November 2, 2006

Canada Enacts a New Tax on Popular Income Trusts

Yesterday’s NY Times article about a new Canadian tax starts with this excerpt, “In a move that surprised Canada’s stock markets, the Canadian government announced late Tuesday that it would tax income trusts. Companies with market values totaling about 70 billion Canadian dollars have changed from conventional stock structures to trusts this year. Once transformed, companies largely avoid corporate taxes by paying out most of their profits directly to shareholders. About 200 billion Canadian dollars held in Canadian markets are now invested in trusts. While the large, regular cash payments have made trusts popular with investors, the trend has come in for considerable criticism.

My first reaction was to wonder: “what will happen to income deposit securities?” Jeffrey Singer, an income fund expert with Stikeman Elliott LLP in Toronto addressed my concern: “IDS and similar “income security” issuers may be one of the few lights shining through the otherwise dark shadow cast by the Canadian federal government’s proposal to tax income funds. Based on available details, the current proposal would not seem to effect IDS structures. In fact, many are considering whether the structure ought to be applied to domestic issuers in much the same manner as it had heretofore been applied to northbound cross-border issuers. However, the likelihood of such a market emerging in the short term and without prior rulings from Finance is unlikely, given the strong contrarian bias of the federal government towards flow-through entity structures expressed, and the overt statement in its background paper that ‘if there should emerge structures or transactions that are clearly devised to frustrate those policy objectives, any aspect of these measures may be changed accordingly and with immediate effect.’ Ironically, this move by the Federal Government ostensibly taken in the best interests of Canada and its economy may have created some significant opportunistic acquisition targets for, among others, foreign and primarily US-based acquirers.”

We have posted other analyses of this new law from several bankers in our “Income Deposit Securities” Practice Area.

RiskMetrics Group Acquires ISS

Yesterday, RiskMetrics Group, a financial risk management firm, announced it has acquired Institutional Shareholder Services, the largest proxy advisor. According to the press release, the merger reflects the broader vision of both companies to expand beyond their core businesses of financial risk management and corporate governance to offer a broad range of data, analytics and advice to investors. Here is an article about the deal from today’s Washington Post.

What’s Next for Boards? Ten Landscape-Altering Trends

Here is a list of ten board trends from John Wilcox, SVP and Head of Corporate Governance of TIAA-CREF, from this recent article in the Directors & Boards e-Briefing:

1. Majority voting and the right of shareholders to vote against directors will become the norm, replacing the plurality vote standard in U.S. director elections.

2. Executive compensation will be brought into line by a combination of factors: enhanced SEC disclosure requirements, an advisory shareholder vote on compensation committee reports, and recognition of the need for internal pay equity.

3. Separating the roles of chairman and CEO will become more common at U.S. companies, encouraging boards to worry less about preserving power and more about developing and incentivizing the best executive talent.

4. The model of the imperial, celebrity CEO will be replaced by the stewardship model, with Reginald Jones unseating Jack Welch as the role model.

5. Sustainability and corporate social responsibility, formerly relegated to gadflies and special interest groups, will be recognized as key corporate governance responsibilities for which directors should be held accountable.

6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, reduce costs, increase efficiency, and improve a board’s ability to identify and communicate with shareholders.

7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, more responsible–and more effective.

8. The definition of beneficial ownership will become more complicated and problematic as stock lending and derivative investment strategies enable investors to separate voting rights from any economic interest in the underlying stock.

9. The spotlight will shift from the governance of companies to the governance of institutional investors, with a focus on how institutions should best fulfill their conflicting duties to maximize returns while acting as responsible owners.

10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic means to lower the cost of capital, reduce risk, create value, and strengthen the long-term performance of the corporate enterprise.