting rights in respect of the stock units
or options granted thereunder do not continue during the
relevant notice period.
Restrictive Covenants
Executives, top sales staff and other high-level employees are often
asked to agree to non-competition and/or non-solicitation clauses
in order to ensure that the departing key employees’ knowledge
of the company’s processes, products, strategies, customers and
8
The ability of an employer to continue group insurance benefits may be subject to
approval from the insurer.
S TI k EMA n Ell IOTT ll P
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other valuable information cannot subsequently be used in a
manner that is unduly prejudicial to the company’s interests. While
it is understandable that companies would wish to extract such
commitments, Canadian courts have generally taken the view that
they constitute a restraint of trade, with the result that, in Canada,
non-competition clauses in employment contracts (in particular)
are prima facie void and unenforceable unless the party seeking to
enforce them can demonstrate that it has a legitimate interest to
protect, that the covenants are necessary to protect those interests,
and that they go no further than necessary.
Patterns have emerged in the case law with respect to the types
of factors that Canadian courts will consider in determining the
reasonableness of a particular restrictive covenant. These factors
include: (i) the relationship between the parties; (ii) whether the
employment contract was pursuant to an agreement of purchase
and sale; (iii) the geographic and temporal scope of the covenant;
(iv) the clarity of the clause; and (v) the circumstances surrounding
the formation of the contract itself. In order for non-competition
clauses to be enforceable, it is therefore essential that the restricted
activity, as well as the geographical and temporal scopes of the
restriction, be limited in each case to what is demonstrably necessary
to protect the legitimate interest of the party seeking to enforce
them. The courts also recognize the unequal bargaining power of
the employer and the employee when the clause is negotiated.
The duration of the non-competition restriction should not be
longer than 12 months (6 months is often viewed as appropriate).
In the case of non-solicitation, whether of customers or employees,
18 months is generally viewed as the upper limit. In Quebec,
24 months is currently viewed as the upper limit for restrictive
covenants.9 Canadian courts generally will not “blue pencil” (or read
down) offending provisions, meaning that an offending provision
will typically be struck down in its entirety.10
9
10
It is important to note that an assessment of the duration of a restrictive covenant (and
in what agreement or agreements it should be contained) is situation-specific and may
depend on the nature of the company and its business.
note, however, that the duration of a “non-compete” in connection with the sale
of a business can range from 3 to 5 years where the executive or other employee
has received significant consideration in exchange for entering into the restrictive
covenant.
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10
It should also be noted that the Nortel decision of the Ontario
Superior Court of Justice (discussed under “The ‘Consideration’
Requirement”, above) provides some support, in limited
circumstances, for provisions requiring that an employee repay
profits derived from the exercise of stock options in the event
of a breach of reasonable restrictive covenants.11 The court
held that even if a former employee who chooses to compete
is thereby required to forgo a benefit, it does not automatically
follow that there has been a restraint of trade. In reaching this
conclusion, the court appears to have been influenced by the
following findings:
The employee had full knowledge of the repayment
provision and the possible repercussions of accepting
employment with a competitor;

The employee executed the stock option agreement and
agreed to its terms and conditions prior to receiving the
first grant of options;

The employee was a sophisticated person and a key
employee who had negotiated his employment contract
with his new employer, including the option agreement;

The repayment required was not more than the gross
profit the employee had received from the sale of the
shares received through the stock option;

Had the employee repaid the money in the year that he
received the profit, the employer would have reversed
its records so that no tax was payable; and

It was the employer’s practice to assess whether
the former employee’s action was “inimical to the
best interests of the Corporation” by taking into
consideration a specified set of criteria and only
applying the clawback where there were no special
circumstances.

It is important to note that, in the province of Quebec, an
employer cannot avail itself of a non-competition clause if the
employment was terminated without just cause.
11
not unlike a “clawback” provision. See “Clawback” in the Glossary, below.
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Modifications of Terms of Employment
Lastly, as a general rule, an employer cannot unilaterally adversely
modify a substantial term and condition of employment. Even if
such a modification did not raise “consideration” issues (as
discussed above), it could very well give rise (generally speaking)
to a claim for constructive dismissal, which would allow the
employee to treat the employment contract as repudiated and
thereby relieve him or her of the obligation of future performance
while giving him or her the entitlement to receive reasonable
notice. One way to avoid a constructive dismissal claim would be
to provide sufficient (reasonable) notice to the employee of the
change in the term or condition of employment, including a plan
or grant. Accordingly, employers will need to consider this when
introducing any changes to employment terms or plans.
Confidential Information and
Intellectual Property
Confidential information and intellectual property are
increasingly significant considerations in the employment
context. This is particularly the case with respect to any
key employees who may have been involved in the creation
and protection of the company’s intellectual property and
confidential information. The centrality of technology in so
many fields of contemporary business means that a company’s
departing executives may possess a wealth of knowledge about
its technology, in addition to other confidential corporate
information. While executives will not always be personally
involved in intellectual property development, such involvement
is quite common in certain sectors, and it is therefore important
to note that Canadian law accords certain rights (including
ownership rights) and obligations to such individuals, which
rights may need to be varied or clarified by contract or by
other measures to avoid diminishment in value or outright loss
of the assets. A comprehensive review of the law relating to
confidential information and intellectual property is beyond the
scope of this publication, but we will touch on some key areas for
consideration by employers and executives.
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Confidential Information
In Canada, confidential information and trade secrets are
generally protected under the common law and through contract.
“Confidential information” refers to information that is original,
and that is actually secret or confidential. It is fundamental to
the law of confidential information that protection exists only
for non-obvious information that is not publicly available or that
was disclosed in confidence. One specific subset of confidential
information is trade secrets, which have an industrial and
commercial character and value, and can include, inter alia,
information relating to secret machines, manufacturing
processes, recipes, formulae, supplier lists, client lists, price lists,
sales levels and commercial contracts.
The common law imposes a duty on employees not to impart
confidential information or trade secrets to anyone outside of
the company or to use such information for their own benefit.
The duty is even higher for fiduciaries who hold key positions
of trust in a company, have statutory duties of loyalty to the
company and routinely have access to the company’s confidential
information. In the event of a dispute between a company and a
current or former employee, the Supreme Court of Canada has
determined that the plaintiff company must prove three key
elements to establish breach of confidence: (i) the information
itself must have the necessary quality of confidence; (ii) there
must be an unauthorized use of that information; and (iii) the
information must have been imparted in circumstances that
impose an obligation of confidence. However, to help prevent such
disputes from arising in the first place, executives should be made
aware of their common law duties with respect to confidential
information and trade secrets, by including such obligations in
the employment agreement and/or through the adoption and
promulgation of a confidentiality policy, as discussed below.
As an alternative to including confidentiality provisions, or to
supplement fiduciary duties, employers can require executives
and independent contractors to execute a separate non-disclosure
agreement (“NDA”). The value of the protection offered by these
contractual obligations can be enhanced by including very broad
definitions of trade secrets and confidential information.
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Intellectual Property
As noted above, it is not unusual for executives to be involved in
the development of a company’s intellectual property. Because
ownership disputes can arise between a company and employees
involved in intellectual property development (and because the
resolution of such disputes
It is desirable to put
can turn on subjective and
evolving understandings
in place a written
of the scope of an
agreement that
individual’s employment
carefully defines
and its relationship with
a particular creative or
relevant intellectual
inventive endeavour), it is
property concepts
desirable to put in place
a written agreement that carefully defines relevant intellectual
property concepts, addresses the issues of disclosure, ownership,
assignment and protection, and includes provisions relating to nonassignable moral rights. Such an agreement can be either a standalone agreement or part of a broader employment agreement. In
addition, given that certain rights cannot be assigned or waived
before the creation of the work, businesses should periodically
monitor the development process to determine when it may be
appropriate to obtain explicit and specific written agreements with
respect to key products as they are developed.
Two of the most common types of intellectual property rights are
patents and copyrights. A patent granted under Canada’s Patent Act
gives a 20-year statutory monopoly over the use of an invention,
which is defined in the Patent Act as any new and useful art, process,
machine, manufacture or composition of matter, or any new and
useful improvement in any art process, machine, manufacture
or composition of matter. Copyright in Canada derives from the
Copyright Act and is, in essence, the right to control reproduction
and publication of original literary, dramatic, musical and artistic
“works” (e.g., books, movies, computer software, website designs
and marketing and advertising materials).
The Patent Act is silent with respect to ownership of inventions
as between employers and employees. The courts have held that an
employer does not automatically own an invention developed by
an employee. A company will only own the invention (and resulting
STIkEMAn EllIOTT llP
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patent) if: (i) a contract states explicitly that the employer will own
any inventions created by the employee; or (ii) the employee was
hired for the express purpose of inventing (the determination of
which is made by the courts on a case-by-case basis using a detailed
analysis of various factors).
Under the Copyright Act, employers are deemed to own the
copyright of works created by employees in the scope of their
employment. However, a dispute over ownership of copyright may
result where an employee claims that the copyrighted work was
created outside the scope of his or her employment.
In addition, under the Copyright Act, an author of a work (as
opposed to the owner of the copyright in that work) has certain
“moral rights” that subsist for the same term as copyright. Moral
rights include the right of integrity (i.e., the right to prevent the use
of the work in a manner that is prejudicial to the author), and the
right of association (i.e., the right of the author to have his or her
name associated with the work).12 Moral rights, which come into
existence upon the creation of a work, cannot be assigned, but they
can be waived by the author, artist or programmer.
Policies and Reminders
The rights and obligations of the business and its employees
(including executives) with respect to intellectual property
and confidential information can be reinforced by a written
company policy that: (i) stresses the importance of these rights
and obligations; and (ii) sets out procedures to protect these
intangible assets. For example, such a policy might include
guidelines for when documents or other materials are to be
labeled “confidential” or for when and how a creative work or
invention must be disclosed.
When an executive resigns or is terminated, he or she should
be reminded of his or her continuing obligations to the company
with respect to intellectual property and confidentiality.
12 Moral rights apply to all works covered by copyright, including, potentially, computer
software.
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PART 2
Special Considerations for Private Companies
S TI k EMA n Ell IOTT ll P
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Structuring Effective
Stock Option Plans
Stock option plans, which grant participants a right to acquire
securities of the company at a specified exercise price, are
common components of executive compensation in both public
and private companies. In order to achieve the alignment of
interest that is often the goal of the option plan, most plans
call for options to vest and become exercisable subject to
certain conditions. Those conditions may include the passage
of time (time-vested or time-based options) and/or certain
performance requirements (performance-based options). Once
vested, the participants may exercise their options, typically
subject to an expiry date. Options are exercised by payment of
the specified exercise price or, if the plan permits, the participant
may offset the exercise price against the share price and receive
the difference in shares of equivalent value (i.e., a “cashless” or
a “net” exercise). Some plans also permit participants to request
a “cash-out” of the options upon their exercise. In a cash-out, the
company cancels the options and, instead of issuing shares, pays
out their cash value net of the exercise price (in other words,
pays out the amount by which the options are in the money).
Cashless and cash-out options are described in greater detail
under the heading “Manner of Exercise”, below.
As discussed in greater detail in Part 4, below, properly
structured stock options can offer significant Canadian tax
advantages to Canadian executives, including both a potential
deferral advantage and the possibility of taxation that is similar
in effect to capital gains treatment. Generally speaking (and
bearing in mind that each situation must be looked at in its own
context), other types of stock-based compensation plans that are
more common in the U.S. (such as restricted stock plans) may
not provide similar tax benefits and may even result, in many
circumstances, in undesirable tax consequences for Canadian
STIkEMAn EllIOTT llP
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executives. Corporate law issues may also come into play. The
result is that compensation plans of those types are not as
prevalent in Canada as they are in the United States.
In a private company, options tend not to be exercised until
the occurrence of a liquidity event. This is primarily because
(i) there is usually no market for the underlying shares, and
(ii) the exercise of options may trigger an inclusion in income,
on exercise, for the optionholder. In the absence of a liquidity
event, an optionholder may not have proceeds with which to
pay the applicable taxes. Moreover, the tax would be payable
regardless of the actual value of the underlying shares when they
are in fact sold. Therefore, an optionholder is likely to hold his
or her options until either an initial public offering or a sale of
the shares of the company in order that proceeds are available
to fund any taxes payable. In a sale situation, there may be
many different methods for dealing with the sale of the options,
including the sale of the options themselves and the sale of the
underlying shares after exercising the options. There may be tax
implications for both the company and the optionholders, which
may affect the method chosen. Also, if the options are exercised
and the underlying shares are sold, the optionee may be asked to
bear his or her pro rata portion of liabilities for representations
and warranties, indemnities and costs of the transaction.
Setting the Exercise Price
Setting the exercise price can be difficult in a private company,
since there is no market to establish a value for the securities.
Unless the company is a “Canadian-controlled private
corporation”13 for tax purposes and certain other conditions (as
discussed in Part 4, below) are satisfied, the board of directors
needs to be satisfied that the exercise price represents at least
fair market value of the shares at the time the option is granted.
Otherwise, the one-half deduction available to the executive
for tax purposes (as discussed in Part 4, below) will not be
available. If a valuation has been obtained, care should be taken
to determine whether it continues to be applicable at the date
the option is actually granted (taking into consideration any
13
See note 29, and accompanying text, below.
STIKEMAN ELLIOTT LLP
20
intervening events in the period between the valuation and the
grant). For Canadian-controlled private corporations, exercise
prices may also increase over time if desired.
Manner of Exercise
Companies or optionholders may prefer to have “net settlement”
exercise provisions. As noted in the introduction to this section,
the two most common of these are cashless exercise provisions
and cash-out provisions.
In a cashless exercise, a formula is typically included to
calculate the number of shares to be issued upon exercise of
vested options after deducting the applicable exercise price (and
often net of withholding taxes). It is
referred to as being “cashless” since
Another
the exercise is paid by deduction
form of net
rather than out of pocket.
settlement can
Where the options are being
be effected
liquidated, another form of net
by means of
settlement can be effected by means
a cash-out
of a cash-out provision, which
typically provides for the company,
provision
at a participant’s request, to buy
back the options for cancellation for the “in the money” net
amount rather than having the optionee exercise the options.
The options are “cashed out” by the company at their net value
(i.e. after deducting the exercise price). Subject to the caveats
discussed in Part 4, below, the tax treatment of the executive on
the cash-out of stock options should generally be the same as it
is with respect to the exercise of options.
Termination of Stock Options
A company may wish to provide that options cease to vest (or
terminate) on certain events, such as the termination of the
employment of the optionee. Companies may also wish to include
a right to acquire and cancel the options of an optionee whose
employment has been terminated. This is distinct from an option
to acquire the underlying shares in similar circumstances, which
may be contained in a shareholder agreement. Typically, unvested
STIkEMAn EllIOTT llP
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options terminate automatically on termination of employment.
For vested options, a plan will typically provide for a limited time
after such termination for the optionee to exercise such vested
options, typically 90-180 days (or longer periods where tied to a
liquidity event), failing which the vested options would terminate.
Providing for a Change of Control
Option plans typically include provisions regarding the treatment
of options on a change of control of the issuer. These provisions
vary widely and may allow, for example, for conversion to
options of the acquiring company, acceleration of vesting, early
termination, or requiring the exercise of vested options in order
that the underlying shares are sold in the change of control
transaction.
Shareholder Agreements
In a private company, the optionholder may be required to
execute and deliver a form of shareholder agreement upon
exercise of his or her options. This is for the protection of the
company and its other shareholders, as described below.
Shareholder agreement provisions vary widely. Some private
companies have “unanimous shareholder agreements” (“USAs”),
which have particular attributes and rights under most Canadian
business corporations statutes, including the Canada Business
Corporations Act and Ontario’s Business Corporations Act. Other
private companies may have minority shareholder agreements
applicable only to certain shareholders, such as optionholders
and employee shareholders.
14
From the company’s perspective, the most important provisions
to be included in a shareholder agreement are the following:
A restriction on transfer in order to maintain control
over membership in the shareholder group;

A “drag-along” or “carry-along” right to enable a certain
percentage of the shareholders, when they want to

14
See CBCA, s. 146 and Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”),
s. 108. One important provision is the right to bind transferees as long as the share
certificates are properly legended.
S TI k EMA n Ell IOTT ll P
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sell their shares, to require the other shareholders
to sell their shares on the same terms as the selling
shareholders. This ensures that 100% of the shares are
available to be sold to a prospective purchaser. Tagalong rights to allow the shareholders to “tag along” on
a sale by certain shareholders may also be granted;
A power of attorney and deposit of shares to seek
to ensure that the drag-along or carry-along can be
accomplished expeditiously; and

A provision permitting amendments to the agreement
with the approval of a specified percentage of the
shareholders.

As these provisions are important for the protection of the
company and its other shareholders, any stock option plan
or agreement should include a requirement to enter into a
shareholder agreement as a condition precedent to the exercise
of options. In addition, a copy of the shareholder agreement
should be made available to the optionee for review when the
option is granted.
While beyond the scope of this publication, shareholder
agreements also often include, inter alia, provisions relating to:
(i) the constitution of the board of directors and appointment of
senior executives; (ii) meetings of directors and shareholders;
(iii) extraordinary approval rights for directors or shareholders;
(iv) permitted transfers; (v) rights of first offer or rights of first
refusal; (vi) tag-along or piggyback rights; (vii) put and call or
shotgun rights; (viii) pre-emptive rights; (ix) confidentiality
obligations; (x) family law matters; (xi) restrictive covenants;
and (xii) a call right in respect of inactive shareholders.
Securities Law Compliance
for Private Companies
Private companies are also subject to compliance with securities
laws with respect to the issuance of stock options and other
securities, as discussed in the first section of Part 3, below.
STIkEMAn EllIOTT llP
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PART 3
Securities law
Considerations S TI k EMA n Ell IOTT ll P
25
Stock Options (Private and Public Companies)
The board approval process for executive compensation
arrangements can be complex and lengthy, and for the equity
incentive plan components of compensation, board approval is
not the last step. Both the issuance of stock options (and other
equity-based awards) and their exercise involve the distribution
of securities by the issuer and must be done in compliance
with prospectus requirements or applicable exemptions from
such requirements under securities laws. These considerations
apply equally to public and private companies (i.e. reporting
issuers and private issuers). While exemptions are generally
available for typical option plans or arrangements, certain
unique arrangements may need to be more carefully scrutinized
to ensure compliance with Canadian securities laws.
Generally speaking, under Canadian securities laws, any trade
of previously unissued securities is considered a “distribution”
and must be undertaken in compliance with the requirement to
prepare and file a prospectus or on the basis of an exemption
from the prospectus requirement. Distributions would therefore
include both the grant of stock options, or similar equity-based
awards, and the issuance of the underlying common shares or other
securities. However, stock options and underlying common shares
can typically be issued in reliance upon a prospectus exemption
that allows an employer to issue its own securities to its (and its
affiliates’) employees, executive officers, directors or consultants
S TI k EMA n Ell IOTT ll P
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and any of their “permitted assigns”.15, 16 The prospectus exemption
that applies in this situation is automatic and does not involve
regulatory paperwork or filings. Regardless, when relying on this
exemption, employers should consider and confirm their compliance
with securities laws. To rely on this exemption, the participation of
the employee or other individual must be “voluntary”, which means
that they must not have been induced to participate by expectation of
initial or continued employment, appointment or engagement.
Stock options or underlying securities are issued in reliance
upon a prospectus exemption by Canadian public companies
and are generally freely tradable provided that the company has
been a “reporting issuer” for at least four months.17 In contrast,
options and underlying shares issued by private companies
can generally be resold or traded only in reliance upon further
prospectus exemptions.18
Under Canadian securities laws, any person involved “in the
business of trading in securities” must generally also register as
a dealer in the applicable province or territory or comply with
an applicable registration exemption. While employers who
make available stock options or similar programs may thereby
technically be “trading in securities”, they are generally not
subject to the dealer registration requirement if they are not in
the business of trading in securities. However, the same sort of
reasoning might not apply in the cases of third party trustees,
custodians or administrators who may be involved with a
company’s stock plan administration. Canadian securities laws
15 While each province or territory has its own securities laws and securities regulator,
prospectus exemptions have been largely harmonized under national Instrument
45-106 – Prospectus Exempt Distributions, and rules relating to resale of securities
issued on a prospectus exempt basis have been largely harmonized under national
Instrument 45-102 – Resale of Securities.
16 To qualify as a “consultant”, the person must be engaged to provide services to the
issuer of the securities or its affiliate under a written contract and spend a significant
amount of time and attention on the affairs and business of the issuer or the affiliate.
The reference to “permitted assigns” makes it possible to issue securities to the
spouse of the person, as well as to a trustee, custodian or administrator acting on
behalf of, or for the benefit of, the person or his or her spouse, as well as to holding
entities and certain specified retirement savings or tax savings plans, in each case of
the person or of his or her spouse.
17 Reporting issuers that are not listed on stock exchanges prescribed for this purpose
are subject to additional requirements.
18 In certain circumstances, securities issued by non-reporting issuers may be traded
through an exchange or market outside of Canada or to a person or company outside
of Canada provided, among other things, the holders of the issuer’s securities in
Canada are below a prescribed threshold.
S TI k EMA n Ell IOTT ll P
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therefore provide for a registration exemption that applies to such
entities when they act on behalf of or for the benefit of an optionee,
to participate in the initial grant and issuance as well as the resale
of securities acquired upon exercise of a grant on a registration
exempt basis (provided that certain conditions are satisfied).19
In addition to compliance with the prospectus and dealer
registration requirements discussed above, Canadian “reporting
issuers” (referred to in this section generally as “public
companies”) must also consider a number of other factors in
designing their equity compensation programs. These include:
Securities laws requirements relating to disclosure and
governance;

Additional restrictions that may be imposed by relevant
stock exchanges (such as the TSX or TSX-V);

The influence of institutional shareholders and proxy
advisors (such as ISS and Glass Lewis & Co., discussed
below); and

Market practice generally.

disclosure and Governance
(Public Companies)
With respect to securities law requirements relating to
governance and disclosure, National Instrument 58-101 –
Disclosure of Corporate Governance Practices requires public
companies to describe the process by which the board determines
the compensation of directors and officers and to disclose
whether or not the board has a compensation committee that is
composed entirely of “independent” directors. If this is not the
case, the company must disclose what steps the board takes to
ensure an objective process for determining compensation. In
addition, where a committee exists, the company must describe
its responsibilities, powers and operations.20 Similar but less
comprehensive disclosure is required for “venture issuers”.21 For
19
20
21
This exemption is found in Part 8 of national Instrument 31-103 – Registration
Requirements, Exemptions and Ongoing Registrant Obligations.
nI 58-101F1, s. 7.
nI 58-101F2, s. 6.
S TI k EMA n Ell IOTT ll P
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all issuers, the disclosure must be contained in any management
information circular involving the solicitation of proxies by
management for the election of directors, or in the issuer’s
annual information form (or annual MD&A for a venture issuer
that does not file an annual information form).22
In National Policy 58-201 – Corporate Governance Guidelines,
the Canadian Securities Administrators (the “CSA”23) set
out recommended “best practices” with respect to a range of
governance matters, including executive compensation. This policy
recommends (although it is not mandatory) that the compensation
committee of the board should be composed entirely of independent
directors and that it should have a written charter that establishes,
among other things, its
National Policy 58-201
responsibilities, structure
and operations as well as
recommends that
member qualifications,
the compensation
appointment and removal.
committee of the
It is also recommended
board should be
that the compensation
committee be given the
composed entirely of
authority to engage and
independent directors
compensate
outside
advisors and that it should be responsible for: (i) reviewing
and approving corporate goals and objectives relevant to CEO
compensation; (ii) evaluating the CEO’s performance in light of
those goals and objectives and determining or recommending to
the board the CEO’s compensation level based on such evaluation;
(iii) making recommendations to the board on non-CEO officer and
director compensation and incentive and equity compensation
plans; and (iv) reviewing the company’s executive compensation
disclosure before it is publicly disclosed.
The disclosure required by National Instrument 58-101 is further
supplemented by the disclosure required under Form 51-102F6
– Statement of Executive Compensation (the “Form”). The Form
requires detailed and comprehensive disclosure regarding a range
of compensation matters and is summarized in Appendix A, below.
22
23
nI 58-101, Part 2.
The CSA is an umbrella body representing Canada’s provincial and territorial securities
commissions.
S TI k EMA n Ell IOTT ll P
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The disclosure includes detailed quantitative information with
respect to the different elements of compensation paid to the
company’s CEO and CFO and the three most highly compensated
executive officers, which includes both employees and those acting
through external management companies. This information is
supplemented by narrative discussion in the form of a “Compensation
Discussion and Analysis” which covers topics such as the objectives
of the compensation program and what it is designed to award,
a comparison of trends in the company’s compensation over a
five-year period to shareholder returns, and information on the
undertakings and composition of the compensation committee,
compensation risk analysis, benchmarking, and the use of
compensation consultants.
Proxy Advisory Firms and
Institutional Shareholders
(Public Companies)
In addition to what securities regulators may require, public
companies may also be influenced by proxy voting guidelines
or recommended best practices adopted by proxy advisory
firms and institutional shareholders. Institutional Shareholder
Services Inc. (“ISS”), for example, has a comprehensive set of
proxy voting guidelines that span a broad range of compensation
related matters and are updated on an annual basis to reflect
market trends and developments.24 According to ISS, its policies
are guided by five global principles:
Appropriate pay-for-performance alignment with an
emphasis on long-term shareholder value;

Avoiding the risk of “pay for failure”;

Maintaining an independent and effective compensation committee; 
Providing shareholders with clear and comprehensive
compensation disclosure; and

Avoiding inappropriate pay for non-executive directors.

24
See the Canadian Proxy Voting Guidelines for TSX-listed Companies and Venture
listed Companies, which are available on ISS’ website at < www.issgovernance.com >
and < http://www.issgovernance.com/files/2013ISSCanadianTSXGuidelines.pdf >.
S TI k EMA n Ell IOTT ll P
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Problematic pay practices may also attract negative votes
under ISS voting policies. These include poor disclosure practices,
overly generous new hire packages for CEOs (and others),25
abnormally large bonus payouts, excessive perks, egregious
employment contracts that include multi-year guarantees for
salary increases, bonuses or equity compensation, interest-free
or low-interest loans for the purpose of exercising options or
acquiring equity, excessive severance provisions, egregious
pension or supplemental executive retirement plan (“SERP”)
awards, payment of dividends on performance awards before
performance criteria are satisfied, backdating, spring-loading or
cancellation and re-grant of options, an absence of pay practices
that discourage excessive risk-taking and excessive internal
pay disparity. ISS’ voting policies set out how a company’s
compensation practices will govern its vote on say-on-pay
resolutions, as well as the election of individual members of the
compensation committee and the board, and include detailed
analysis of when it will or will not support equity compensation
plans generally as well as employee stock purchase plans
(“ESPPs”), employee stock ownership plans (“ESOPs”) and
deferred share units plans (“DSUs”).
Glass Lewis & Co. also identifies problematic pay practices in
its proxy guidelines, including excessive or guaranteed bonuses,
high executive pay that is not reinforced by outstanding company
performance, and inappropriate benchmarking.26
The Canadian Coalition for Good Governance (“CCGG”) has
also published various forms of guidance on recommended pay
practices, including a model say-on-pay policy for boards for
directors and “executive compensation principles.”27 In addition,
certain institutional shareholders, including the Canadian
Pension Plan Investment Board (“CPPIB”) and the Ontario
Teachers’ Pension Plan (“OTPP”), have published their own
25
26
27
See, e.g., the overwhelmingly negative say-on-pay vote received by Barrick Gold
Corp. in April 2013, in protest against the extremely large signing bonus awarded
to the company’s co-chairman the year before: < http://www.theglobeandmail.com/
report-on-business/industry-news/energy-and-resources/shareholders-blast-barrick­
over-bonus/article11558587/ >.
See Glass lewis’ website at < http://www.glasslewis.com/ >.
See the Canadian Coalition for Good Governance’s website at < http://www.ccgg.
ca/index.cfm?pagepath=Policies/Executive_Compensation&id=17579 > and < http://
www.ccgg.ca/index.cfm?PAGEPATH=Policies/_Say_on_Pay_&ID=27349 >.
S TI k EMA n Ell IOTT ll P
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proxy voting principles and guidelines.28 With respect to equitybased compensation plans, for example, the CPPIB’s policy is to
vote against a plan that expressly permits re-pricing of options
without prior shareholder approval or has a three-year grant
(burn rate) that exceeds the acceptable deviation from its
industry group. The OTPP, meanwhile, will generally support
plans where the underlying securities are to be issued at no less
than 100% of current market value, where the total potential
dilution is less than 5%, and where the “burn rate” is less than
1% per annum. The OTPP reviews plans that provide for a higher
dilution or burn rate on a case-by-case basis.
28 Available on their respective websites at < http://www.cppib.com/content/dam/
cppib/How%20we%20invest/Responsible%20Investing/Proxy%20Voting/Proxy_Voting_
Principles_and_Guidelines.pdf > and < http://docs.otpp.com/TeachersCorpGovE.pdf >.
S TI k EMA n Ell IOTT ll P
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PART 4
Tax Considerations
S TI k EMA n Ell IOTT ll P
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Introduction
Among the many factors that must be taken into consideration
in determining an appropriate compensation package for
executives, one of the most important and complex is taxation.
The tax treatment of each element of the compensation package
may have a significant impact upon the overall compensation
package. Of course, while attempting to avoid creating an
excessive tax burden for the executive who receives the package,
the employer will also seek to optimize its own contribution
from a taxation perspective. The following section summarizes
the high-level tax considerations associated with the more
common types of plans and awards that we see in Canada.
Salary, Wages and
Cash-Based Plans
Salary and bonuses paid to an executive are, subject to the application
of the “salary deferral arrangement” rules (discussed immediately
below), generally taxed in the year in which the executive receives
the payment and are generally deductible to the company.
In order to prevent the deferral of income recognition beyond the
year in which the income was earned, the Income Tax Act (Canada)
incorporates a very broadly-worded set of rules, generally referred
to as the “salary deferral arrangement” rules (the “SDA rules”),
which, if applicable to a particular plan or arrangement, require the
executive to include the deferred income in the year in which it is
considered to have been earned. Most, if not all, compensation plans
are structured specifically to avoid the application of these rules.
For example, with respect to a bonus plan, a specific exemption
from the SDA rules applies if the right to the bonus is computed in
respect of services rendered in a particular taxation year and the
payment of such bonus is made within 3 years following the end of
that particular year.
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Stock Options
As discussed above, one of the most common forms of executive
compensation besides salary and bonuses is the stock option
plan, in which an executive is provided with options (or rights)
to purchase shares of the company at a later time for a specified
exercise price. Properly structured, stock options can offer
significant tax advantages to Canadian executives.
One advantage offered by stock options is generally referred
to as the “deferral advantage”. In general, stock options can
be granted to executives without triggering immediate tax
consequences to either the executive or the granting company
because the taxable event is generally deferred until the time at
which the executive exercises the
The company
option. In addition, if the granting
company is a “Canadian-controlled
is generally
private corporation” (“CCPC”)29, a
not entitled
further deferral may be available
to claim any
until the time at which the
deduction on
executive disposes of the shares
the issuance of
underlying the option.
shares pursuant
In general, the difference
between the exercise price of the
to a stock
option and the fair market value
option plan
of the share when the option is
exercised is considered to be employment income for the
executive. However, another significant advantage of stock
options is that the executive will be entitled to a deduction
in calculating his or her taxable income equal to one-half of
that amount, provided that certain prescribed conditions are
satisfied. In respect of options granted by a non-CCPC, the
prescribed conditions are generally as follows:
That the exercise price of the stock option be equal
to or greater than the fair market value of the share
covered by the option at the time the option is granted;

29
In broad terms, a “Canadian-controlled private corporation”(or “CCPC”) is a private
corporation which is not controlled by one, or any combination of, non-resident
persons or public corporations. Depending on the structure of a corporation and its
shareholders, this can sometimes be a complicated determination.
S TI k EMA n Ell IOTT ll P
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That the share be a “prescribed share” (very generally,
an ordinary fully participating common share) at the
time the option is exercised; and

That, immediately after the option is granted, the executive
must be dealing at arm’s length with the company.

The effect of the one-half deduction is to tax the employment
income amount at a rate equivalent to the capital gains inclusion
rate. With respect to executives who acquire shares of a CCPC,
the one-half deduction will also be available (assuming the
conditions outlined above were not otherwise satisfied) provided
that the executive deals at arm’s length with the company and
that he or she does not dispose of the relevant shares within two
years of the exercise of the options.30
The company is generally not entitled to claim any deduction on
the issuance of shares pursuant to a stock option plan. However,
options are sometimes offered with share appreciation rights
attached, otherwise known as “cash-out” rights, which allow the
executive to elect to receive cash for the “in the money” amount31
rather than exercising the options. In these circumstances,
provided that the election discussed below is not made and the
payment is made in the normal course (ie., not in the context of
a corporate takeover or reorganizaton), the cash payment made
to the executive should generally be deductible to the company.
Subject to two caveats, the tax treatment to the executive
on the exercise of a “cash-out” right should generally be the
same as described above with respect to the exercise of options
(including the availability of the one-half deduction, provided
that the relevant conditions are otherwise satisfied). The first
caveat is that it must be the executive (and not the company) who
has the discretion to trigger the “cash-out”. The second caveat is
that in order for the executive to obtain the one-half deduction,
the company must file an election whereby it agrees that it will
not claim a deduction in respect of the cash-out payment. With
respect to the second caveat, the effect of this election is that
30
31
If the executive disposes of the relevant shares within two years of the date of
exercise, the one-half deduction will not be available unless the conditions outlined
above for non-CCPC’s options are otherwise satisfied.
The “in the money” amount being the difference between the fair market value of the
shares issued on exercise of the options and the aggregate option exercise price.
S TI k EMA n Ell IOTT ll P
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either the executive or the company can obtain a deduction (but
not both). This will sometimes be a point of negotiation between
the parties.
Restricted Share Units
Restricted share unit plans32 involve granting employees notional
shares that mirror the market value of a class of the company’s
shares, typically the common shares. In this way, the value of
the restricted share units rises and falls with the share value.
Restricted share units are subject to a vesting period and can be
settled in shares or cash at the date of settlement. The vesting can
be based on time or performance, or both. However, to avoid the
SDA rules the vesting period is typically no more than three years
(although if the units are settled in newly issued shares the vesting
period can be longer than three years).
In general, as long as the plan does not fall within the SDA
rules,33 the executive will be subject to tax at the time the unit is
settled and the amount received will be considered employment
income. Therefore, this type of plan does not generally offer the
same tax advantage as a stock option plan in terms of the onehalf deduction, although it does achieve the benefit of deferring
tax until the cash or shares are received. Similarly, provided
that settlement was not in the form of newly issued shares, the
company should be entitled to a deduction for the amount paid
to the executive for the year in which the settlement occurred.
If the issuing company qualifies as a CCPC at the time of grant
and settlement is paid in shares, it may be possible for the
income recognition to be deferred further until the year of
disposition of the shares acquired upon settlement (rather than
the year the restricted share unit is settled) and, in very limited
32
33
It should be noted that the tax treatment of “performance share units” is generally
similar to that of restricted share units. Performance share units are similar to restricted
share units, in that they are notional shares, have a value equivalent to a class of the
company’s shares (typically common shares) and are subject to a vesting period, which is
typically no more than three years. However, unlike restricted share units, the number of
performance share units that will ultimately vest adjusts based on the executive’s and/or
the company’s performance as measured against pre-determined targets.
See page 37, above.
S TI k EMA n Ell IOTT ll P
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circumstances34, to qualify for a capital gains-like deduction in
respect of that taxable benefit.
deferred Share Units
Deferred share unit plans are similar to restricted share unit
plans, as employees receive notional shares that follow the
market value of the company’s shares. However, as the name
indicates, the benefit of the plan can be deferred over a longer
period (i.e., longer than three years) as such plans rely upon
a specific exception to the SDA rules which prescribes (as a
condition to the application of the exception) that payment under
a deferred share unit plan be made only after the retirement,
termination of employment, or death of the executive.
When deferred share units are settled, the executive is provided
with the cash value of the units, and if the plan is properly
structured, this payment will only be taxed (as employment
income) in the year that it is received. As is the case with a cashsettled restricted share unit plan, this type of plan does not offer
the same tax advantages as a stock option plan. Cash payments
made by the company under a deferred share unit plan should
generally be deductible to the company in computing its income.
Share Appreciation Rights
A plan may also not be a salary deferral arrangement (“SDA”)
if it meets the Canada Revenue Agency’s (“CRA”) administrative
policies in relation to “share appreciation rights” (SARs). The
CRA is of the view that where, on a specified date, the executive
(or any other employee) is entitled to receive only the increase
in value of the underlying phantom share, the plan may not be
considered to be an SDA. However, if the plan is not exempted
from the salary deferral arrangement rules (either by virtue
of the Income Tax Act (Canada) or the administrative policy
applying to SARs), the deferral arrangement will be lost. This will
occur, for example, in instances where the executive is entitled,
at a minimum, to the value of the shares at the time the plan is
34 Generally, if the executive deals at arm’s length with the company and he or she does
not dispose of the relevant shares with two years of the settlement.
S TI k EMA n Ell IOTT ll P
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implemented, notwithstanding that such value may fluctuate.
Performance appreciation rights (PARs), with future
payments based on a corporation’s achieving specified financial
performance and business goals – such as earnings growth rate,
return on capital, return on investment and cash generated by
the underlying business – are considered to be similar to SARs for
tax purposes. A PAR plan is structured to avoid the SDA rules by
ensuring that the rights of employees to receive amounts relate
only to future services rendered after the PARs are granted.
The appreciation of a PAR is valued not by reference to share
value, but by specific long-term measures of performance. The
CRA has concluded that a plan whose measures of appreciation
were based on the consolidated income of a parent corporation
(before the deduction of certain items) was excluded from the
SDA rules. The CRA stated that the SDA exclusion was available
to such a plan on the basis that the PAR could be considered a
payment for future services, as the eventual payout was based
on the future performance of the parent group of companies.
The CRA also concluded that a plan based on the value of the
company determined as a percentage of EBITDA (earnings before
interest, taxes, depreciation and amortization) adjusted for
certain debts and cash (and cash equivalents) and distributions
to shareholders was a “typical SAR” under which the employee
has no right, conditional or otherwise, to receive an amount.
Because appreciation for PAR plans is based on increases in
the value of a business rather than on share value, they may be
used to provide long-term incentive plans for persons (including
executives) who are employed by partnerships.
The exercise and payout of a SAR or a PAR need not occur
within three years of the grant date. The performance period can
extend for any reasonable length of time and can be matched to
the time horizon of the related risks. The payout must occur in
the same year in which the SAR or PAR becomes exercisable, to
avoid the SDA rules and a finding of constructive receipt. The CRA
takes the position that once an employee has a right to exercise a
SAR and does not do so, the SAR may become a deferred amount
for the purposes of the SDA rules. For this reason, a SAR or PAR
plan should not provide for “exercise windows” or any vesting
provisions that may cause the right to become unconditional
before the end of a performance period.
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The CRA has ruled numerous times on various “future
services”-oriented incentive plans. What is interesting is that,
in doing so, the CRA did not rely on the 3-year bonus exception
in the Income Tax Act (Canada)’s definition of SDA. The CRA’s
favourable rulings were in respect of plans where: (i) the
amount of incentive payable was based on the increase of
the corporation over a set number of years; (ii) the incentive
amount payable was based upon total shareholder return and
was calculated by using a multiplier varying with a peer ranking
analysis of similar corporations listed on the TSX; (iii) the plan
had a 7-year duration, entitled employees to accrue points and
to receive payments based pro rata on the total points accrued
by all employees with respect to a profit pool accrued each year
during the plan term by the employer; and (iv) an employee’s
not being entitled to receive an amount upon the vesting of
incentive units because payment depended upon EBITDA and
accrued debt of the corporation in future years.
Cross-Border Plans
A parent corporation that is not resident in Canada may wish to
offer equity-based plans, schemes or arrangements to Canadian
resident executives (or other employees) of a subsidiary (whether
resident of Canada or not). In such a case, it is common to have
shares of the foreign parent purchased with contributions
from the foreign parent, or from the participating subsidiaries/
employers, and contributed to a trust (usually implemented
in the country of residence of the parent corporation; thus a
foreign trust) for later distribution to executives who have been
awarded any type of equity-based compensation. Canadian
executives of a Canadian-resident subsidiary of the foreign
parent who participate in such a foreign equity-based plan will
receive shares from the foreign trust when the awards granted
to them become vested or payable.
It is also commonly the case, whenever Canadian executives
participate in a foreign equity-based plan, that (i) the Canadianresident employer entity is obligated under a “recharge
agreement” with the parent corporation to repay the costs
associated with the participation of its Canadian executives in
the parent’s foreign equity-based plan (this recharge may also
STIkEMAn EllIOTT llP
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be required to comply with transfer pricing rules) or (ii) that
the Canadian-resident employer is obligated under the rules of
the foreign equity-based plan to make direct contributions to
the foreign trust in respect of its Canadian executives in order
that they participate in the foreign equity-based plan. The nonresident trust rules (“NRT rules”), which came into effect on
June 26, 2013, are retroactive to taxation years ending after
2006. While the NRT rules are not specific to foreign equitybased plans, they affect the Canadian income tax liability and the
administration of foreign equity-based plans with participants
resident in Canada.
The NRT rules create income tax liabilities and tax filing
requirements for foreign equity-based plans that use foreign
trusts and that have Canadian-resident participant employees
(specifically, for present purposes, executives). The NRT rules
deem such foreign trusts to be resident in Canada and to be
subject to Canadian income taxation on their worldwide income.
The NRT rules impose joint and several/solidary liability on
contributors and deemed contributors (Canadian employers)
and resident beneficiaries (Canadian executive participants) for
Canadian income taxes not paid by the NRT. The NRT rules deem
a NRT to be resident in Canada and taxable on its worldwide
income, or, upon having made a valid election, taxable only with
respect to income on the portion of contributions made by or
deemed to have been made by Canadian-resident participating
employers. The NRT rules provide that an NRT is deemed to
be resident in Canada and liable to pay income tax in Canada
on its worldwide income if (usually at the end of a taxation
year) there is either a “resident contributor” to the trust or a
“resident beneficiary” under the NRT. Under the NRT rules,
most if not all NRTs used to fund foreign equity-based plans
with Canadian participants will be deemed to have a Canadian
“resident contributor”, either because of the existence of a
recharge agreement between the foreign parent corporation and
its Canadian subsidiary or because of direct contributions
made by the Canadian subsidiary employer of the Canadian
executives. NRTs having or deemed to have Canadian “resident
contributors” are deemed to be resident in Canada and liable to
income taxation in Canada on their worldwide income.
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Any Canadian employer who is (or is deemed to be) a “resident
contributor” and any “resident beneficiary” are jointly and
severally/solidarily liable with the NRT in respect of the NRT’s
income tax liabilities. A resident beneficiary is a person who is a
beneficiary of the NRT and is a resident of Canada at the end of the
NRT’s taxation year, but only if there is a “connected contributor”
to the NRT. A “connected contributor” to a NRT is a person who
contributed property to the NRT. Generally, a Canadian employer
that has made or is deemed to have made contributions in
respect of its Canadian employees to a NRT during a period when
it was resident in Canada will be considered to be a “connected
contributor”, the Canadian employee participants in the foreign
equity-based plan will be considered “resident beneficiaries” for
the purposes of the application of the NRT rules and they will be
jointly and severally/solidarily liable for the taxes payable by the
NRT. Despite this joint and several/solidary liability, a Canadian
employee (executive) who fulfills certain conditions may obtain
some tax relief and will not be liable for Canadian income tax
in an amount greater than a “recovery limit”. To summarize, a
Canadian executive’s “recovery limit” as a “resident beneficiary”
should be equal to the total of all amounts that the Canadian
executive has received from the NRT.
Executives who are subject to taxation in countries other
than Canada, by reason of citizenship or residence or for any
other reason, may also be subject to the tax rules of those
other countries. Their compensation plans must therefore be
structured to comply with those rules.
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PART 5
Retirement Plans
Retirement Plans
The Canadian retirement system has three tiers: (i) Old Age
Security (“OAS”); (ii) Canada Pension Plan (“CPP”) and Quebec
Pension Plan (“QPP”); and (iii) savings plans (RRSP/TFSA) and
retirement plans (RPP). It is common for Canadian employers to
provide group retirement plans to their employees to supplement
government benefits and private savings.
In addition to savings plans that can be set up on a group basis,
such as a group registered retirement savings plan (“Group
RRSP”), employers also provide registered pension plan (“RPP”)
benefits to their employees. There are two main types of
registered pension plans35: defined benefit plans and defined
contribution plans. Defined benefit plans generally promise to pay
the employee a specific retirement benefit that is typically based
on a formula using factors such as a fixed percentage (usually
2%), the number of years worked for the employer and the level
of pay. The plan stipulates a method to calculate the amount to
be paid, and there is a risk that the plan may be underfunded or
overfunded at any given time. Given the prolonged low interest
rate environment, volatile markets, increasing life expectancies
and other factors, many defined benefit plans in Canada have
been underfunded, and in some cases, significantly so. Given
the funding volatility, and administrative and legal complexities
relating to defined benefit plans, there has been an increasing
trend for many Canadian employers to terminate or convert
their defined benefit plans to defined contribution plans for
existing and new employees, although some employers maintain
defined benefit plans for their executives.
Defined contribution plans do not guarantee any particular
pension amount upon retirement. Under defined contribution
35 Target benefits plans may replace these types of plans in the future or be offered as
an alternative choice.
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plans, the employer contributes an amount every month for each
participant. Typically, the employer remits a fixed percentage of
an employee’s salary. Depending on the design of the plan, the
employee may also make contributions under the plan. Upon
retirement, the employee’s pension is determined by how much
was contributed to the fund (net of fees), plus whatever earnings
(or less whatever losses) have resulted. As a result, the employee
bears the investment risks associated with the monies in the
defined contribution account.
A supplemental executive retirement plan (often called a
“SERP” or “top hat” plan) is typically designed to provide
benefits to executive officers above and beyond those pension
benefits available under the employer’s registered pension
plan.36 These plans generally allow executives or other high
income employees to earn the same pension payout as under
the respective registered pension plans but without regard to
the Income Tax Act (Canada) limits applicable to benefits and
contributions under such registered pension plans. Often these
plans are contractual unfunded promises to pay a benefit to an
executive on retirement. If they are funded or secured, they are
retirement compensation arrangements for the purposes of the
Income Tax Act (Canada), which create additional tax remittance
and reporting obligations. Some SERPs have received much
criticism for resulting in an increase in total compensation of
the executive without an adequate connection to executive
or company performance. Large institutional investors have
proposed that excesses under these plans be restricted by,
among other things, imposing an absolute dollar limit on the
pension benefits payable, restricting service credits for years
of service not worked and the circumstances for accelerated
vesting, and restricting excessive bonuses and performancebased equity awards in the calculation of pension benefits. 
36
The ITA limits the amount that can accrue under a DB plan to years of service times a
prescribed amount. For 2014 the prescribed amount is $2,770.00
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Appendices
APPEnDIx A
Executive Compensation
Disclosure for Public Companies
Disclosure of executive compensation matters is required to be provided
by Canadian reporting issuers in compliance with Form 51-102F6 –
Statement of Executive Compensation (the “Form”), which has been
adopted by all members of the Canadian Securities Administrators
(“CSA”). The Form applies to most public companies and is required to
be disclosed in the annual management proxy circular, subject to certain
exceptions available to “venture issuers”. The following is a summary of
the principal elements of the required disclosure.
Compensation discussion and Analysis
The Form requires a narrative form of discussion and analysis of
the compensation provided to named executive officers (“nEOs”),
referred to as Compensation Discussion and Analysis (“CD&A”). Under
the CD&A, the company is required to provide a description and
explanation of all significant elements of compensation paid, made
payable, granted, given or otherwise provided to nEOs and directors
during the most recently completed financial year. Specifically, the
CD&A is to include a discussion of the following:

The objectives of the compensation program;

What the compensation program is designed to reward;

Each element of compensation;

Why the issuer chooses to pay each element;

How the issuer determines the amount and formula for each
element; and

How each element of compensation and the issuer’s
decisions about that element fit into the issuer’s overall
compensation objectives and affect decisions about other
elements.
In addition to the disclosure set out above, the CD&A also requires
the issuer to include disclosure of the following items, to the extent
that they are applicable: (i) any new actions, decisions or policies
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that were made after year-end that could affect an understanding of
an nEO’s compensation for the most recently completed financial year;
(ii) a statement of the benchmark used for compensation purposes and
an explanation of its components, including companies included in the
benchmark group and the selection criteria; and (iii) subject to certain
exceptions, any performance goals or similar conditions applicable to the
compensation plan, including objective, identifiable measures, as well as a
description of any subjective measures.
Amendments made to the Form in 2011 introduced an additional
disclosure obligation as to whether or not the board or a committee of
the board considered the implications of the risks associated with the
company’s compensation policies and practices. If they were considered,
the company must disclose, among other things: (i) the extent and
nature of the board or committee’s role in risk oversight; (ii) the practices
the company uses to identify and mitigate compensation policies and
practices that could encourage inappropriate or excessive risks; and (iii) any
identified risks arising from its compensation policies and practices that are
reasonably likely to have a material adverse effect on the company. While a
risk analysis will ultimately be specific to the company and its industry, the
Form does include examples of situations that could potentially encourage
an executive officer to expose the company to inappropriate or excessive
risk (such as incentives awarded upon the accomplishment of a task while
the risk to the company extends beyond the award period).
In this section, the company is also required to disclose whether an nEO or
director is permitted to purchase financial instruments, including prepaid
variable forward contracts, equity swaps, collars or units of exchange funds,
that are designed to hedge or offset a decrease in the market value of
equity securities granted as compensation or held, directly or indirectly, by
the nEO or director.
Where the company has established a compensation committee, it is
specifically required to disclose the name of each committee member and to
state whether or not he or she is independent and has any direct experience
that is relevant to his or her responsibilities in executive compensation,
as well as the skills and experience that enable the committee to make
decisions on the suitability of the company’s compensation policies and
practices and the responsibilities, powers and operation of the committee.
The CD&A Form includes a requirement to set out a performance graph
showing the company’s five-year cumulative total shareholder return as
compared to the cumulative total return of at least one appropriate broad­
S TI k EMA n Ell IOTT ll P
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based index. The company is required to discuss how the trend shown
by the graph compares to the trend in the company’s compensation to
executive officers reporting under the form over the same period.
The compensation governance section also requires the company to
disclose whether it retained a compensation consultant or advisor to assist
the board of directors or the compensation committee in determining
compensation for any of the company’s directors or executive officers.
Where this applies, the company must identify the consultant or advisor,
state when they were originally retained and provide a summary of their
mandate. In 2011, new disclosure requirements were added in respect of
any other services that the consultant or advisor may have provided to
the company or its related entities and whether the board of directors
or compensation committee must pre-approve other services that the
consultant or advisor, or any of its affiliates, provides to the company
at the request of management. Detailed disclosure is also required in
respect of the fees billed to the consultant or advisor for each of the two
most recently completed financial years, segregated to show fees for
services related to determining compensation for any of the company’s
directors and executive officers and for all other services provided.
Also under the CD&A, the company is required to describe the process
used to grant option-based awards to executive officers, including a
description of the role of the compensation committee and executive
officers in setting or amending any equity incentive plan under which an
option-based award is granted.
Summary Compensation Table
Item 3 of the Form sets out the requirement to provide a summary
compensation table (the “SCT”) for each nEO for the company’s three
most recently completed financial years.
The SCT requires disclosure of each nEO’s salary, share-based
awards, option-based awards, non-equity incentive plan compensation
(separated between annual and long-term plans), pension value, all
other compensation and total compensation for the three most recently
completed financial years. The following is a brief description of some
of these categories, which generally correspond to columns in the SCT.

Salary: The salary column requires the disclosure of the dollar
value of cash and non-cash based salary that was earned by an
nEO during the relevant financial year.
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
Share-based awards: The Form defines “share-based award”
as an award under an equity incentive plan of equitybased instruments that do not have option-like features.
Such instruments include common shares, restricted shares,
restricted share units, deferred share units, phantom shares,
phantom share units, common share equivalent units and
stock. The disclosure required for share-based awards is
based on the fair value of the award on the grant date for the
particular year.

Option-based awards: The term “option-based award” is
defined as an award under an equity incentive plan of options,
including share options, share appreciation rights and similar
instruments having option-like features. Again, such awards
must be disclosed on the basis of their fair value on the grant
date. Option-based awards, with or without tandem share
appreciation rights, are to be included.

non-equity incentive plan compensation: This column
requires disclosure of all amounts earned for services
performed during the relevant year that are related to awards
under non-equity incentive plans and all earnings on any such
outstanding awards. Included are discretionary cash awards,
earnings, payments, or payables that were not based on pre­
determined performance goals as well as performance-based
plan awards. This category is divided into two subcategories:
(i) annual incentive plans (“AIPs”); and (ii) long-term incentive
plans (“lTIPs”). Disclosure under the AIP sub-column relates
only to a single financial year and includes annual non-equity
incentive plan compensation such as bonuses and discretionary
amounts. Disclosure under the lTIP sub-column includes all
non-equity incentive plan compensation related to a period
longer than one year.

Pension value: This column requires disclosure of all compensation
relating to defined benefit or defined contribution plans, including
disclosure relating to service costs and other compensatory
items. This disclosure relates to all plans that provide for payment
of pension benefits and includes only compensatory values for
defined benefit and defined contribution plans.

All other compensation: This column requires disclosure
of all other compensation that is not reported in any other
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column in the SCT. This includes, but is not limited to,
perquisites (such as property or other personal benefits that
are provided to an nEO and that are not generally available to
all employees); other post-retirement benefits (such as health
insurance or life insurance after retirement); all gross-ups or
other amounts reimbursed during the relevant financial year
for the payment of taxes; incremental payments relating to
termination or change of control benefits that occur before the
end of the relevant financial year; the dollar value of insurance
premiums paid or payable by or on behalf of the company for
personal insurance for an nEO (if the estate of the nEO is the
beneficiary); the dollar value of dividends or other earnings
paid or payable on share-based or option-based awards that
were not factored into the fair value of the grant award on
the grant date required in the SCT; the compensation cost
for any security that an nEO bought from the company or its
subsidiaries at a discount from the market price; above-market
or preferential earnings on compensation that is deferred on a
basis that is not tax-exempt; and any company contribution to
a personal savings plan made on behalf of an nEO.

Total compensation: This column requires disclosure of the
aggregate dollar value of all of the other columns on the SCT.
Following the SCT, the company is required to provide a narrative
discussion explaining any significant factors necessary to understand
information contained in the SCT, which may include the significant
terms of an nEO’s employment agreement or arrangement as well as
any re-pricing or other significant changes to the terms of any sharebased or option-based award programs.
Incentive Plan Awards
Item 4 of the Form requires specific disclosure regarding incentive plan
awards in the form of two separate tables and a narrative discussion.
The first table requires disclosure of all outstanding option-based
awards and share-based awards at year-end. Option-based awards
must be disclosed based on the number of securities underlying
unexercised options, the option exercise price, expiration date and
value of unexercised in-the-money options (calculated based on the
market price of the relevant securities at year-end). For share-based
awards, the table requires disclosure of the number of shares or units that
S TI k EMA n Ell IOTT ll P
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have not vested, the market or payout value of those unvested sharebased awards and the market or payout value of vested awards that have
not been paid out or distributed. The second table requires disclosure of
the value vested or earned on option-based, share-based and non-equity
incentive plan compensation during the most recently completed financial
year. For option-based awards, the amount disclosed is the aggregate
dollar value that would have been realized if the options had been
exercised on the vesting date, using the market price on the vesting date
for the purposes of the calculation. Similarly, for share-based awards, the
amount required to be disclosed is the dollar value that would be realized
on the vesting date.
These tables are to be followed by a narrative discussion that describes the
significant terms of all plan-based awards, including non-equity incentive
plan awards, but only in respect of awards that were issued, vested or were
exercised during the year, or that were outstanding at year-end.
Pension Plan Benefits
Item 5 of the Form requires disclosure in tabular form for all defined benefit
plans and defined contribution plans, along with the opening and closing
present values of the defined benefit obligations. Following the tabular
disclosure, the company is required to include a narrative discussion on
any significant factors necessary to understand the information disclosed
in the tables. Also required is a description of the significant terms of
any deferred compensation plan, including the types of compensation
that can be deferred, the significant terms of payouts, withdrawals and
other distributions, and measures for calculating interest or other earnings
(including how and when such measures can be changed and at whose
election). These measures must also be quantified where possible.
Termination and Change-of-Control Benefits
Item 6 of the Form requires detailed disclosure of the compensatory
arrangements with nEOs relating to retirement, resignation, termination
and change of control. The Form requires that for each contract,
agreement, plan or arrangement that provides for payments to an
nEO at, following, or in connection with any termination, resignation,
retirement, a change in control of the company or a change in an nEO’s
responsibilities, the company is required to describe and explain, and
where possible to quantify, the following:
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
Circumstances that trigger payments or provision of other
benefits;

The estimated incremental payments that are triggered,
including timing, duration and whom they are provided by;

How the payment and benefit levels are determined;

Any significant conditions or obligations that apply to receipt
of payments, including but not limited to non-compete, nonsolicitation, non-disparagement or confidentiality agreements
(including the terms of these agreements and provisions for
waiver or breach); and

Any other significant factors for each written contract,
agreement, plan or arrangement.
director Compensation
The Form also includes a table that requires disclosure of director
compensation under Item 7, which is similar in form to the SCT for
nEOs. This table requires tabular disclosure for each director of the
fees earned, share-based awards, option-based awards, non-equity
incentive plan compensation, pension value, all other compensation
and total compensation provided for the relevant year. With respect
to fees earned, this column is to include all fees awarded, earned, paid
or payable in cash for services as a director, including annual retainer
fees, committee, chair and meeting fees. The column for all other
compensation requires disclosure of compensation that is provided,
directly or indirectly, by the company or a subsidiary of the company to
a director in any capacity. Following the table, the Form also requires
the company to include a narrative discussion of any factors necessary
to understand director compensation. Disclosure relating to sharebased, option-based and non-equity incentive plan compensation is also
required for directors – similar to the disclosure required for nEOs under
Item 4 of the Form.
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APPEnDIx B
TSX and TSX-V Stock Exchange
Rules for Equity Compensation
In addition to the securities law requirements discussed in Part 3, above,
where the company’s securities are listed on an exchange, stock option
arrangements must also satisfy applicable exchange requirements, the
most important of which is the requirement for shareholder approval.
TSX
The TSX Company Manual requires shareholder approval by majority
vote37 of all “security based compensation arrangements” at the time
they are instituted and when they are amended, unless prescribed
exemptions from these approval requirements are satisfied.38 There
are also important restrictions and requirements imposed on the terms
of security-based compensation arrangements that are covered by the
TSX’s rules. Such security-based compensation arrangements include:

Stock option plans for the benefit of employees, insiders or
service providers;
37 Under the TSX’s “disinterested shareholder approval requirements,” insiders entitled to
receive a benefit under the arrangement are not eligible to vote their securities, unless
the aggregate of the issuer’s securities (i) issued to insiders within any one year period
and (ii) issuable to insiders, under the arrangement, or when combined with all of the
issuer’s other security based compensation arrangements, could not exceed 10% of the
issuer’s total issued and outstanding securities (referred to as the “insider participation
limit”). Where the 10% threshold is exceeded and insiders are therefore not eligible
to vote, holders of restricted shares must be entitled to vote with the holders of any
class of securities of the issuer which otherwise carry greater voting rights, on a basis
proportionate to their respective residual equity interests in the issuer (TSX Company
Manual, Part I (“Interpretation”) and s. 613(a)).
38 Shareholder approval is not required in the following circumstances for TSX-listed issuers: (i)
the assumption of options or other entitlements in the context of an acquisition, provided
the number of securities issuable pursuant to the awards made under the assumed
arrangement (and their applicable exercise or subscription price) is adjusted in accordance
with the price per acquired security payable by the listed issuer (s. 611(f)); (ii) stock options,
stock option plans and employee stock purchase plans, which are in effect at the time a
company is first listed on the TSX (s. 329); (iii) arrangements used as an inducement to
a person not previously employed by the issuer provided that such person enters into
a contract of full time employment as an officer of the listed issuer and the number of
securities made issuable during any twelve month period do not exceed in aggregate 2%
of the number of securities of the listed issuer which are outstanding, on a non-diluted basis,
prior to the date this exemption is first used during such twelve month period (s. 613(c));
and (iv) a plan of an issuer that is also listed on another exchange where at least 75% of the
trading value and volume over the six months immediately preceding notification to the
TSX occurs on that other exchange (s. 602(g)).
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
Individual stock options granted to employees, service
providers or insiders that are not granted pursuant to a plan
previously approved by shareholders;

Stock purchase plans pursuant to which the company provides
financial assistance or matches purchases made by participants,
in part or in whole;

Stock appreciation rights or any other compensation or
incentive mechanism involving the issuance or potential
issuance of securities from treasury; and

Security purchases from treasury by an employee, insider or
service provider that is financially assisted by the company.39
The TSX Company Manual makes clear that security-based compensation
arrangements are limited to arrangements where listed securities are
issuable from treasury. They do not include arrangements where awards
are settled entirely in cash or where securities are purchased only on the
secondary market.
Under the TSX’s rules, security-based compensation arrangements must
generally be approved by shareholders when they are instituted and when
they are amended. Certain amendments may be made to plans without
shareholder approval, provided that the plan specifically identifies such
amendments and the amendment-related provisions of the plan have
previously been approved by shareholders. However, irrespective of such
amendment-related provisions in the plan itself, shareholder approval
will still be required for certain types of amendments.40 These include
a reduction in the exercise price or purchase price, extension of a term
that benefits an insider of the issuer, any amendment to remove or to
exceed the insider participation limit, an increase in the maximum number
of securities issuable and amendments to an amending provision of the
compensation arrangement. If the company cancels options and then
re-grants those securities under different terms, the TSX will consider this
an amendment that requires shareholder approval, unless the re-grant
occurs at least three months after the cancellation.41 Options issued to
non-insiders may otherwise be amended if the plan specifically permits
such an amendment to be made without shareholder approval (i.e., under
the amendment-related provisions referred to above).
39
40
41
See TSX Company Manual, s. 613(b). See TSX Company Manual, s. 613(i). Also see s. 613(l) for amendment procedures. See TSX Company Manual, s. 613(i). S TI k EMA n Ell IOTT ll P
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When seeking shareholder approval, materials provided to security
holders in respect of a meeting at which the approval of security based
compensation arrangements will be requested must be pre-cleared
with the TSX (through advance filing directly with the TSX). As of the
date of the materials, disclosure of the compensation arrangement
(as provided under s. 613(d) of the TSX Company Manual) is required.
Following the TSX’s approval, these details must also be disclosed
annually in the issuer’s information circular or other annual disclosure
document distributed to all of its shareholders.42
The TSX also requires that all security-based compensation arrangements
provide for an exercise price that is not lower than the market price at
the time of grant and that each compensation arrangement specify
the maximum number of securities issuable under it.43 This number
can be expressed in absolute terms as a fixed number or as a fixed
percentage of the total number of issued and outstanding securities.
A plan that does not specify a fixed maximum number, but rather a
“rolling” percentage of outstanding securities, must be re-approved
by shareholders every three years.44 The three-year requirement also
applies to reloadable plans under which exercised options become
re-eligible even though the maximum number of securities is expressed
as an absolute number.45
TSX-V
Policy 4.4 of the TSX Venture Exchange Corporate Finance Manual also
imposes various restrictions and requirements upon “incentive stock
options” for its listed issuers. Incentive stock options are described
under the policy as a means of rewarding directors, employees and
consultants (each as defined under Policy 4.4) for future services
provided to the venture issuer.
42
43
44
45
See TSX Company Manual, s. 613(d) and s. 613(g) for details regarding the required
disclosure.
See TSX Company Manual, s. 613(h). See also TSX Staff Notice 2013-0003 for details
regarding the pricing of stock options that are granted prior to an IPO. The TSX
considers market price of the listed securities to be the offering price of the applicable
security. Options granted within the three months immediately prior to the filing of a
preliminary prospectus are generally expected to be priced at or above the offering
price. Options granted within three months immediately prior to the filing of a
preliminary prospectus which are priced below the offering price will likely be required
to be cancelled, forfeited or re-priced to the offering price as a condition of listing.
See TSX Company Manual, s. 613(a).
See the TSX’s Guide to Security Based Compensation Arrangements. Such plans,
along with rolling plans, are also referred to as “evergreen” plans.
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The TSX-V requires all of its listed issuers (other than capital pool
companies) to establish an incentive stock option plan.46 The TSX-V also
applies this requirement to unlisted companies planning on applying, or
those that are in the process of applying, for listing on the TSX-V that
intend to grant stock options to their directors, employees and consultants
that will remain outstanding after listing.47 The TSX-V requires that all
issuers implement a stock option plan in accordance with its policy prior to
granting options.48 When the TSX-V is determining a plan’s acceptability, it
will take into account the number of shares reserved for issuance under the
plan, the number of directors and employees, the average tenure of the
person receiving the options, whether the issuer has a long or short term
development cycle and any other factors it deems relevant.49
Stock option plans can be established as either (i) a “rolling” stock option
plan, reserving for issuance pursuant to the exercise of stock options, a
number of shares of the issuer equal to up to a maximum of 10% of the
issued shares of the venture issuer at the time of any stock option grant;
or (ii) a fixed-number stock option plan, reserving for issuance pursuant
to the exercise of stock options, a specified number of shares up to a
maximum of 20% of the venture issuer’s issued shares at the date of
implementation of the stock option plan by the issuer.50 The TSX-V prefers
that a company have only one option plan at any point in time. However, it
also acknowledges that there are circumstances where it is either necessary
or prudent for a company to have more than one. The TSX-V also maintains
that an issuer may not have both a rolling stock option plan and a fixed
number stock option plan in effect at the same time if, when taken in the
aggregate, the number of shares reserved for issuance under the plans
could exceed the 10% limit as discussed above.51
The TSX-V imposes certain shareholder approval requirements for
plan implementation as well as grants and amendments. Shareholder
approval is required when a fixed number stock option plan that,
together with all of the issuer’s other previously established stock
option plans or grants, could result at any time in the number of
listed shares reserved for issuance exceeding 10% of the issued
shares at the date of implementation (a plan that does not exceed such
46
47
48
49
50
51
See
See
See
See
See
See
Policy
Policy
Policy
Policy
Policy
Policy
4.4,
4.4,
4.4,
4.4,
4.4,
4.4,
s.
s.
s.
s.
s.
s.
2.1.
1.1. 2.1(a).
2.1(b).
2.2(a)(i) and 2.2(a)(ii).
2.2(c). S TI k EMA n Ell IOTT ll P
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threshold being referred to as a “10% Fixed Plan”). An issuer must receive
shareholder approval for a plan that is not a 10% Fixed Plan at the time
the plan is implemented and at the time the number of shares reserved
for issuance is amended. “Rolling stock option plans” must be approved
by shareholders at the time the plan is implemented and on an annual
basis thereafter. In general, the TSX-V will require that any amendment to
a stock option plan that is not a 10% Fixed Plan be subject to shareholder
approval as a condition to the TSX-V’s acceptance of the amendment.52 In
certain circumstances, the TSX-V also requires “disinterested shareholder
approval” (i.e., approval by a majority of shareholders excluding votes
attaching to shares beneficially owned by insiders to whom options may be
granted under the stock option plan and their associates).53
Generally, the minimum exercise price of a stock option must not be
less than the “discounted market price” at the time of grant, and must
52 See Policy 4.4, s. 3.9(c). For greater clarity, amendments to any of the following
provisions of a stock option plan will be subject to shareholder approval: (i) persons
eligible to be granted options under the plan; (ii) the maximum number or percentage,
as the case may be, of shares that may be reserved under the plan for issuance pursuant
to the exercise of stock options; (iii) the limitations under the plan on the number of
options that may be granted to any one person or any category of persons (such as, for
example, insiders); (iv) the method for determining the exercise price of options; (v) the
maximum term of options; and (vi) the expiry and termination provisions applicable to
options. note that amendments to a stock option plan that would result in any of the
thresholds being exceeded as listed under disinterested shareholder approval provision
in Policy 4.4, s. 3.9 will also trigger the need for disinterested shareholder approval.
53 See Policy 4.4, s. 3.10, which states when disinterested shareholder approval is
required for plans, grants and amendments. An issuer must obtain disinterested
shareholder approval in the event that: (i) the stock option plan, together with all of
the issuer’s previously established and outstanding stock option plans or grants, could
permit, at any time:
(A) the aggregate number of shares reserved for issuance under stock options granted
to insiders (as a group) to exceed 10% of the issued shares at any point in time;
(B) the granting to insiders (as a group), within a 12 month period, of an aggregate
number of options exceeding 10% of the issued shares calculated at the date an
option is granted to any insider; or
(C) the aggregate number of options granted to any one recipient, within a 12 month
period, exceeding 5% of the issued shares calculated on the date an option is
granted.
In any of these cases – (A), (B) or (C) – the grant/amendment must be approved
by a majority of votes cast by all shareholders, excluding votes attaching to shares
beneficially owned by insiders to whom options may be granted under the plan and
any associates of such insider(s); (ii) any individual stock option grant that would result
in any limitations as mentioned in (i)(A), (B), (C) being exceeded if the issuer’s stock
option plan does not permit these limitations to be exceeded; (iii) any amendment to
stock options held by insiders that would have the effect of decreasing the exercise
price of the stock options; or (iv) if the issuer requires shareholder approval as listed in
3.9 (e) of Policy 4.4. If (ii), (iii) or (iv) applies, the grant/amendment must be approved
by a majority of votes cast by all shareholders, excluding votes attaching to shares
beneficially owned by the person(s) who hold or will hold the options in question and
the associates of such person(s).
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be paid in cash.54 However, the TSX-V’s “exchange-imposed” hold
period or restriction on transfer will not apply if the grant is made at the
market price rather than the discounted market price.55
In addition to requiring all of its listed issuers to establish such plans, the
TSX-V also prescribes certain required terms, conditions or provisions.56
With respect to plan amendments, a venture issuer may generally amend
the terms of a stock option plan to reduce the number of listed shares
under option, increase the exercise price or cancel an option without
the acceptance of the TSX-V, provided it issues a news release outlining
the terms of the amendment. With respect to any other amendments,
the venture issuer is generally required to obtain approval from the
TSX-V and must satisfy other applicable requirements, including, as
discussed above, disinterested shareholder approval for amendments
to options granted to insiders. Exercise prices may not be amended
until six months have passed since the later of: (i) the start of the term
54 See Policy 4.4, s. 3.6(d). If stock options are granted within 90 days of a distribution
by a prospectus, the minimum exercise price of those options must be the greater of
the discounted market price and the per share price paid by public investors for listed
shares acquired under the prospectus distribution.
55 See Policy 4.4, s. 3.7 and Policy 1.1, s. 1.2. The exchange-imposed hold period is four
months, commencing on the date of grant.
56 See Policy 4.4, s. 3.8 for requirements. For greater certainty, these conditions and
requirements require that the following be included in all TSX-V compliant stock
option plans: (a) all options are non-assignable and non-transferable (except in the
event of death of the optionee); (b) a maximum term of 10 years from the date of
grant (subject to extension where the expiry date falls within a “blackout period”
(as defined under Policy 4.4)); (c) the aggregate number of options granted to any
person in a 12 month period must not exceed 5% of the issued shares calculated
on the date the option is granted to the person (unless the issuer has obtained the
requisite disinterested shareholder approval); (d) the aggregate number of options
granted to any one consultant (as defined under Policy 4.4) in a 12 month period
must not exceed 2% of the issued shares, calculated at the date an option is granted;
(e) the aggregate number of options granted to all persons retained to provide
investor relations activities (as defined under Policy 4.4) must not exceed 2% of the
issued shares of the issuer in any 12 month period calculated at the date an option is
granted to any such person; (f) if a provision is included that the optionee’s heirs or
administrators can exercise any portion of the outstanding option, the period in which
they can do so must not exceed one year from the optionee’s death; (g) disinterested
shareholder approval must be obtained for any reduction in the exercise price if the
incentive stock option recipient is an insider of the issuer at the time of the proposed
amendment; (h) for stock options granted to employees, consultants or management
company employees, the issuer and the recipient of the stock option are responsible
for ensuring and confirming that the incentive stock option recipient is a bona fide
employee, consultant or management company employee, as the case may be, at the
time of the grant; and (i) any options granted to a director, employee, consultant or
management company employee must expire within a reasonable period following the
date he or she ceases to be in that role (the TSX-V generally considers anything not
exceeding 12 months to be a reasonable period for these purposes). A stock option
plan may contain a provision allowing for the automatic extension to the expiry date
of a stock option governed by the plan if such expiry date falls within a period during
which an issuer prohibits optionees from exercising their stock options.
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of the option; (ii) the date the company’s shares commenced trading;
and (iii) the date of the most recent amendment to the price. If an
option exercise price is reduced to less than the market price, the
TSX-V will also impose a new four-month hold period on the underlying
shares, counting from the date of the amendment. Term extensions are
generally treated as new option grants and are subject to similar pricing
and other requirements under Policy 4.4. In addition, the term cannot
be extended beyond an effective aggregate term of 10 years, and an
option must be outstanding for one year before it can be extended.57
57
See Policy 4.4, s. 5.1 for details of these requirements.
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GLOSSARY
Backdating: Refers to the practice of claiming an earlier grant date for
stock options than the date they were actually granted to allow for a
lower exercise price, and generally to timing of stock option grants to
take advantage of expectations of stock price movements. See also
Springloading.58
Burn Rate: A measure of the speed at which a company uses up
the securities available for grant under its equity compensation
arrangements. Also referred to as a “run rate” and calculated based on
the total number of securities issued under all relevant arrangements
over the total number of securities outstanding.
Clawback: Also referred to as “malus” (i.e. opposite of bonus),
recoupment or disgorgement provisions, it involves the institution of
a mechanism for clawing back compensation that has been paid or
earned based on pre-determined triggers that are determined not
to have been met, either with or without misconduct on the part of
the executive. The first regulatory clawbacks, instituted in the United
States in 2002 under s. 304 of the U.S. Sarbanes-Oxley reforms, require
CEOs and CFOs to reimburse certain types of incentive compensation
received and profits realized where financial statements have to be
restated as a result of misconduct. The clawback provisions of DoddFrank require companies to adopt policies to recover from any current
or former executive officer any incentive compensation that was paid
during the three years preceding any accounting restatement due to
material noncompliance with reporting requirements, to the extent
that the compensation would not have been paid based on the
restatement. While less common in Canada, in the U.S. (beyond these
legally imposed clawbacks) contractual clawbacks instituted through
employment agreements or forming part of incentive compensation
plans have become more common.
Deferred Share Units: Deferred share units (“DSUs”) are typically
notional units similar to restricted share units and performance
share units (each defined below), with the amounts payable under a
deferred share unit plan being paid out only after death, termination
or retirement, whichever is earliest. This deferral is possible because of
58
See CSA Staff Notice 51-320 – Options Backdating.
STIKEMAN ELLIOTT LLP
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a specific exemption to the SDA rules59 that applies where the amount
payable under a deferred plan is payable only after death, termination
or retirement. The objective is to align the executive’s interests with
shareholder interests for the long term as well as to qualify for a
particular deferred tax treatment.60 See also the discussion in Part 4 of
this publication.
Dividend Equivalents: Payments paid on notional units (such as
restricted share units, performance share units, and deferred share
units) to replicate dividends paid on the relevant reference securities.
Equity Incentive Plans: Under Form 51-102F6, an equity incentive plan
is defined as an incentive plan, or portion of an incentive plan, under
which awards are granted and that falls within the scope of Section 3870
of the CPA Canada Handbook. That section applies to transactions in
which a company grants shares of common stock, stock options or
equity instruments, or incurs liabilities based on the price of common
stock or other equity instruments. An equity incentive plan can take
the form of either a short term or long term incentive plan. The awards
under an equity incentive plan can generally be categorized under one
of two categories: option-based awards or share-based awards.
Inactive Shareholder Provisions: Shareholder agreements often
provide an option for the company (and/or other shareholders) to
repurchase the shares of an “inactive shareholder”, at a price that
in some cases will depend on the “fault” or “no-fault” nature of the
triggering event. A shareholder might become inactive for any of a
variety of reasons: bankruptcy, conviction of an offence, family law
issues, death, disability or termination of employment, for example.
Employees will often try to negotiate a mandatory purchase by the
company. While many companies resist this, mandatory purchases may
be more acceptable in the event of death. This is mainly because, in that
case, (i) the employee’s estate will face a deemed disposition and the
accompanying income taxes on capital gains (and will need proceeds
to fund this tax payment), and (ii) the company can usually purchase life
insurance relatively inexpensively to fund some or all of the potential
purchase obligation. In the case of an executive, an inactive shareholder
provision may be especially useful in the event of termination, as the
59
60
See page 41, above.
Deferred share unit plans are generally designed to fit within a prescribed exception,
so as to not to be subject to the current taxation that might otherwise result under the
SDA rules.
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company will typically not want a terminated employee to continue to
have access, as a shareholder, to sensitive financial information.
Long-term Incentive Plans: long-term incentive plans (“lTIPs”) pay
compensation on the basis of achievement of performance goals based
on a longer time horizon, typically more than one year and often three
years or more.
non-equity Incentive Plans: Under Form 51-102F6, a non-equity
incentive plan is defined as “an incentive plan, or portion of an incentive
plan, that is not an equity incentive plan”. A non-equity incentive plan
can take the form of either a short term or long term incentive plan.
The Form requires separate disclosure of the dollar value of any award
earned under an annual non-equity incentive plan and under a long
term non-equity incentive plan, together with a narrative discussion
of the non-equity incentive plans. non-equity incentive plans are
predominantly linked to cash bonuses, the payout of which is time- or
performance-based, or both.
Pay for Performance: Pay for performance refers to the correlation of
the different elements of executive remuneration with the achievement
of desirable corporate goals. As described in the ISS 2013 Policy
Guidelines, the principle of pay for performance, aligned with an
emphasis on long term shareholder value, takes into consideration the
linkage between pay and performance, the mix between fixed and
variable pay, performance goals and equity-based plan costs.
Performance Share Units: Performance share units (“PSUs”) are similar
to restricted share units, in that they are notional shares, have a value
equivalent to a class of the company’s shares (typically common shares)
and are subject to a vesting period, which is typically no more than
three years. However, unlike restricted share units, the number of
performance share units that will ultimately vest adjusts based on the
executive’s and/or the company’s performance as measured against pre­
determined targets. For any units to vest, the executive or company, as
applicable, must meet a minimum performance level. As the executive’s
and/or the company’s performance improves (as measured against the
pre-determined targets), the number of units that will ultimately vest
increases, capping out at a pre-determined maximum number of units.
Performance share units can be settled in shares or the cash equivalent
of the value of the shares at the date of settlement. Performance share
unit plans that are properly structured achieve the benefit of deferring
tax until amounts are received. like receipts under restricted share
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unit plans, amounts received under a performance share unit plan are
generally fully taxed as employment income.
Perquisites: CSA commentary describes perquisites as those items that
are not integrally and directly related to the person’s job that provide
a direct or indirect personal benefit. The CSA provide non-exhaustive
examples, which include cars, corporate aircraft, club memberships,
and reimbursement of taxes owed with respect to perquisites or
other personal benefits. The new Disclosure Requirements require
the disclosure to include the dollar value of all perquisites that are not
generally available to employees, and that in aggregate are worth at least
more than the lesser of $50,000 or 10% of the nEO’s salary. Disclosure is
also required of the type and amount of each perquisite which exceeds
25% of the total value of perquisites reported for the nEO.
Pre-emptive Rights: A pre-emptive right is the right of a shareholder
to participate in future issuances of equity securities by a company
through purchase of additional equity securities, so as to allow that
shareholder to maintain its proportionate ownership interest. They may
also apply to issuances of debt. Such rights are sometimes granted only
to major shareholders.
Restricted Shares: Restricted shares are actual awards of shares of the
company that are issued subject to restrictions on transfer and are subject
to forfeiture if the executive’s employment terminates before vesting
occurs. Executives may only dispose of the shares once the restrictions
lapse. Restricted shares are much more common in the U.S. than in
Canada, as a result of the potentially adverse tax implications of restricted
share awards under Canadian tax rules and corporate law restrictions.
Restricted Share Units: Restricted share units (“RSUs”) are notional
shares or “phantom share units” that mirror the market value of a class
of the company’s shares, typically the common shares. In this way, the
value of the restricted share units rises and falls with the share value.
Restricted share units are subject to a vesting period, typically no more
than three years,61 and can be settled in shares or the cash equivalent
of the value of the shares at the date of settlement. The vesting can be
time- or performance-based, or both. However, to avoid the SDA rules,
the vesting period is typically no more than three years (although, if
the units are settled in newly-issued shares, the vesting period can be
61 The limitation to three years is generally intended to avoid the application of the
SDA rules.
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longer than that). In general, as long as the plan does not fall within
the SDA rules, the executive will be subject to tax at the time the unit
is settled and the amount received will be considered employment
income. Thus, under Canadian law, this type of plan does not generally
offer the same tax advantage as a stock option plan (with respect to
the one-half deduction), but it does achieve the benefit of deferring tax
until the cash or shares are received.
RSUs differ from share appreciation rights in that share appreciation
rights start with a nil value, and therefore can have no value at the time of
vesting if the share price has dropped since the start of the measurement
period. In contrast, restricted share units mirror the value of the tracked
shares, and will therefore almost always (absent insolvency) have some
value at the time of vesting, even if it is below the original price at the
start of the measurement period. Restricted share unit plans, properly
structured, achieve the benefit of deferring tax until amounts are
received. See also the discussion in Part 4 of this publication.
Say on Pay: “Say on pay” refers to governance mechanism of allowing
shareholders to vote on a company’s overall approach to executive
compensation. Typically non-binding and retroactive, the vote is of an
advisory nature. Under Dodd-Frank, companies subject to the SEC’s
reporting rules are required to hold a say-on-pay vote once every three
years. The Canadian Coalition for Good Governance also advocates
the adoption of a say-on-pay policy and has published its own “model”
policy for boards of Canadian companies to consider.
Share Appreciation Rights: Share appreciation rights, or “SARs,” are
similar to stock options in that they provide the executive with the
ability to profit from an increase in the company’s shares, typically
the company’s common shares. They are discussed in greater detail
in Part 4, above. Under a share appreciation rights plan, participants
are granted “phantom stock” that has a nil value at the beginning of a
performance period. The phantom stock then tracks the increase in the
value of the underlying shares. like stock options, share appreciation
rights have a vesting period, which can be time or performance-based,
or both, and are subject to set expiry dates. However, unlike stock
options, the participant is not required to pay or offset an exercise price
to exercise the award. Rather, the net amount of any increase in the
company’s share value is paid out in cash, shares or a combination of
both. Share appreciation rights can be option-based awards or sharebased awards, depending on whether the plan includes an option­
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like feature. Option-like features include provisions that allow the
participant to choose whether to exercise the award (and acquire the
underlying shares) or to receive the difference between the share price
and the exercise price in cash. Share appreciation rights plans that have
such option-like features generally result in better tax treatment to the
participant. The exercise of rights to receive shares or cash under such
plans (like the exercise of stock options) will generally result in taxation
of only 50% of the benefit realized on exercise, provided that certain
prescribed conditions are satisfied. Share appreciation rights suffer
some of the same criticisms as stock option plans, and similarly have a
diminished compensatory value during economic downturns.
Share-based Awards: Under Form 51-102F6, a share-based award is
defined as an “award under an equity incentive plan of equity-based
instruments that does not have option-like features”, and includes
common shares, restricted shares, restricted share units, deferred
share units, phantom shares, phantom share units, common share
equivalent units and stock. Share-based awards can take a number of
forms, but currently the most commonly used are restricted share units,
performance share units and deferred share units.
Short-term Incentive Plan: Short-term incentive plans compensate on
the basis of achievement of performance goals, typically over a one year
period. Short-term incentive plans may be non-equity based, equitybased, or a combination of both.
Shotgun Clause: A shotgun clause, also known as a “buy-sell” clause, is
typically included in a shareholder agreement to provide a fair and efficient
exit mechanism for one side in a shareholder dispute (or in an otherwise
acrimonious or unsatisfactory shareholder relationship). It is generally
used primarily in a “50-50” shareholder situation. A shotgun clause can
typically be triggered by any shareholder or group of shareholders, who
are required by the terms of the clause to offer the other shareholder(s) an
amount (per share) for their shares. The amount offered is generally up to
the shareholder(s) making the offer. The offeree shareholder(s) then have
two options: (i) accept the offer; or (ii) buy the triggering shareholder(s) out
at that same price (per share). The shotgun buy-sell mechanism is intended
to seek to ensure that the triggering shareholder will name a fair price in
its offer, as it will know that it could potentially be required by the offeree
shareholder(s) to accept that same price for its own shares. However,
financing or other issues could affect this.
Springloading: This term refers to the practice of timing the grant of
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options to precede the announcement of positive information in order
to take advantage of an anticipated increase in the market price of
the securities.
Tag-along Rights: The contractual right of a minority shareholder to
sells its shares (on a pro rata basis) along with and at the same price as
the founder or majority shareholder, if either the founder or majority
shareholder elects to sell shares to a third party. In this way, the minority
shareholder is permitted to “tag along” with the selling shareholders.
These rights are also referred to as “co-sale” or “piggy-back” rights. A
variation is a “leap-frog”, which allows a shareholder to sell its shares in
place of shares that the founder or majority shareholder had intended or
agreed to sell to a third party or that would allow a shareholder to sell all of
its shares on the sale of any shares by the founder or majority shareholder.
Wealth Accumulation Analysis: A wealth accumulation analysis involves
valuing an executive’s current and future compensation over the long
term to give the company a better picture of the cumulative value of a
compensation package over a longer horizon. This includes factoring in
such elements as gains on equity-based incentives as well as the value of
accrued pension benefits, severance and other termination or change­
of-control payments.62 A wealth accumulation analysis necessarily
involves forecasting reasonable ranges for different elements based on
relevant variables. While these may be difficult to predict or pinpoint
years in advance, undertaking the exercise allows for an understanding
of the total wealth potential that is represented by the pay package.
62
“Wealth Accumulation And Full ‘Walk Away’: What You need to know and Do”,
Compensation Standards (Summer 2008), 1-3.
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Stikeman Elliott’s Executive
Compensation Group
Strategic, tax-efficient compensation plans that meet today’s increasingly
complex regulatory requirements are the focus of Stikeman Elliott’s
Executive Compensation Group, which brings together the firm’s marketleading expertise in Canadian securities law, corporate governance,
taxation, pensions and benefits law, and employment law for the benefit
of Canadian and international clients. With a wealth of experience in both
common law and civil law environments, the Executive Compensation
Group works with energy and creativity to achieve the goals of companies
and their boards in the context of current regulatory and market realities.
Cross-Border Capabilities
We have a particular expertise in international executive compensation.
We have worked with a variety of cross-border clients, compensation
consultants and foreign counsel in the U.k., U.S. and throughout the
world to address Canadian compensation considerations, accommodate
differences in domestic securities, pension, tax and employee benefit
regulation, and craft effective, integrated compensation schemes that
address these concerns. In particular, our practitioners are sensitive to
distinctions between Canadian and foreign tax regimes, which can affect
the optimal mix of compensation arrangements in Canada as opposed
to elsewhere. With offices throughout Canada, as well as in new York,
london and Sydney, we are well-positioned to efficiently provide clients
with customized solutions and expertise.
developing Effective Contracts and Arrangements
Our cross disciplinary Executive Compensation Practice Group works with
clients to develop strategies for executive compensation structures and
draft and negotiate employment contracts and arrangements. Mitigation
of risk in diverse areas of law is critical, requiring an experienced team
with varied expertise and a thorough understanding of current market
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developments. Stikeman Elliott employs a multi-disciplinary approach to
executive compensation legal services, with team expertise in the areas of
securities law, corporate governance, employment, pensions and benefits
and tax, coupled with a real-world understanding of business goals.
Mergers & Acquisitions and Change of
Control Scenarios
Executive compensation, retention and severance issues are often
highlighted in merger and acquisition transactions and other change
of control scenarios. We work with clients, first, to draft strategic,
comprehensive change of control provisions in executive employment
contracts and then, in the context of transactions, to effectively negotiate
and settle issues related to executive employment in the combined
business entity. Our team is also experienced in identifying and addressing
issues related to benefit plan liabilities and risks, as well as harmonizing
compensation and plan structures and incentive arrangements.
Similarly, our extensive experience in complex cross-border M&A enables
us to offer considerable advantages and expertise in dealing with
international companies in the negotiation of executives’ continuing
employment relationships.
dealing with Regulators
Executive compensation issues for public companies, which are often in
the spotlight as proxy season approaches, continue to draw shareholder
and media attention. Significant disclosure requirements imposed by
the Canadian Securities Administrators, including “say on pay”, risk
management, pay-for-performance, tax gross-ups, clawbacks and change
of control payments continue to receive increased scrutiny.
For more information on our Executive Compensation Group and its
expertise and experience, visit www.stikeman.com/ExecutiveComp.
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Firm Profile
Stikeman Elliott is one of Canada’s leading business law firms,
recognized for top tier services in each of our core practice areas –
corporate finance, M&A, real estate, corporate-commercial law, banking,
tax, structured finance, insolvency, competition and foreign investment,
employment, pensions and business litigation. We are regularly retained
by domestic and international companies in a wide range of industries
including financial services, insurance, technology, telecommunication,
transportation, manufacturing, mining, energy, infrastructure and retail.
The firm’s Canadian offices are leaders in their respective jurisdictions.
The firm has more lawyers ranked than any other Canadian firm in the
Corporate, M&A and Corporate Finance categories of legal directories
from Chambers Global, Best Lawyers and Lexpert. Its national litigation
Group, whose specializations include class actions, securities litigation,
antitrust and restructurings, has been ranked among the top business
litigation practices in Canada by Chambers Global, Lexpert and Benchmark.
The firm is also well known for its extensive regulatory and government
relations expertise; the latter anchored by its office in Ottawa.
We have prominent cross-border expertise, with offices in london, new
York and Sydney, and extensive experience in the U.S., Europe, China,
South and Southeast Asia as well as in latin America, the Caribbean
and Africa. Our 500 lawyers include many of Canada’s most prominent
business practitioners and litigators, and our depth across practice areas
enables clients to benefit from
efficient, expert teams of lawyers
at all levels. The firm has also
invested heavily in cutting-edge
knowledge management and
project management systems
in order to assure our clients of
advice of the highest quality.
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For more information, please contact your Stikeman Elliott lawyer
or any of the following members of our Executive Compensation Group:
MONTRÉAL
Luc Bernier (Tax)
[email protected]
Hélène Bussières (Employment)[email protected]
Robert Carelli (Securities/Corporate Governance)
[email protected]
Peter Castiel (Private Equity)
[email protected]
TORONTO
Donald G. Belovich (Securities/Corporate Governance)
Andrea Boctor (Pension)
Ramandeep Grewal (Securities/Corporate Governance)
Samantha Horn (Private Equity)
John G. Lorito (Tax)
Nancy Ramalho (Employment)
Simon A. Romano (Securities/Corporate Governance)
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
OTTAWA
Justine Whitehead (Corporate)[email protected]
CALGARY
Gary T. Clarke (Employment) [email protected]
Douglas Richardson (Tax)
[email protected]
Craig A. Story (Securities/Corporate Governance/Private Equity) [email protected]
VANCOUVER
John F. Anderson (Corporate Governance)
[email protected]
Neville J. McClure (Securities)
[email protected]
Noordin S.K. Nanji (Corporate Governance, Private Equity)
[email protected]
Daniel E. Steiner (Private Equity)
[email protected]
Michael G. Urbani (Securities)[email protected]
NEW YORK
Kenneth G. Ottenbreit (Corporate)[email protected]
SYDNEY
Quentin Markin (Corporate)[email protected]
LONDON
Dean P. Koumanakos (Corporate)[email protected]
Stikeman Elliott (London) LLP is authorised and regulated by the
Solicitors Regulation Authority under number 569318
With thanks to all those who contributed to this publication.
Contributors:
Luc Bernier, Andrea Boctor, Samantha Horn, Michel Legendre, Nancy Ramalho,
Natasha Vandenhoven, Ramandeep Grewal, Kyle Lamothe, John O’Connor,
Alexandra Stockwell and Elyse Velagic
Editorial Review:
Marc Barbeau, Helene Bussières, John Lorito, Simon Romano and Andrew Cunningham