As closing sales are conducted in Target’s Canadian stores, executives appear to have benefited from questionable share-unit timing.MARK BLINCH/Reuters
Target Corp.'s decision to grant share units to 20 executives and directors on the day before announcing its decision to close its stores in Canada would not be allowed under Canadian law for a domestic company in the same situation.
The board of the Minneapolis-based retailer operates under U.S. rules, allowing companies to grant equity to insiders on a pre-determined date, irrespective of what undisclosed news is in the pipeline, even if the date proves beneficial for those receiving the grants.
In Target's case, the grant of 113,298 performance share units to 10 executives and 10 directors on Jan. 14 came just before it released news on Jan. 15 that the company was closing all of its 133 stores in Canada because it had determined they could not be profitable for at least five years.
The news sent Target's share price up to $75.67 (U.S.) on Jan. 15 from $74.33 the prior day. Since then, the shares have risen further, closing at $76.87 on Friday. A Target spokeswoman said the company has an established practice of granting annual equity awards at its January board meeting.
In Canada, Toronto Stock Exchange listing rules do not allow boards to grant stock options to insiders if the company has material, undisclosed news, even if the grant date was pre-determined and falls at the same time each year, says Toronto securities lawyer Cornell Wright of Torys LLP.
While the TSX rule specifically mentions stock options, Mr. Wright said it is broadly interpreted to cover other grants such as share units that raise the same policy issues.
"They've specifically stated they don't view regular annual grants during those periods to be a mitigating factor," he said. "When we've worked with cross-border companies, it's a revelation to them that the Canadian rules work so differently."
The Canadian standards reduce the opportunity for insiders to choose a favourable time to release good or bad news to improve the value of their new equity grants. But Mr. Wright said there are pros and cons to both countries' systems.
The obvious drawback with the American rules is that they can leave boards open to criticism about the optics of well-timed equity grants, which has been the result in Target's case.
"In the U.S. you can do it, but you're going to potentially court reputation harm," Mr. Wright said. "Even though it's allowed, people are going to be left with a bad taste in their mouth."
Critics of the U.S. rules argue that even if the grant date is fixed, companies can choose to issue news releases at a beneficial time around that date, creating an opportunity for unscrupulous timing of news if insiders are seeking to enrich themselves.
The benefit of the model, however, is that boards can proceed with routine equity grants without becoming entangled in complications, insulating boards from legal action if the grant dates happen to be favourable.
Charles Elson, director of the Weinberg Centre for Corporate Governance at the University of Delaware, said the rules are intended to avoid the appearance of insider trading, and companies could risk more trouble if they move away from their regular grant dates when news is pending.
"You can't fault a board for using automatic procedures," Mr. Elson said.
However, "discretion is the better part of valour," he added, and companies may prefer to ensure news is out before equity is granted, if possible.
The Canadian rules avoid much of the trouble with optics of favourable timing, but they can cause their own problems for boards.
For example, if insiders are awaiting a routine, annual grant of stock options, and it is unexpectedly delayed, it can tip insiders that important news is pending.
"If you have a big company and you're making grants to 100 people, all 100 people are going to know you're not making grants when you normally would have done it," Mr. Wright said. "So you're running the risk of making people anxious, and you're running the risk of people speculating about what might be going on."
Compensation consultant Paul Gryglewicz of Global Governance Advisors said the Canadian rules can also sometimes leave boards struggling to find any date to grant new equity.
Mr. Gryglewicz said he worked with a Canadian board that had so many deals in the pipeline that it struggled to find a date to do its annual stock option grant that wouldn't fall during a blackout period.
Companies in both countries have developed strategies to try to mitigate some of the downside risks of both systems.
Mr. Wright said U.S. boards can approve equity grants at a set date, but arrange for the grants to be issued at a date in the future – a month later, or even at the end of the current fiscal quarter.
He said the practice of building in delays is especially common when boards approve equity during an off-cycle time that is different from the normal annual grant date, such as when a new executive is hired and issued share units or stock options as a hiring bonus.
Some U.S. boards also try to factor in the impact of undisclosed news on the share price, and adjust the size of an equity grant accordingly, he added. If news could raise the share price by 10 per cent, an executive may get 10 per cent fewer shares as a result.
While the impact may be hard to know in advance, Mr. Wright said companies are accustomed to doing a sophisticated analysis of the potential impact on shareholder value from proposed transactions such as takeover deals.
In Canada, boards sometimes try to avoid major news decisions in the period before the annual equity grant date. But the option is not always available when third parties are involved, such as during takeover deals, and boards do not always have flexibility.
Janet McFarland