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Exhibit 99.1

 

TIM HORTONS INC.
874 Sinclair Road (Canada)		4150 Tuller Road, Unit 236 (United States)
Oakville, Ontario, Canada, L6K 2Y1		Dublin, Ohio, 43017, U.S.A.
(905) 845-6511		(614) 791-4200

 

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

You are cordially invited to attend, and notice is hereby given that, the Annual and Special Meeting of Shareholders of Tim Hortons Inc. will be held at the School of Hospitality and Tourism Management, Ted Rogers School of Management, Ryerson University, 7^th Floor Auditorium, 55 Dundas Street West, Toronto, Ontario, on Thursday, May 10, 2012, at 10:30 a.m., Eastern Daylight Savings Time (EDST), for the following purposes:

 

(a)

to receive our consolidated financial statements, and the independent auditor’s report thereon, for the fiscal year ended January 1, 2012;

 

(b)

to elect nine directors, as named and described in the accompanying management proxy circular;

 

(c)

to reappoint PricewaterhouseCoopers LLP as our independent auditor (and, for the purposes of U.S. securities laws, our independent registered public accounting firm) for the fiscal year ending December 30, 2012;

 

(d)

to reconfirm the Tim Hortons Inc. Shareholder Rights Plan;

 

(e)

to approve the Tim Hortons Inc. 2012 Stock Incentive Plan;

 

(f)

to consider the shareholder proposal and management’s response thereto set out in Schedule “A” to the accompanying management proxy circular; and,

 

(g)

to transact such further or other business or matters as may properly come before the meeting.

These matters are more fully described in the management proxy circular accompanying this notice. Any action on the items of business described above may be considered at the meeting or at any adjournment or postponement thereof. Please note that our proxy materials are also available through the Internet at www.envisionreports.com/THI2012 and at our website at www.timhortons-invest.com. In the interest of convenience to you and of minimizing the environmental impact associated with printing and mailing our proxy materials and annual reports in the future, you may indicate your preference for receiving all future materials electronically, in the manner provided for on the enclosed proxy card or, for beneficial holders, on the voting instruction form.

Shareholders of record attending the meeting should be prepared to present government-issued picture identification for admission. Shareholders owning common shares through a broker, bank, or other record holder should be prepared to present government-issued picture identification and evidence of share ownership as of March 13, 2012, such as an account statement, or a voting instruction form issued by the broker, bank or other record holder, for admission. Check-in at the meeting will begin at 9:30 a.m., EDST, and you should plan to allow ample time for check-in procedures. Seating will be limited and admission is on a first-come, first-served basis. Cameras, cell phones, recording equipment, and other electronic devices will not be permitted. If you would like to attend in person, we request that you indicate your plans in this respect as prompted if you vote electronically through the Internet, or on your proxy card or voting instruction form, as applicable.

As shareholders of Tim Hortons, your vote is very important, regardless of the number of shares you own. Whether or not you are able to join us in person, it is important that your shares be represented. Voting promptly will aid in reducing the expense of additional proxy solicitation. As such, we request that you vote as soon as possible by telephone, electronically, or in writing by following the instructions noted on the proxy card or, for beneficial shareholders, the voting instruction form, included with this notice. Your proxy card or voting instruction form, as applicable, must be received by our transfer agent before 11:59 p.m., EDST, on the day before the meeting (i.e., May 9, 2012). If you received a voting instruction form, you hold your shares through an intermediary and must provide your instructions as specified in the voting instruction form in sufficient time for the intermediary to act on them prior to that deadline. Voting your shares electronically through the Internet or by telephone does not affect your right to vote in person if you attend the meeting. For specific information regarding voting of your common shares, please refer to the section entitled “General Information About the 2012 Tim Hortons Inc. Annual and Special Meeting of Shareholders” in the accompanying proxy circular.

Thank you for your continued interest in Tim Hortons.

 

Oakville, Ontario, Canada

March 23, 2012

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EXPLANATORY NOTES REGARDING THE CONTENT AND FORMAT OF THIS DOCUMENT

Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although as a foreign private issuer we are no longer required to do so, we currently continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”), instead of filing the reports available to foreign private issuers. All of our periodic and current reports are available through the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”), at www.sedar.com, and on the SEC website, at www.sec.gov.

As a Canadian corporation and foreign private issuer in the U.S., we are not subject to the requirements of Section 14(a) of the Exchange Act or Regulation 14A. As a result, (i) our management proxy circular (the “proxy circular”) and related materials have been prepared in accordance with Canadian corporate and securities law requirements, and (ii) our officers and directors are required to file reports of equity ownership and changes in equity ownership with the Canadian Securities Administrators (“CSA”) and do not file such reports under Section 16 of the Exchange Act.

In addition, as a foreign private issuer in the U.S., we are not required to disclose executive compensation according to the requirements of Regulation S-K that apply to U.S. domestic issuers, and we are otherwise not required to adhere to the U.S. requirements relative to certain other proxy disclosures and requirements. As set forth above, our proxy disclosures will be in compliance with Canadian requirements, which are, in most respects, substantially similar to the U.S. rules. We generally attempt to comply with the spirit of the U.S. proxy rules when possible and to the extent that they do not conflict, in whole or in part, with required Canadian corporate or securities requirements or disclosure, with the exception that we have determined to monitor and follow the development of say on pay practices in Canada and, therefore, have not adopted the U.S. say on pay advisory vote on executive compensation.

A copy of our Annual Report on Form 10-K for the fiscal year ended January 1, 2012 (“Form 10-K”), including the 2011 financial statements and management’s discussion and analysis, is being delivered: (i) contemporaneously with this proxy circular to registered shareholders, except those who asked not to receive it; and (ii) separately, to beneficial shareholders who requested a copy. The printed Form 10-K, as well as the Form 10-K which is available at www.envisionreports.com/THI2012 and at www.timhortons-invest.com, will not have attached to it all of the exhibits filed with or incorporated by reference into the Form 10-K filed with the SEC and with the CSA. You may review and print the Form 10-K and all exhibits from the SEC’s website at www.sec.gov or from the website of the CSA at www.sedar.com. In addition, we will send a complete copy of the Form 10-K (including all exhibits, if specifically requested), to any shareholder (without charge) upon written request addressed to: Investor Relations Department, Tim Hortons Inc., 874 Sinclair Road, Oakville, Ontario, Canada, L6K 2Y1.

In this proxy circular, we refer to Tim Hortons Inc., the Canada Business Corporations Act corporation whose shares you own (together with its subsidiaries, where applicable), as “Tim Hortons.” Additionally, we sometimes refer to Tim Hortons as “we,” “us,” “our,” “our corporation,” or “the corporation.” References to “GAAP” mean generally accepted accounting principles in the U.S.

 

 

All dollar amounts included in this proxy circular are in Canadian dollars, unless otherwise expressly stated to be in U.S. dollars or another currency.

All information in this proxy circular is being provided effective as of March 23, 2012, unless otherwise indicated.

All references to our website contained herein do not constitute incorporation by reference for information contained on the website and such information should not be considered part of this document.

 

 

 

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GENERAL INFORMATION ABOUT THE 2012 TIM HORTONS INC. ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

 

 

The following questions and answers are intended to address commonly asked questions regarding shareholder meeting matters. These questions and answers may not address all matters that may be important to you. Please refer to the more detailed information contained elsewhere in this proxy circular.

Questions and Answers Regarding Annual and Special Meeting Matters

Why am I receiving these proxy materials?

These proxy materials have been mailed to you, or made available to you through electronic means in accordance with your prior instruction, on or about March 23, 2012, in connection with the solicitation by management of proxies for use at the meeting. These materials are available on the Internet at www.envisionreports.com/THI2012 and on our investor website at www.timhortons-invest.com. Under applicable Canadian requirements, we must provide printed copies of proxy materials to shareholders, unless they consent to receive materials by electronic delivery. As a result, shareholders are encouraged to indicate their preference for receiving future materials from us electronically by following the instructions for doing so on the proxy card or, in the case of beneficial holders, the voting instruction form, mailed with this proxy circular. Doing so will allow us to save considerably on printing and mailing costs and to further our environmental objectives through the prudent use of resources.

Our meeting will take place at the School of Hospitality and Tourism Management, Ted Rogers School of Management, Ryerson University, 7^th Floor Auditorium, 55 Dundas Street West, Toronto, Ontario, on Thursday, May 10, 2012, at 10:30 a.m., EDST. Our shareholders are invited to attend the meeting and are requested to vote on the proposals described in this proxy circular.

Only shareholders of record at the close of business on March 13, 2012 will be entitled to notice of, to attend and to vote at the meeting or any adjournment(s) or postponement(s) thereof. A list of shareholders of Tim Hortons Inc. will be maintained and open for examination by any of our shareholders, for any purpose germane to the meeting, during regular business hours at our principal executive offices.

What is included in these proxy materials?

These proxy materials include:

 

•

Our proxy circular for (and notice of) the meeting; and,

 

•

Our proxy card or, for beneficial shareholders, a voting instruction form, for submitting your vote in writing to us or your broker, as the case may be, in the event you choose not to take advantage of electronic or telephonic voting.

The Form 10-K is being delivered:

 

•

contemporaneously with these proxy materials to registered shareholders, except those who asked not to receive it; and,

 

•

separately from these proxy materials to beneficial shareholders who requested a copy.

What meeting procedures are available electronically?

We have implemented electronic procedures that provide you with the ability to:

 

•

View our proxy materials for the meeting through the Internet at www.envisionreports.com/THI2012 and at our investor website at www.timhortons-invest.com;

 

•

For shareholders of record, cast your votes on the proposals before the shareholders at the meeting at www.investorvote.com; and,

 

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•

For shareholders of record, instruct us to send our future proxy materials to you electronically by e-mail, also at www.investorvote.com.

Choosing to receive your future proxy materials by e-mail will reduce the impact of our annual shareholders’ meetings on the environment and will also save us the cost of printing and mailing documents to you. If you choose to receive future proxy materials by e-mail, you will receive an e-mail notifying you of next year’s meeting, which will contain a link to the Internet site where the proxy materials will be posted and, if separate from the site where the proxy materials are posted, a link to the site where you may register your vote. Your election to receive proxy materials by e-mail will remain in effect until (i) you affirmatively terminate it; or (ii) the e-mail address provided is rejected in which case, if an updated e-mail address is not provided, proxy materials will be received by mail.

What proposals will be voted on at the meeting?

There are five proposals that will be voted on at the meeting:

Proposal 1—The election to the Board of Directors of nine individuals, as named and described in this proxy circular, each for a term of one year;

Proposal 2—The reappointment of PricewaterhouseCoopers LLP as our independent auditor (and, for the purposes of U.S. securities laws, our independent registered public accounting firm) for the fiscal year ending December 30, 2012;

Proposal 3—The reconfirmation of the Tim Hortons Inc. Shareholder Rights Plan (the “Rights Plan”);

Proposal 4—The approval of the Tim Hortons Inc. 2012 Stock Incentive Plan (the “2012 Stock Incentive Plan”); and,

Proposal 5—The consideration of the shareholder proposal and management’s response thereto set out in Schedule “A” to this proxy circular.

What are our Board of Directors’ voting recommendations?

 

Proposal 1—Election of directors		Our Board recommends that you vote your shares “FOR” the election of each of the nine nominees as directors as named and described in this proxy circular, each for a term of one year.
Proposal 2—Reappointment of our independent auditor		Our Audit Committee and Board recommend that you vote your shares “FOR” the reappointment of PricewaterhouseCoopers LLP as our independent auditor for the fiscal year ending December 30, 2012.
Proposal 3—Reconfirmation of the Rights Plan		Our Board recommends that you vote your shares “FOR” the reconfirmation of the Rights Plan.
Proposal 4—Approval of the 2012 Stock Incentive Plan		Our Board recommends that you vote your shares “FOR” the approval of the 2012 Stock Incentive Plan.
Proposal 5—Consideration of the shareholder proposal and management’s response thereto set out in Schedule “A” to this proxy circular		Our Board recommends that you vote your shares “AGAINST” the shareholder proposal set out in Schedule “A” to this proxy circular.

 

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Who may vote at the meeting?

If you owned common shares at the close of business on March 13, 2012 (the “Record Date”), you may attend and vote at the meeting. At the close of business on the Record Date, we had 156,903,917 common shares issued and outstanding, of which 156,626,728 common shares are entitled to vote at the meeting. There are 277,189 common shares currently held by The TDL RSU Employee Benefit Plan Trust, and these shares are not entitled to vote at the meeting. As of the Record Date, our directors and executive officers and their affiliates beneficially owned, in the aggregate, approximately 587,130 common shares, representing beneficial ownership of less than 1% of the outstanding common shares as of that date. You are entitled to one vote for each common share held. There are no cumulative voting rights in the election of our directors.

What is the difference between holding shares as a shareholder of record and as a beneficial owner of shares held in street name?

Shareholders of Record. If your common shares are registered directly in your name with our transfer agent, Computershare Trust Company of Canada (“Computershare”), you are considered a shareholder of record with respect to those common shares, and the proxy materials were sent directly to you by us.

Beneficial Owners of Shares Held in Street Name. If your common shares are held in an account at a brokerage firm, bank, or other similar organization, you are the beneficial owner of common shares held in “street name,” or in the general account of the broker or other organization. Proxy materials are generally forwarded to beneficial holders by the brokerage firm, bank or other organization through which the shares are held.

If I am a shareholder of Tim Hortons, how do I vote?

Shareholders of Record. All registered shareholders may vote electronically by accessing the Internet site at www.investorvote.com or by telephone by using the toll-free telephone number stated on the proxy card.

Registered shareholders also have the option to vote by mail, in which case such shareholders will need to complete the enclosed proxy card, sign, and return it in the prepaid envelope provided. Registered shareholders may also vote in person at the meeting. If you vote electronically through the Internet, or by telephone, you do not have to return your proxy card.

Beneficial Owners of Shares Held in Street Name. Beneficial shareholders may vote electronically or by telephone by following the instructions provided by their bank, broker or other intermediary, or by mail by returning the completed voting instruction form in the prepaid envelope provided. If you are a beneficial shareholder and you wish to vote in person at the meeting, you may do so by acting in accordance with either of the two following procedures, depending upon whether your intermediary is registered with Broadridge Investor Communication Solutions Canada (“Broadridge”):

 

•

If your intermediary is registered with Broadridge, complete your voting instruction form by inserting your own name in the blank space provided, but leave all of the “for,” “withhold,” and “against” boxes blank. You should then return your voting instruction form, following the instructions provided, in sufficient time for your intermediary to act upon it. If you have done so and your instructions have been received by Computershare from your intermediary by 11:59 p.m., EDST, on the day before the meeting (i.e., May 9, 2012), then when you appear at the meeting in person, you will be allowed to vote the shares covered by the voting instruction form; or,

 

•

If your intermediary is not registered with Broadridge, complete your voting instruction form by inserting your own name in the blank space provided, and indicate on the voting instruction form that you wish to receive a legal form of proxy. After you return your voting instruction form, you should receive the legal form of proxy from your broker, bank, or other intermediary. Please note that you must then send the legal form of proxy to our transfer agent, Computershare, and it must be received by Computershare by 11:59 p.m., EDST, on the day before the meeting (i.e., May 9, 2012). If you have requested a legal form of proxy but do not send it back to Computershare in time for Computershare to receive it before this deadline, you will not be able to vote your shares in person at the meeting.

 

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The shares represented by the proxy will be voted or withheld from voting in accordance with your instructions.

What happens if I do not give specific voting instructions?

Shareholders of Record. If you are a shareholder of record and you indicate when voting on the Internet or by telephone that you wish to vote as recommended by our Board of Directors, or, if you sign and return a proxy card without giving specific voting instructions, then the proxyholders appointed by our Board of Directors will vote your shares in the manner recommended by our Board on all matters presented in this proxy circular and as the proxyholders may determine in their discretion with respect to any other matters as may be properly presented for a vote at the meeting.

Beneficial Owners of Shares Held in Street Name. If the organization that holds your shares does not have discretionary authority to vote on a particular matter and does not receive instructions from you on how to vote your shares on such matter, or otherwise elects not to vote your shares in the absence of your direction on a matter for which it has discretionary authority, the organization that holds your shares will inform our scrutineer that it does not have the authority (or otherwise declines) to vote on such matter with respect to your shares. This is generally referred to as a “broker non-vote.” We encourage you to provide voting instructions to the organization that holds your shares by carefully following the instructions provided in the voting instruction form. See “How are abstentions and broker non-votes treated?” below for additional information.

Who can act as a proxy?

The persons named as proxyholders in the accompanying proxy card are officers of the corporation. A shareholder has the right to appoint a person as nominee to attend and act for and on such shareholder’s behalf at the meeting other than the management nominees named in the accompanying proxy card, and such person need not be a shareholder of the corporation. This right may be exercised by inserting in the blank space on the enclosed proxy card the name of the person the shareholder wishes to appoint as proxyholder, or by completing, signing, and submitting a separate proxy card (in proper form) naming such person as proxyholder.

The accompanying proxy card confers discretionary authority upon the persons named therein with respect to any amendments or variations to matters identified in the Notice of Meeting accompanying this proxy circular and with respect to such other business or matters which may properly come before the meeting or any adjournment(s) or postponement(s) thereof. As of the date of this proxy circular, we are not aware of any such amendments or variations or any other matters to be addressed at the meeting.

What is the quorum requirement for the meeting?

The presence, in person or by proxy, at the opening of the shareholders’ meeting of holders of common shares representing not less than 25% of the outstanding common shares entitled to vote at the meeting on the Record Date constitutes a quorum. For purposes of determining whether there is a quorum, abstentions and broker non-votes are treated as shares that are present. See below under “How are abstentions and broker non-votes treated?”

 

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What is the voting requirement to approve each of the proposals?

The voting requirements with respect to each of the proposals are as follows:

 

Proposal 1—Election of directors		Each director must be elected by a plurality of the votes cast. Shareholders may vote for individual nominees, as we do not have slate voting.
Proposal 2—Reappointment of our independent auditor		To be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast.
Proposal 3—Reconfirmation of the Rights Plan		To be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast.
Proposal 4—Approval of the 2012 Stock Incentive Plan		To be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast, provided that the total votes cast represent over 50% in interest of all common shares entitled to vote on the proposal.
Proposal 5—Consideration of the shareholder proposal and management’s response thereto set out in Schedule “A” to this proxy circular		To be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast.

There is no substantial interest, direct or indirect, of any director, executive officer, or associate of any of the foregoing in any of the proposals before the shareholders at the meeting.

How are abstentions and broker non-votes treated?

Abstentions and broker non-votes are counted for purposes of determining whether a quorum is present. For the purpose of determining whether the shareholders have approved a matter, abstentions and broker non-votes will have no effect on the outcome of the vote. It is critical that you cast your vote if you want it to count. As a result of restrictions under the Canada Business Corporations Act and recent rules governing members of the New York Stock Exchange, your bank, broker or other intermediary will not be able to vote your uninstructed shares on a discretionary basis. If you are a shareholder of record and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the meeting.

May I change my vote after I have voted?

If you are a shareholder of record, you may revoke your proxy and change your vote at any time before the final vote at the meeting. You may vote again on a later date through the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date no later than 11:59 p.m., EDST, on the day before the meeting (i.e., May 9, 2012), or by attending the meeting and voting in person. However, your attendance at the meeting will not automatically revoke your proxy unless you vote again at the meeting or specifically request in writing that your prior proxy be revoked. The Internet and telephone procedures for voting and for revoking or changing a vote are designed to authenticate shareholders’ identities, to allow shareholders to give their voting instructions, and to confirm that shareholders’ instructions have been properly recorded.

A beneficial holder of shares in street name may revoke a voting instruction form that has been given to an intermediary at any time by written notice to the intermediary or to the service company that the intermediary uses, in sufficient time for the intermediary to act on it.

 

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Is my vote confidential?

Proxy instructions, ballots, and voting tabulations that identify individual shareholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within our corporation or to third parties, except:

 

•

As necessary to meet applicable legal requirements;

 

•

To allow for the tabulation and certification of votes; and,

 

•

To facilitate a successful proxy solicitation.

Occasionally, shareholders provide written comments on their proxy cards, which may be forwarded to management and/or our Board of Directors.

Where can I find the voting results of the meeting?

The preliminary voting results will be announced at the meeting. The final voting results will be tallied by the scrutineer and reported promptly, and in any event within four business days after the end of the meeting (or, if not then available, on such later date as they become available), in a current report on Form 8-K that will be accessible at www.sec.gov and www.sedar.com.

Who is soliciting my proxy?

Proxies are being solicited by and on behalf of management of Tim Hortons Inc.

Who is paying for the cost of this proxy solicitation?

We are paying the costs of the solicitation of proxies for our shareholders of record and beneficial owners of shares held in street name. These costs include certain fees and expenses associated with:

 

•

Forwarding printed proxy materials by mail to shareholders; and,

 

•

Obtaining beneficial owners’ voting instructions from banks, brokers, and other organizations that are the record owners.

In addition to soliciting proxies by mail and electronically, our Board members, officers and certain employees, or our transfer agent, may solicit proxies on our behalf, personally or by telephone, or, we may ask a proxy solicitor to solicit proxies on our behalf by telephone, electronically or otherwise. We expect the cost of a private proxy solicitor would be approximately $35,000. Arrangements also may be made with brokerage houses and other custodians, nominees, and fiduciaries for the forwarding of solicitation materials to the beneficial owners of our shares held by those persons, and the corporation will reimburse such organizations for reasonable expenses incurred by them in connection with the forwarding of solicitation materials to beneficial holders.

Shareholders that vote through the Internet should understand that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies that will be borne by the shareholder in order for the shareholder to connect to or access the Internet site.

Where are our principal executive offices located, and what is our main telephone number?

Our principal executive offices in Canada are located at 874 Sinclair Road, Oakville, Ontario, Canada, L6K 2Y1; our main telephone number in Canada is (905) 845-6511.

Our principal executive offices in the U.S. are located at 4150 Tuller Road, Unit 236, Dublin, Ohio, 43017, U.S.A.; our main telephone number at our U.S. office is (614) 791-4200.

 

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Voting Securities and Their Principal Holders

The following table sets forth information with respect to the shareholders known to us, based on our review of public filings as of the Record Date, to own beneficially, directly or indirectly, or exercise control or direction over, more than 5% of the issued and outstanding common shares of the corporation:

 

Title of Class		Name and Address           of Beneficial Holder		Amount and Nature of Beneficial Ownership*		Percent of Class*
Common Shares		FMR LLC and a joint filer(1) 82 Devonshire Street Boston, MA 02109		19,826,154		12.6%

*

Based on 156,903,917 common shares outstanding as of the Record Date (including the 277,189 common shares held by The TDL RSU Employee Benefit Plan Trust).

 

(1)

Information based solely on the Schedule 13G/A filed with the SEC on February 14, 2012 by FMR LLC (“FMR”). Fidelity Management & Research Company (“Fidelity”), 82 Devonshire Street, Boston, Massachusetts, 02109, is a wholly owned subsidiary of FMR and a registered investment advisor. Fidelity is the beneficial owner of 15,828,632 common shares as a result of acting as investment advisor to various registered investment companies (the “funds”). The ownership of one fund, Fidelity Contrafund, amounted to 12,168,732 common shares. Fidelity Contrafund has its principal business office at 82 Devonshire Street, Boston, Massachusetts, 02109.

 

Edward C. Johnson 3d, Chairman of FMR, and FMR, through its control of Fidelity, and the funds each has sole power to dispose of the 15,828,632 common shares owned by the funds. Voting power for these common shares is held by the boards of trustees of the funds. Members of the family of Mr. Johnson own, directly or through trusts, securities representing 49% of the voting power of FMR and, as a result of a shareholders’ voting agreement, may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR.

 

Strategic Advisers, Inc. (“Strategic”), 82 Devonshire Street, Boston, Massachusetts, 02109, a registered investment adviser, is a wholly owned subsidiary of FMR and, as such, FMR’s beneficial ownership includes 1,460 common shares beneficially owned through Strategic.

 

Pyramis Global Advisors, LLC (“PGALLC”), 900 Salem Street, Smithfield, Rhode Island, 02917, an indirect wholly owned subsidiary of FMR and a registered investment adviser, is the beneficial owner of 3,408,563 common shares as a result of its serving as investment advisor to institutional accounts, non-U.S. mutual funds, or investment companies registered under the Investment Company Act of 1940 owning such shares. Mr. Johnson and FMR, through its control of PGALLC, each has sole dispositive power over 3,408,563 common shares and sole power to vote or to direct the voting of the 3,378,663 common shares owned by the institutional accounts or funds advised by PGALLC.

 

Pyramis Global Advisors Trust Company (“PGATC”), 900 Salem Street, Smithfield, Rhode Island, 02917, an indirect wholly owned subsidiary of FMR and a bank as defined under Section 3(a)(6) of the Exchange Act, is the beneficial owner of 575,070 common shares as a result of its serving as investment manager of institutional accounts owning such shares. Mr. Johnson and FMR, through its control of PGATC, each has sole dispositive power over 575,070 common shares and sole power to vote or to direct the voting of 241,500 common shares owned by the institutional accounts managed by PGATC.

 

FIL Limited (“FIL”), Pembroke Hall, 42 Crow Lane, Hamilton, Bermuda, and various foreign-based subsidiaries provide investment advisory and management services to a number of non-U.S. investment companies and certain institutional investors. FIL is the beneficial owner of 12,429 common shares. Partnerships controlled predominantly by members of the family of Mr. Johnson and FIL, or trusts for their benefit, own shares of FIL voting stock. While the percentage of total voting power represented by these shares may fluctuate as a result of changes in the total number of shares of FIL voting stock outstanding from time to time, it normally represents more than 25% and less than 50% of the total votes which may be cast by all holders of FIL voting stock.

 

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Security Ownership of Management

The following table sets forth, as of the Record Date, information with respect to common shares owned beneficially by each person who has been a director or executive officer of the corporation at any time since the beginning of the last fiscal year, by each proposed nominee for election as a director of the corporation, and by all of our directors and executive officers as a group:

 

Title of Class		Name and address of beneficial holder(1)		Common Shares currently held(2)				Common Shares that can be acquired within 60 days(3)		Total beneficial ownership				Percent of Class
Common Shares		Paul D. House			170,903			93,197			264,100			*
		M. Shan Atkins			1,000			—			1,000			*
		Michael J. Endres			42,787	(4)		—			42,787			*
		Moya M. Greene			—			—			—			*
		The Hon. Frank Iacobucci			6,607			—			6,607			*
		John A. Lederer			15,120			—			15,120			*
		David H. Lees			6,624	(5)		—			6,624			*
		Ronald W. Osborne			3,000	(6)		—			3,000			*
		Wayne C. Sales			11,998			—			11,998			*
		Catherine L. Williams(7)			—			—			—			*
		Cynthia J. Devine			74,127			74,785			148,912			*
		David F. Clanachan			50,380	(8)		73,374			123,754			*
		William A. Moir			104,003			73,517			177,520			*
		Roland M. Walton			70,192			73,374			143,566			*
		Donald B. Schroeder			73,187	(9)		78,269			151,456			*
		All directors and executive officers as a group (20 persons)			662,696	(10)		542,985(11)			1,205,681			*

*

Represents beneficial ownership of less than 1% of our outstanding common shares.

 

(1)

The business address for all of the directors and executive officers is Tim Hortons Inc., 874 Sinclair Road, Oakville, Ontario, Canada, L6K 2Y1, or Tim Hortons USA Inc., 4150 Tuller Road, Unit 236, Dublin, Ohio, 43017, U.S.A.

 

(2)

The amounts reflected in this column include common shares owned directly or indirectly for which there is voting and/or investment power, including shared voting and/or investment power. See immediately below under “Ownership of Deferred Stock Units by Directors” for a listing of the number of deferred stock units (“DSUs”) owned by each director as of the Record Date, which are not included in the table above.

 

(3)

Amounts reflected in this column include: (i) common shares issuable or deliverable to settle restricted stock units (including restricted stock units received automatically pursuant to settlement of dividend equivalent rights) held by executive officers under the Tim Hortons Inc. 2006 Stock Incentive Plan (“2006 Stock Incentive Plan”), up to and including the May 2012 vesting of restricted stock units and dividend equivalent rights; and (ii) vested stock options with tandem stock appreciation rights issued under the 2006 Stock Incentive Plan held by executive officers, including those that vest in May 2012. We have included for this purpose the gross amount of shares deliverable, but actual shares received will be less as a result of the payment of applicable withholding tax. Additionally, as required, we have provided the number of stock options with tandem stock appreciation rights that may be acquired without reduction for the value of the exercise price. For additional information regarding outstanding restricted stock units and stock options with tandem stock appreciation rights held by executive officers, see “Incentive Plan Awards” and Notes 2 and 3 to the Summary Compensation Table under “Executive and Director Compensation.”

 

(4)

Includes 30,000 common shares held in two trusts over which Mr. Endres has voting and investment power.

 

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(5)

Common shares are held jointly by Dr. Lees and his spouse with whom he shares voting and investment power.

 

(6)

Common shares are held jointly by Mr. Osborne and his spouse with whom he shares voting and investment power.

 

(7)

Ms. Williams will not be standing for reelection as a director at the meeting.

 

(8)

Certain of the common shares beneficially owned by Mr. Clanachan are held in accounts in respect of which he has shared voting and investment power with his spouse.

 

(9)

Effective as of May 24, 2011, Mr. Schroeder no longer served as a director and executive officer of the corporation. Information with respect to common shares currently held by Mr. Schroeder is set forth as of May 24, 2011.

 

(10)

Includes an aggregate of 75,566 common shares held by two former executive officers of the corporation.

 

(11)

Includes 78,269 common shares issuable on vesting of stock options with tandem stock appreciation rights held by a former executive officer of the corporation.

For the purpose of this table, which contains information that is also included in our Form 10-K filing for the fiscal year ended January 1, 2012, the term “executive officer” has the meaning ascribed to it under Rule 405 promulgated under the Securities Act of 1933, as amended (the “1933 Securities Act”), and National Instrument 51-102—Continuous Disclosure Obligations. The information with respect to beneficial ownership is based upon information furnished by each director or executive officer or information contained in insider reports publicly available on the System for Electronic Disclosure by Insiders.

Ownership of Deferred Stock Units by Directors

The following table sets forth the number of DSUs held by our non-employee directors as of the Record Date. These DSUs are not included in the number of common shares beneficially owned by directors set forth in the table above. DSUs are notional units that track the value of our common shares, with the value determined upon a director’s separation from service with us and, ultimately, settled in cash. One DSU is equivalent in value to one common share, and DSUs carry dividend equivalent rights. We include DSUs in determining compliance with our stock ownership guidelines for directors. For additional information regarding outstanding DSUs held by directors, see “Executive and Director Compensation—Director Compensation.”

 

Director		Number of Deferred Stock Units
M. Shan Atkins			10,317
Michael J. Endres			15,043
Moya M. Greene			10,958
The Hon. Frank Iacobucci			26,940
John A. Lederer			17,622
David H. Lees			17,489
Ronald W. Osborne			9,220
Wayne C. Sales			17,399
Catherine L. Williams(1)			9,394

 

(1)

Ms. Williams will not be standing for reelection as a director at the meeting.

 

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CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES

The corporation has adopted certain principles and practices so that effective corporate governance is maintained and the Board functions independently of management.

Applicable Governance Requirements and Guidelines

The corporation is a Canadian reporting issuer and qualifies as a foreign private issuer for purposes of the Exchange Act. Our common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”). As a result, the corporation is subject to, and complies with, a number of legislative and regulatory corporate governance requirements, policies and guidelines, including those of the TSX, the CSA, the NYSE, and the SEC. The corporation currently complies with the governance requirements of the NYSE applicable to U.S. domestic issuers listed on the NYSE. Pursuant to Section 303A.11 of the NYSE Listed Company Manual, foreign private issuers such as the corporation must disclose significant differences between their corporate governance practices and those required to be followed by U.S. issuers under the NYSE listing standards. Our corporate governance practices comply with the NYSE requirements applicable to U.S. domestic issuers and are in compliance with applicable rules adopted by the SEC to give effect to the provisions of the Sarbanes-Oxley Act of 2002. As mentioned above, we also comply with applicable Canadian corporate governance requirements.

In addition to compliance with governance requirements, our Board continuously monitors initiatives and trends in corporate governance with a view to evaluating and, where appropriate, implementing best practices. Our significant governance principles and practices, all of which are described below, are set forth in governance documentation available on our website at www.timhortons-invest.com. These include our Principles of Governance (our Board mandate), Governance Guidelines, committee mandates or charters, Standards of Business Practices (Code of Ethics), Directors’ Code of Business Conduct and Ethics, and our Audit Committee Pre-Approval Policy. We will provide a copy of any of these governance documents to any person, without charge, who requests a copy in writing to our Secretary at Tim Hortons Inc., 874 Sinclair Road, Oakville, Ontario, Canada, L6K 2Y1.

Principles of Governance and Governance Guidelines

Principles of Governance

Our Board of Directors, which is comprised of a substantial majority of independent directors (9 of 10), has adopted Principles of Governance and Governance Guidelines. The Principles of Governance set forth, in general terms, the mandate, or role and general responsibilities, of the Board. The Principles of Governance outline that the Board’s overall goals are: to maximize long-term shareholder value and provide oversight and support such that the corporation conducts its business in a highly ethical manner; to create an environment that respects and values all employees; and, to promote corporate responsibility. The full text of the Principles of Governance is as follows:

Tim Hortons Board of Directors assumes accountability for the success of the enterprise by taking responsibility for the corporation’s failure and success. The Board’s overall goals are to maximize long-term shareholder value and provide oversight and support such that the corporation conducts its business in a highly ethical manner; to create an environment that respects and values all employees; and, to promote corporate responsibility.

Specifically, the Board’s responsibilities include:

 

•

Approving a corporate philosophy and mission;

 

•

Selecting, monitoring, evaluating, compensating, and, if necessary, replacing the Chief Executive Officer (“CEO”) and other senior executives, and overseeing management succession;

 

•

Providing guidance for, reviewing and approving management’s strategic and business plans, including developing in-depth knowledge of the businesses being served, understanding and questioning the assumptions

 

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upon which such plans are based, and reaching an independent judgment as to the probability that the plans can be realized, including but not limited to potential risk exposures in connection with such strategic plans and objectives;

 

•

Reviewing and approving the corporation’s financial objectives, plans, and actions, including significant capital allocations and expenditures and the corporation’s liquidity needs;

 

•

Reviewing the principal risk exposures of the corporation and, if applicable, reviewing mitigation plans in connection therewith during at least one Board meeting each year;

 

•

Reviewing and approving material transactions not in the ordinary course of business;

 

•

Monitoring corporate performance against the strategic and business plans, including overseeing the operating results on a regular basis to evaluate the extent to which the business is being properly managed, the business and liquidity are sufficiently stable, and management is prepared for contingencies in the corporation’s industry and the economy;

 

•

Requiring ethical behavior and compliance with laws and regulations, auditing and accounting principles, and the corporation’s own governing documents; and,

 

•

Performing such other functions as are prescribed by law or assigned to the Board in the corporation’s governing documents.

The Board strives to be a strategic asset of the corporation. It must continuously monitor and confirm that it has the right people to address the right issues with the right information in a culture that fosters teamwork.

The Board, in a spirit of continuous improvement, will periodically assess its performance against governance “best practices” and hold itself accountable both as individual directors and as a Board for adhering to the highest standards of board professionalism and performance.

Governance Guidelines

The Governance Guidelines address Board structure, membership (including nominee qualifications), performance, management oversight, and other matters. The Governance Guidelines describe the three main Board committees (the Audit Committee, the Nominating and Corporate Governance Committee (the “Nominating Committee”), and the Human Resource and Compensation Committee (the “Compensation Committee”), as well as the charters of each committee. Pursuant to the Governance Guidelines, unless waived by all independent directors, the independent directors schedule and hold regular executive sessions (without management present) at every Board and committee meeting. The Lead Director, The Hon. Frank Iacobucci, presides at executive sessions of the independent directors, except where the principal matters to be considered are within the scope of authority of one of the other committee chairs. Executive sessions comprised only of the independent directors were held at all but one of the Board’s six meetings during 2011, and the meeting for which the executive session was not held was a special telephonic meeting for which the directors determined an executive sessions was not necessary.

Except in compelling circumstances, any director who, during two consecutive full calendar years, attended fewer than 75% of the total of: (i) all Board meetings held during the period for which he or she has been a director (including regularly scheduled, special and telephonic meetings); and (ii) all meetings held by all committees on which he or she served (during the periods that he or she served) shall be asked to tender his or her resignation to the Board, and the Board shall consider relevant facts and circumstances and determine whether to accept or decline such tendered resignation. The Board of Directors held a total of six meetings during 2011, both regularly scheduled and special. Each director attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and Board committees held during the period for which such director served. The Governance Guidelines also provide that the directors are expected to attend the meeting of shareholders. All of the nine directors nominated for reelection to the Board in 2011 attended the annual and special meeting of shareholders in 2011.

 

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With respect to our governance structure, the Governance Guidelines provide that if the Chair of the Board is not an independent director, the Chair of the Nominating Committee will serve as Lead Director and as a member of the Executive Committee. Mr. House was appointed as our President and CEO on May 24, 2011, with the departure of Mr. Schroeder, in addition to continuing to serve as our Executive Chairman, a position he has held since March 2008. He was previously our Chairman of the Board and CEO from February 2007 to March 2008. The Hon. Frank Iacobucci, an independent director, has served as our Lead Director since Mr. House became our Executive Chairman in February 2007. The Governance Guidelines contain a general description of the responsibilities of the Executive Chairman and the Lead Director. See also “Governance Structure” below.

Majority Voting Policy for Election of Directors

We have adopted a majority voting policy for the election of directors in uncontested elections, which is included in the Governance Guidelines. Under that policy, if a nominee does not receive the affirmative vote of at least the majority of votes cast, the director shall promptly tender his or her resignation for consideration by the Nominating Committee and the Board.

Code of Ethics (Standards of Business Practices) and Directors’ Code of Business Conduct and Ethics

We have adopted a Code of Ethics, which we have designated as our Standards of Business Practices, that applies to all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We also have an Ethics and Compliance Office. Our Chief Risk and Privacy Officer is responsible for overseeing compliance initiatives and programs, managing the investigation and resolution of reports of non-compliance and ethics issues, and reporting on such activities to the Audit Committee. In addition, we have an Ethics HotLine, and significant matters raised through this line are discussed with the Audit Committee, as needed. In addition, in the event a call to the Ethics HotLine relates to a matter involving an executive officer or a member of the Ethics and Compliance Office, that matter would by-pass the Ethics and Compliance Office and be referred directly to our Audit Committee Chair. As part of our decision to voluntarily comply with Form 8-K reporting requirements, notwithstanding that the corporation is a foreign private issuer under U.S. securities laws, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver of, any provision (related to elements listed under Item 406(b) of Regulation S-K) of the Standards of Business Practices that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by timely posting such information on our corporate and investor website at www.timhortons-invest.com, as required.

In August 2011, the Standards of Business Practices were amended to expand the prohibition against retaliatory action by the corporation to include retaliatory action of any kind against any employee who, in good faith, provides the corporation with information, causes information to be provided to the corporation, or otherwise assists in authorized corporation investigations regarding any conduct that he or she reasonably believes constitutes statutory or regulatory violations that have occurred, are ongoing or are about to occur. This amendment to the Standards of Business Practices is designed to encourage our employees to make affirmative reports of any known or suspected unlawful conduct.

In order to augment the prohibitions against improper insider trading in our Standards of Business Practices, we also have separate insider trading and window trading policies for directors, franchisee advisory board members, officers and employees who may from time to time be in possession of material, non-public information. Our insider trading and window trading policies allow for, and we have a separate policy governing, automatic trading plans entered into pursuant to Rule 10b5-1 under the Exchange Act and applicable provisions of Canadian securities laws.

We have also adopted a separate Directors’ Code of Business Conduct and Ethics. This Code of Business Conduct and Ethics emphasizes the importance of the Standards of Business Practices and reaffirms the Board’s commitment to certain key principles, including confidentiality, fair dealing, compliance with laws, and the reporting of illegal or unethical behavior. Under the Directors’ Code of Business Conduct and Ethics, directors are encouraged to bring questions regarding particular circumstances that may implicate its provisions to the Chair of the Nominating Committee.

 

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Board Committees

In accordance with our Governance Guidelines and applicable NYSE and Canadian corporate governance rules, the Board of Directors has a Nominating Committee, an Audit Committee, and a Compensation Committee. The Board has also established an Executive Committee. The Executive Committee has been delegated all of the authority of the Board with respect to matters below an established dollar threshold, subject to certain exceptions and limitations. Committee membership is considered annually in May by the Nominating Committee and the Board. The charter for each of the three main committees sets forth the purpose and responsibilities of each respective committee, which are generally described below, as well as descriptions of the role of the Chair of each committee. Each committee is required to meet at least four times a year, and otherwise as needed.

Nominating and Corporate Governance Committee

The current members of the Nominating Committee are The Hon. Frank Iacobucci (Chair), Ms. Atkins, and Messrs. Lederer, Lees, and Sales, each of whom satisfies the Independence Requirements and is, therefore, independent of the corporation. See below for a discussion of applicable “Independence Requirements” set forth under “Independence and Other Considerations for Director Service.” The Nominating Committee met four times during 2011. Executive sessions comprised of only the independent directors who were members of the Nominating Committee were held at each of those 2011 meetings.

The Nominating Committee’s functions include: assisting the Board in reviewing and determining, annually, the appropriate governance structure for the corporation and the Board; overseeing the process for CEO succession planning, including reviewing such planning and related processes and facilitating the Board’s identification and evaluation of potential successors to the CEO; reviewing and monitoring the desired qualifications of directors and identifying and assessing potential nominees meeting those criteria; recommending to the Board nominees for election as directors by the shareholders, including any candidates nominated by shareholders; reviewing and making recommendations to the Board regarding the functions and responsibilities of the Chairman, CEO and Lead Director; reviewing independence considerations for existing and prospective Board members; and, developing plans regarding the size and composition of the Board and its committees. In addition, the Nominating Committee reviews the Principles of Governance and Governance Guidelines, periodically reviews and makes recommendations to the Board with respect to other corporate governance principles and policies applicable to us, annually reviews compliance with listing standards, oversees the annual self-evaluation of the Board and its committees, conducts an annual self-evaluation of the Nominating Committee, and monitors and recommends changes to the responsibilities of the Board’s committees, including determining proper oversight by the Board and its committees of risk assessment and mitigation under our enterprise risk management program. Governance structure and director-nominee considerations are described in greater detail below. The Nominating Committee charter also includes the Nominating Committee’s oversight accountability, on behalf of the Board, for: sustainability, corporate responsibility and environmental and social issues, which includes the consideration of potential short-and long-term trends and impacts, as well as risks and opportunities to our business; and, corporate political contributions, under the corporation’s political contribution policy. With respect to succession planning activities, see also “Human Resource and Compensation Committee,” below.

Director Orientation and Education

The Nominating Committee also oversees and maintains programs for initial orientation and ongoing education of our directors. The orientation and education program consists of three important parts: initial orientation sessions; continuing general knowledge and education; and, receipt of current information between meetings, each of which is described below. Upon joining our Board, each new director is provided with extensive Board manuals. The materials contained in the manuals, coupled with the other components of the orientation and education program, are intended to inform new directors regarding, among other matters, the role and responsibilities of the Board, its committees, and the directors; the nature and operation of the corporation’s business; financial reporting and internal controls; the significant risks facing the corporation; the corporation’s relationships with its key stakeholders, including shareholders, restaurant owners, and employees; and, the corporation’s strategic plans. The Nominating Committee annually reviews, and reports to the Board regarding, the effectiveness of the Board’s orientation and education program.

 

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Initial Orientation Sessions. As soon as reasonably practicable after joining the Board, new directors participate in discussions with our Executive Chairman and Lead Director, as well as key members of our senior management including, among others, the CEO, CFO, General Counsel, Secretary, and Vice President, Corporate, Public and Government Affairs, in order to gain working knowledge in each of the key areas identified above. In addition, new directors are required to tour certain of the corporation’s manufacturing and distribution facilities to supplement this information with direct exposure to the operation of the business. Directors new to service on a public company board must also attend an appropriate external seminar within two years of their appointment, and those new to public company audit committee service must attend such a seminar within a reasonable period of time after their appointment, to further understand the roles, responsibilities, and liabilities associated with public company board service.

Continuing General Knowledge and Education. General knowledge is conveyed to directors in meetings with, and in written or other materials provided by, members of senior management. In particular, directors: (i) receive comprehensive advance materials prior to each regularly scheduled and, if appropriate, special Board and committee meeting; (ii) are involved in setting the agendas for Board and committee meetings; (iii) attend annual or biennial strategic planning sessions; and (iv) have full access to our senior management both during the course of and in between meetings. In addition to the information regarding the business that is conveyed in the normal course as part of regular Board and committee meetings, the corporation also maintains an ongoing education program. This program consists of a minimum of two educational sessions per year, one led by internal members of senior management and one led by external subject matter experts. Topics for these sessions may include discussions of regulatory and compliance matters, governance matters, enterprise risk management or assessment, or, they may focus on certain aspects of the business for which senior management or any director believes additional education would be appropriate. In addition, there is a requirement of at least one operational facility or market tour annually.

Commencing in 2012, the Board also adopted as part of the program the requirement that directors attend all franchisee conventions, generally held every seven to ten years. Annually, directors are also required to attend a restaurant owner regional meeting. These events will enable directors to gain further insight into the issues that are relevant to our restaurant owner.

Receipt of Current Information. Senior management and the Board recognize the importance of keeping the Board adequately informed of events and business matters in between regularly scheduled meetings. In this regard, the Board receives consistent updates between Board meetings on key matters or events affecting our business from the CEO and other members of senior management. Directors are also encouraged to attend meetings and events involving restaurant owners (see also required attendance at certain events, discussed above) and the Tim Horton Children’s Foundation that occur outside of our Board and committee meetings. In furtherance of keeping current regarding general matters relevant to Board and committee service, our directors also must attend at least one external educational seminar every two years relevant to Board or committee service, and the directors are encouraged to share any meaningful information obtained from such seminars with other Board or committee members, as applicable, depending upon the subject matter. The Secretary’s office maintains a list of appropriate external educational seminars and makes the list available to directors on an ongoing basis.

Shareholder Engagement

The corporation maintains active shareholder engagement through a variety of activities. Our investor internet website is www.timhortons.com. We make available free of charge on this website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC and the CSA. We also make available all of our news releases, investor presentations, transcripts from conference calls, presentations and a range of financial, performance, business and strategy information on our investor website. We also engage in dialogue directly with investors through a series of activities, including participation in investor conferences, one-on-one meetings, conference calls and other means.

 

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Board and Committee Self-Evaluation

The annual Board and committee self-evaluation process was adopted by the Board based on the review and recommendation of the Nominating Committee. The annual process considers such matters as: participation and involvement of Board and committee members; oversight and effectiveness of the Board and its committees as to key functions; quality and adequacy of materials and information provided to the Board and committees, both for and between meetings; Board and committee composition; and, with respect to the committees, fulfillment of accountabilities delegated from the Board and outlined in the committee charters. Feedback is solicited from Board and committee members on these and other important areas through a set of detailed, multi-page questionnaires that are tailored to the Board and each committee, respectively. The questionnaires include specific questions, with scaled responses, as well as open-ended requests for written commentary in certain limited areas, including, if applicable, with respect to any response indicating that improvement is needed.

Commencing in 2011, the Nominating Committee created separate questionnaires with scaled questions to solicit responses related to the performance of individual directors, the Executive Chairman, and the Lead Director. Additionally, the questionnaire requires that each director provide written commentary on his or her assessment of the individual performance of other Board members (including in connection with his or her service as a committee chair or service on a committee), on both an individual basis and/or collective basis.

Board members submit completed Board and Nominating Committee questionnaires, including the questionnaire and any commentary on the performance of individual Board members and/or the Executive Chairman, on an anonymous basis to Mr. Iacobucci, Lead Director and Chair of the Nominating Committee. The completed questionnaires for the other committees are submitted on an anonymous basis to the committee chairs of the Compensation Committee and the Audit Committee, respectively. Directors are also informed as part of the process, in advance, that they may submit feedback regarding the Lead Director’s performance directly to the Secretary. Although questionnaires may be completed on an anonymous basis, Board and committee members are advised that they are free to identify themselves on their questionnaires should they wish to discuss any matter directly with Mr. Iacobucci, the respective committee chair, or, with respect to any matter involving the Lead Director, the Secretary.

In addition, in 2011, the Board adopted an interview process whereby Mr. Iacobucci individually discussed with each director matters relevant to the Board, the corporation, and/or individual directors. Feedback included, but was not limited to, any specific topic or matter addressed as part of the self-evaluation questionnaires. Mr. Iacobucci shared information obtained from these interviews on an anonymous basis as part of his report of self-evaluation results.

For the Board and the Nominating Committee, Mr. Iacobucci presents the results of the self-evaluations at the succeeding Board and Nominating Committee meetings. The Board results are reviewed by the Nominating Committee to fulfill its oversight role to facilitate the evaluation process and so that any areas for improvement for the Board and/or any committee surfaced through the self-evaluations, including any suggestions for improvement in the self-evaluation process, are reviewed and, if appropriate, addressed. The Audit Committee and Compensation Committee chairs present the results to their respective committees and to the Board. The committee chairs follow up with Mr. Iacobucci and/or respective members of management, as appropriate, regarding any results or feedback to be reviewed and/or addressed, as applicable. Any feedback on the performance of individual Board members or the Executive Chairman is provided to such Board member or the Executive Chairman, as applicable, by Mr. Iacobucci. The Secretary would provide any feedback received by the Secretary regarding the Lead Director directly to the Lead Director.

The Nominating Committee reviews the Board and committee self-evaluation process annually. As a result of this review, the Nominating Committee may revise the form and content of the questionnaires and/or other aspects of the overall process to reflect changing circumstances, to include feedback from directors, or to incorporate modifications designed to improve the overall process.

 

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Governance Structure

Since March of 2008, the governance structure for the corporation consisted of the three key leadership roles of Executive Chairman, Lead Director, and CEO. Our Governance Guidelines contain a general discussion of the responsibilities of each of the Executive Chairman and Lead Director based on position descriptions for each role. The Lead Director’s accountabilities include providing independent leadership to the Board, and the Lead Director works with the Executive Chairman to facilitate the proper functioning and effectiveness of the Board. Also included in the Lead Director’s responsibilities are: presiding at executive sessions of the independent directors, except where the principal matters to be considered are within the scope of authority of one of the other committee chairs; coordinating with the Executive Chairman and management to set the agenda for Board meetings; serving as a communication channel between the independent directors and the Executive Chairman and management; and, overseeing and reporting to the Board regarding the Board’s and Nominating Committee’s annual self-evaluation. The general duties and responsibilities of the Executive Chairman include: board leadership, including presiding at regular and special meetings of the Board and fostering a strong working relationship between the CEO and the Board; strategic planning and related activities, in coordination with key members of senior management; enhancing restaurant owner relations and promoting goals of the corporation with key stakeholders, including restaurant owners, general industry and the community; and, such other duties as are assigned by the Board.

As set forth in the written position description for the CEO, the CEO is responsible for the general management of the business and affairs of the corporation, and the development of strategic plans for the corporation, with the objective of enhancing long-term shareholder value. Among the CEO’s other responsibilities are: articulating and communicating the corporation’s mission and values; providing leadership for creating productive relationships with restaurant owners and other stakeholders; and monitoring and evaluating the corporation’s performance.

Effective as of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. Mr. House, the corporation’s Executive Chairman, was appointed by the Board to serve as the corporation’s President and CEO until the Board has appointed a permanent CEO. Given that CEO succession is of paramount importance to the effective exercise of any board’s oversight accountabilities, the Compensation Committee and Nominating Committee, in particular, had been planning for CEO succession at the corporation since the commencement of Mr. Schroeder’s appointment as CEO. The Board is currently in the process of conducting a comprehensive internal review and external search and, although the timing of the completion of the search process cannot be determined with certainty, the Board’s objective is to make an appointment as soon as practicable.

Mr. House’s extensive restaurant industry knowledge and his directly relevant experience, having served with the corporation as a former CEO and as a senior executive for over 20 years, and more recently as our Executive Chairman, has made for a smooth transition. The seamless transition of the CEO role to Mr. House upon Mr. Schroeder’s departure was a direct consequence of the thoughtful planning for, and reflects the strength of, the corporation’s governance structure, which, at present, continues to consist of a very experienced Executive Chairman, an independent Lead Director and Chair of the Nominating Committee. With Mr. House as our President and CEO until a permanent CEO is appointed, we are able to take advantage of his background and experience as a board member of a public company in the quick service restaurant industry for many years and also allows us to continue to benefit from Mr. House’s extensive knowledge of our business.

With respect to the Lead Director role, Mr. Iacobucci has extensive legal (including as a Justice of the Supreme Court of Canada), corporate governance, and public company board skills and related leadership experience, with a reputation for excellence in these areas, that he also brings to service on our Board. He is often appointed by the Government of Canada and the Province of Ontario to consider controversial and potentially divisive matters, given his well-established track record of solid and reasoned analysis and appropriate resolution of a myriad of complex issues. As our Lead Director and Chair of the Nominating Committee, Mr. Iacobucci oversees and leads the independent directors and makes recommendations to the Board with respect to the adoption and maintenance of sound governance principles and best practices. Our governance structure has allowed for members of senior management to continue to benefit from access to the considerable and varied knowledge and experience of both Messrs. House and Iacobucci.

 

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The corporation believes that its leadership structure, discussed in detail above, also supports the risk oversight function of the Board. The CEO and other members of senior management have responsibility for assessing and managing the corporation’s risk exposure, and the Board and its committees provide oversight in connection with those efforts. In addition, we believe that our Board leadership and governance structure further supports effective risk oversight because the role of the Executive Chairman brings additional expertise directly related to our business that is valuable to the Board and its committees in understanding the key risks and assessing management’s mitigation plans, as may be applicable. See also “Audit Committee—Enterprise Risk Management,” below.

Concurrent with the Board’s annual review of the governance structure and position descriptions of the Executive Chairman, Lead Director and CEO, the Compensation Committee also reviewed the respective roles and accountabilities in connection with annual compensation determinations. Effective upon his appointment as CEO in May of 2011, the Board determined that Mr. House’s compensation should be substantially similar to the compensation that Mr. Schroeder received as President and CEO prior to his departure from the corporation and that no additional compensation would be provided for Mr. House’s concurrent service as our Executive Chairman. See below under “Compensation Discussion and Analysis” for a complete description of Mr. House’s compensation.

Independence and Other Considerations for Director Service

The Governance Guidelines express our Board’s goal that a substantial majority of our directors satisfy the independence requirements set forth in the Governance Guidelines (the “Independence Requirements”). The Independence Requirements incorporate the listing standards of the NYSE and the rules of the Canadian securities administrators. The Governance Guidelines also set forth additional requirements, including that directors have no “business conflict” with the corporation. The Governance Guidelines further require that all members of the Audit Committee, the Compensation Committee, and the Nominating Committee satisfy the Independence Requirements. Each member of the Compensation Committee also must be a “non-employee director,” as such term is defined in Rule 16b-3 under the Exchange Act, and an “outside director,” as described under Section 162(m) of the Internal Revenue Code of 1986, as amended. Members of the Audit Committee must also satisfy the heightened independence standards for service on audit committees established by the SEC and the rules of the Canadian securities administrators.

In making the affirmative determination, in February 2012, that all of our directors (including Ms. Catherine L. Williams, who will not be standing for reelection at the meeting) are independent in accordance with the Independence Requirements, except for Mr. House, the Nominating Committee and the Board considered all relevant facts and circumstances, not merely from the standpoint of the director, but also from that of any person or organization with which the director has an affiliation or association.

The independence determinations of the Nominating Committee and the Board for the director-nominees set forth herein included consideration of the following:

 

•

Michael J. Endres. Mr. Endres serves on the board of directors of Huntington Bancshares, Inc. (“Huntington”). Huntington, either directly, or indirectly through affiliates or subsidiaries, provides certain banking services to us in the United States, and is a member of the board of trustees of OhioHealth Corporation (“OhioHealth”), a lessor of two restaurant sites to one of the corporation’s subsidiaries. The Board concluded that Mr. Endres is not affected by his service as a Huntington director or as a trustee of OhioHealth because he is not involved in day-to-day activities of these entities and does not have any direct responsibility with respect to arrangements between these entities and us. Additionally, Mr. Endres has agreed to recuse himself from participating in meetings of the Huntington board of directors, OhioHealth’s board of trustees, and our Board if such participation would, or is reasonably likely to, present a conflict of interest.

 

•

John A. Lederer. In 2010, Mr. Lederer became the President and Chief Executive Officer of US Foods, a food distribution enterprise which also supplies quick service restaurants in the U.S. The Board considered whether Mr. Lederer’s position with US Foods would have an impact on his independence and, after review, the Board concluded that Mr. Lederer’s independence would not be affected by his relationship with US Foods. Mr. Lederer has agreed to recuse himself from participating in meetings of the US Foods board of directors and our Board if such participation would, or is reasonably likely to, present a conflict of interest.

 

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•

Ronald W. Osborne. Mr. Osborne has been the Chairman of the board of directors of Postmedia Network Canada Corp. and its subsidiary Postmedia Network Inc. (collectively, “Postmedia”) since July 2010, and is a member of the board of trustees of RioCan Real Estate Investment Trust (“RioCan”). Mr. Osborne is also a director, and until November 30, 2011, was Chairman of the board of directors of Sun Life Financial Inc. (“Sun Life”). Mr. Osborne intends to retire from the Sun Life board of directors at its 2012 annual meeting, which is expected to take place in May 2012. Postmedia’s operations consist of publishing properties formerly owned by Canwest Global Communications Corporation. As such, we may from time to time in the ordinary course purchase advertising space in one or more of the publications owned by Postmedia. RioCan is the lessor of various restaurant sites to the corporation’s subsidiaries. Sun Life provides the corporation with administration services for various retirement benefit plans and programs and also leases restaurant space in one downtown Toronto location to one of the corporation’s subsidiaries. The Board concluded that Mr. Osborne’s independence would not be affected by his directorships with Postmedia, RioCan or Sun Life, and was not affected during the time he was the Chairman of the board of directors of Sun Life because, as a director, he is not or was not involved in the day-to-day operating activities of these companies and does not or did not have any direct responsibility with respect to the agreements between these companies and us. Additionally, Mr. Osborne has agreed to recuse himself from participating in meetings of Postmedia, RioCan or Sun Life, and/or our Board if such participation would, or is reasonably likely to, present a conflict of interest.

 

•

Wayne C. Sales. In 2010, Mr. Sales became the Chairman of the Board of SuperValu Inc., a grocery retailer and distributor (“SuperValu”). The Board considered whether Mr. Sales’ position with SuperValu would have an impact on his independence and, after review, the Board concluded that Mr. Sales’ independence would not be affected by his relationship with SuperValu. Mr. Sales has agreed to recuse himself from participating in meetings of the SuperValu board of directors and our Board if such participation would, or is reasonably likely to, present a conflict of interest.

 

•

Catherine L. Williams. Ms. Williams is a member of the board of directors of Enbridge Inc. (“Enbridge”). Enbridge provides certain of the corporation’s subsidiaries with natural gas. The Board concluded that Ms. Williams’ independence would not be affected by her position with Enbridge because the annual payments to Enbridge were for essential utility services and, further, were not of sufficient size to require direct consideration or approval by Ms. Williams in her capacity as a director of Enbridge. As of the Record Date, our records indicate that the Alberta Investment Management Corporation (“AIMCO”), an Alberta crown corporation which manages pensions, endowments, and government funds, held 929,000 of our common shares, representing approximately 0.6% of the corporation’s outstanding common shares as of such date. Ms. Williams has been a member of the board of AIMCO since September 2009. The Board concluded that AIMCO’s minimal ownership of our common shares does not affect Ms. Williams’ independence. Ms. Williams has agreed to recuse herself from participating in meetings of our Board, Enbridge’s and/or AIMCO’s board of directors if such participation would, or is reasonably likely to, present a conflict of interest. Ms. Williams will not be standing for reelection as a director at the meeting.

Policy of Service on Board of Tim Horton Children’s Foundation. In May 2008, the Nominating Committee and Board determined that it would be in the corporation’s best interest to ensure prudent utilization of financial and other support provided by us to the Tim Horton Children’s Foundation (the “Foundation”), and, in furtherance of the corporation’s other interests associated with the Foundation, for an independent member of the Board of Directors of the corporation to also serve on the board of directors of the Foundation. The Nominating Committee and Board determined that such simultaneous service would not create a conflict of interest or impair the independence of our Board members under the Independence Requirements and, in connection therewith, the Board adopted the Policy Regarding Independence Considerations of Service on the Board of the Tim Horton Children’s Foundation. As set forth in this Policy, the Nominating Committee and Board based their independence determination primarily on the following factors: the corporation and its employees and restaurant owners have provided (for over 30 years), and intend to continue to provide, substantial financial and other support (e.g., accounting, legal and a variety of other services), to the Foundation; the Foundation and the corporation are closely linked in terms of community presence and association such that the various programs and activities of the Foundation have the potential to directly affect the corporation’s brand and reputation; and, service on the Foundation’s board by one of the corporation’s independent directors is not anticipated to affect in any

 

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significant manner the nature or scope of the corporation’s ongoing support of, or involvement with, the Foundation. After the adoption of this Policy by the Board, Mr. Lederer was appointed to the board of directors of the Foundation in May 2008, and he continues to serve on that board.

Skills and Experience of Directors

In addition to the Independence Requirements, the Board has established, in the Governance Guidelines, the desired qualifications, skills and attributes of candidates for service on the corporation’s Board. These include:

 

•

high personal and professional ethics, integrity, practical wisdom and mature judgment;

 

•

board training or prior public company board service, and/or senior executive experience in business, government, or education;

 

•

expertise and skills that are useful to our corporation and complementary to the background and experience of other Board members, as determined by the Board from time to time;

 

•

willingness to devote the required amount of time to carrying out the duties and responsibilities of Board membership;

 

•

commitment to serve on the Board over a period of several years to develop knowledge about our corporation and its operations and provide continuity of Board members;

 

•

willingness to represent the best interests of the corporation and objectively appraise management’s performance;

 

•

furtherance of board diversity, regional representation (as appropriate), and other relevant factors as the Board may determine;

 

•

tenure with the Board, past contributions to the Board, and/or whether advanced age may impact the expected continued capacity to serve as a director; and,

 

•

anticipated future needs of the Board.

The Nominating Committee may consider, giving such weight as it deems appropriate, ancillary attributes such as energy, terms served, change in employment status, and other directorships. In addition, the Board’s director recruitment efforts during the time since the corporation became a public company have involved consideration of gender and regional diversity, and such factors have been given greater weight. The Nominating Committee assessed the effectiveness of its emphasis on diversity by its ability to recruit and appoint women as directors and also to achieve regional diversity with its newest members. Women directors account for 30% of our Board’s representation currently, and 22% following Ms. Williams’ resignation from the Board at the commencement of the meeting. The Board is also geographically diverse with representation from provinces in Canada where the corporation has a substantial business presence, from the U.S., and from the United Kingdom. Diversity is one of the factors, among many others, that the Nominating Committee considers in identifying and assessing director candidates. In early 2011, the Board reviewed the retirement age limitation previously included in the Governance Guidelines and determined that the Board’s ability to review whether advanced age would impact the expected capability of any individual to continue to serve as director should occur on a continuous basis. In adopting this standard, the Board believed that it would not be appropriate to deprive the Board of qualified candidates due to maintenance of an arbitrary age limitation and that any incapacity due to age should be handled on a case-by-case basis at such time that the issue arose.

The Nominating Committee considered the skills and experience of each respective Board member, as compared to the qualifications outlined in the Governance Guidelines, in connection with determinations such as initial appointments to the Board, nominations for reelection, committee service assignments, and in various other circumstances. As a result of this ongoing review and assessment, the Nominating Committee and Board believe that the skills and experience of existing Board members are comprehensive and varied, of first-tier caliber, and represent a high degree of alignment with the needs of the corporation.

 

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Under the Governance Guidelines, it is currently anticipated that the CEO will serve as a director. With Mr. Schroeder’s departure and Ms. Williams’ resignation as a director at the commencement of the meeting, the Board will consist of nine directors until a permanent CEO is named. The Nominating Committee is reviewing the skills matrix and, in considering the skills and experience of a permanent CEO, as well as the skills and experience that Ms. Williams brought to the Board, will also determine the qualifications that would be beneficial to the corporation.

The Nominating Committee uses a skills matrix as an assessment tool that sets forth the skills and experience of our directors individually and collectively, with respect to core competencies and related skills and experience that we believe are important to and needed for the proper functioning of the Board. The skills matrix highlights varied experience and capabilities, including real estate, franchising, marketing, distribution, public company board membership, human resources, senior executive leadership, and others. These areas of skills and experience are intended to align with the general qualifications, skills, and attributes set forth in the Governance Guidelines. It is not necessary that all Board members have expertise and experience in each area. Rather, the Board seeks to achieve a mix of members that possess valuable experience and expertise in the areas that align with the corporation’s needs. In making these determinations, the Board has not, and does not intend to apply a rigid set of criteria. The Board will also not limit itself to considering only the core competencies and/or related skills and experience set forth on the skills matrix in selecting members. Rather, the Board will continue to seek members who represent a broad diversity of backgrounds, skills, perspectives, and overall qualifications that will further the interests of the corporation through the individual’s service on the Board.

The core competencies that have been identified for service on the corporation’s Board include the following areas of experience and/or expertise: real estate, such as site selection, leasing, capital requirements and return, REITs and/or portfolio management; franchised organization, including working with restaurant owners on a daily basis and/or negotiating franchise arrangements; general retail industry; corporate governance and/or legal; financial acumen; brand marketing; public company board service; and, distribution, warehouse, and/or logistics expertise.

Related skills and experience are broader areas of proficiency that are also highly desirable given the corporation’s current business activities and expectations for future plans and growth. These include: senior leadership, such as prior service as President, CEO, or head of a significant business unit of a large public company, private enterprise, or governmental or educational institution; new business development, including joint ventures, strategic alliances, or acquisitions; corporate social responsibility (“CSR”), including significant participation in or leadership of a community organization or activities associated with CSR activities of an affiliated organization; information technology; human resources and total rewards; government/regulatory, such as substantial public service in a high-level or advisory capacity to governmental organizations; risk assessment and mitigation; international business development, operations, or activities; manufacturing; and, restaurant industry and/or operations experience or expertise.

In making determinations relative to Board service, the Nominating Committee and Board also consider how the skills and attributes of each individual candidate or incumbent director collectively create a board that is collegial, engaged, and effective in performing its duties and responsibilities. Refer to “Proposal 1—Election of Directors” below for a description of the skills and experience of each director-nominee that are most closely aligned with the core competencies and related skills and experience described above, as well as a summary of each director’s professional work history or background from which, in most cases, the directly relevant or related qualifications, experience, or skills for service on our Board, were derived. In early 2012, the Nominating Committee and Board considered the respective qualifications, skills, and experience of each individual director-nominee and all nominees collectively, in connection with recommending to the shareholders such individuals for reelection to the Board.

In addition to the foregoing considerations, the Governance Guidelines provide that, before accepting another directorship, a director should consider whether that service will compromise his or her ability to perform his or her responsibilities to our corporation. The Board’s Governance Guidelines currently limit the number of public company boards on which our directors may serve concurrently to four other public company boards, in addition to our Board, without the prior approval of the Nominating Committee. The director also must consult with the Chair of the Nominating Committee to confirm that such new position does not create a conflict of interest with the corporation or

 

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otherwise affect the independence of the director. The Board does not have an express policy prohibiting interlocking or overlapping service by directors on more than one Board; however, interlocking relationships of directors are considered at the time of appointment of directors, either to our Board or another (interlocking) board, to confirm that no conflict of interest or impact on independence would arise due to the interlocking relationship. Additionally, no member of the Audit Committee may serve on more than three audit committees, including the Audit Committee of our Board, without Board approval. The Governance Guidelines also provide that neither the Executive Chairman nor the CEO may accept a position as a director of another public company without the consent of our Board.

Identification of Candidates and Shareholder Nominations. The selection of candidates for Board membership involves evaluating our corporation’s needs and identifying persons viewed as being responsive to those needs, as described above. The Nominating Committee’s process of identifying potential director candidates has historically been to utilize the services of a professional search firm to identify and assist the committee and Board with the evaluation of potential candidates. The Nominating Committee does not maintain a list of potential directors in the event a vacancy may arise, but rather, not less frequently than annually and otherwise at such time that a vacancy arises, the Board considers director appointments in accordance with the ongoing needs of the organization at such time. The Nominating Committee will consider director candidates recommended by our shareholders, utilizing the same criteria applicable to other candidates. For shareholder proposals to be validly made, certain specific requirements must be satisfied. See below under “Shareholder Proposals” for additional information on these requirements.

 

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PROPOSAL 1—ELECTION OF DIRECTORS

Nominees

Since the time of Mr. Schroeder’s resignation, the Board has conducted a search for a permanent CEO who would also serve as a director of the Corporation after his or her appointment and, as such, the vacancy on the Board created by Mr. Schroeder’s departure has not yet been filled.

Ms. Catherine L. Williams has notified the corporation that she will not stand for reelection at the meeting due to conflicting business commitments. In February 2012, the Board, on recommendation of the Nominating Committee, determined to reduce the size of the board from the current eleven to nine members, effective immediately upon Ms. Williams’ resignation at the commencement of the meeting. Consequently, you will be asked to elect nine directors at the meeting. Each of the corporation’s current directors intends to stand for election to the Board, other than Ms. Williams. The corporation is appreciative of Ms. Williams’ service on the Board and as a member of the Audit Committee and extends best wishes to her. The Board and Nominating Committee intend to commence the search for a qualified candidate to fill the vacancy created as a result of Ms. Williams’ departure, and although the timing of the completion of the process cannot be determined with certainty, the Board’s objective is to make an appointment as soon as practicable following the meeting. Upon such appointment and the appointment of a permanent CEO (who would be expected to also serve as a director of the corporation), it is anticipated that the size of the Board will be increased from nine to eleven members.

You may vote for individual nominees, as we do not have slate voting. Each of the nominees proposed for election in this proxy circular is currently an incumbent director. As we do not have a staggered board structure, each of our directors elected at our meeting will serve until the next meeting at which directors are to be elected or until their respective successors are elected or appointed, subject to earlier death, resignation, retirement, disqualification or removal.

In February 2012, each of the director-nominees, other than Mr. House, was determined by our Board of Directors to satisfy the applicable Independence Requirements. Mr. House is not independent because he is an executive officer of the corporation. See “Independence and Other Considerations for Director Service” above for additional information on independence determinations for our directors.

Unless otherwise directed, all proxies received will be voted “FOR” the election of each director-nominee, as named and described in this proxy circular, each for a term of one year. Management has no reason to believe that any nominee will be unwilling to serve as a director, if elected. Should any nominee not remain a candidate for election on the date of the meeting, we will vote the proxies in favour of the election of the remaining nominee(s) and any substitute nominee(s) selected by the Board. Information concerning each of the nominees for election to serve as directors is set forth below.

 

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M. Shan Atkins Independent Age: 55 Residence: Long Grove, Illinois, United States Director Since: March 2007										M. Shan Atkins has been a Managing Director of Chetrum Capital LLC, a private investment firm, since 2001. From 1996 to 2001, Ms. Atkins held various positions with Sears Roebuck & Co., a major retailer, being promoted to Executive Vice President in 1999. Prior to joining Sears, Ms. Atkins spent 14 years with Bain & Company, Inc., an international management consulting firm, as a leader in Bain’s consumer and retail practice. Ms. Atkins began her career as a public accountant at what is now PricewaterhouseCoopers LLP, a major accounting firm, and has designations as a C.A. (Ontario) and C.P.A. (Illinois). Ms. Atkins has served as a member of the Queen’s University Advisory Board since the Spring of 2009. She has also been a director of Northwest Community Healthcare (“Northwest”) since 2001, and is a member of its audit and compliance committee. Ms. Atkins is also a member of Northwest’s nominating and compensation committee. Ms. Atkins holds a Bachelor of Commerce degree from Queen’s University in Kingston, Ontario, as well as a Master of Business Administration from Harvard University.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board Meetings Attended				Committee Meetings Attended						Human Resource and Compensation Committee (HRCC) Nominating and Corporate Governance Committee (NCGC)
6 of 6		100%		HRCC: 6 of 6			100%
				NCGC: 3 of 4			75%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common   Shares		Value of Securities Held at March 13, 2012						The Pep Boys-Manny, Moe & Jack (NYSE) Spartan Stores Inc. (NASDAQ) Shoppers Drug Mart Corporation (TSX) (through May 2012)
10,317		1,000		$600,593						Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
										None
Percentage of Achievement of Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
222%										General retail; senior leadership; public company board; human resource and compensation; and, financial expertise.

 

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Michael J. Endres Independent Audit Committee Financial Expert Age: 64 Residence: Columbus, Ohio, United States Director Since: April 2006										Michael J. Endres is a Managing Principal of Stonehenge Financial Holdings, Inc. (“Stonehenge”), a private equity firm that he co-founded in 1999. Prior to co-founding Stonehenge, Mr. Endres was Vice Chairman of Banc One Capital Holdings Corporation and Chairman of Banc One Capital Partners. Mr. Endres currently serves as a member of the board of directors of Worthington Industries, Inc. and Huntington Bancshares, Inc. Mr. Endres also serves on the Board of Trustees of OhioHealth Corporation, a large non-profit health system with multiple hospitals and related healthcare facilities and services, located in Ohio. He holds a Bachelor of Science degree from Miami University in Oxford, Ohio.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board  Meetings Attended						Committee Meetings Attended				Audit Committee (Chair) Executive Committee (not included for director attendance purposes)
6 of 6			100%			Audit: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				Worthington Industries, Inc. (NYSE) Huntington Bancshares, Inc. (NASDAQ)
15,043			42,787			$3,069,038				Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
										ProCentury Corporation (now a private company subsidiary of Meadowbrook Insurance Group, Inc.) (2005-2007) (NYSE)
Percentage of Achievement of Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
1,137%										Financial expertise; new business development, strategic initiatives and/or acquisitions; senior leadership; public company board; and, risk assessment and mitigation expertise.

 

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Moya M. Greene Independent Age: 57 Residence: London, United Kingdom Director Since: February 2008										Moya M. Greene has been Chief Executive Officer of the Royal Mail, the U.K. government postal service, since July 2010, and prior thereto, was the President, Chief Executive Officer and a member of the Board of the Directors of Canada Post Corporation, the Canadian postal authority, since May 2005. She was also Vice Chair of Purolator and served on its Nominating and Corporate Governance Committee and Compensation Committee. From 2003 to 2004, Ms. Greene was Senior Vice President, Operational Effectiveness, of Bombardier Inc., a leading manufacturer of rail transportation equipment and aircraft. From 2000 to 2003, she was Senior Vice President, Chief Administrative Officer, Retail Products, at Canadian Imperial Bank of Commerce, a leading North American financial institution, and from 1996 to 2000, Managing Director, Infrastructure Finance and Public Private Partnership for TD Securities Inc., a leading Canadian financial services firm. Ms. Greene also has an extensive public service background, having served most recently as Assistant Deputy Minister for Transport Canada, the Canadian federal transportation authority, from 1991 to 1996 and, from 1989 to 1991, as Director, General Policy, for Human Resources and Social Development, Canada. She is a graduate of Osgoode Hall Law School and was recognized in 2003 by the National Post as one of Canada’s Top 100 influential women and in 2004 by the Ivey School of Business/Women Executive Network as one of the Top 40 female corporate executives in Canada.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board  Meetings Attended						Committee Meetings Attended				Audit Committee Human Resource and Compensation Committee (HRCC)
5 of 6			83%			HRCC: 6 of 6		100%
						Audit: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				None
										Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
10,958			—			$581,541				None
Percentage of Achievement of Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
215%										General retail; senior leadership; financial expertise; government/regulatory; and, logistics, warehouse, and distribution expertise.

 

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Paul D. House Executive Chairman, President and CEO Age: 68 Residence: Jordan, Ontario, Canada Director Since: 2006								Since May 24, 2011, Mr. House has served as our Executive Chairman and President and CEO. From March 1, 2008 to May 2011, Mr. House served as our Executive Chairman. Mr. House joined our corporation as Vice President of Marketing in 1985 and occupied various senior management positions leading to his appointment in 1993 as Chief Operating Officer. He became President and Chief Operating Officer in 1995 and Chief Executive Officer in November 2005. In 2007, he was appointed Chairman of the Board and Chief Executive Officer. Mr. House served on the Board of Directors of Wendy’s International, Inc. from 1998 through February 1, 2007. He is a member of the Board of Directors of the Tim Horton Children’s Foundation and serves on the Board of Trustees of Brock University, as well as on the Advisory Board of the Brock University Business School. Mr. House joined Dairy Queen Canada in 1972 and held various management positions with that company including Vice President of Canadian Operations. Mr. House holds a Bachelor of Arts in Economics from McMaster University.
Board Attendance								Tim Hortons Inc. Board Committee Membership
Board Meetings Attended								Executive Committee (not included for director attendance purposes)
6 of 6						100%
Number of Tim Hortons Securities Beneficially Held								Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012		None
								Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
N/A			170,903			$9,069,822		Wendy’s International, Inc. (1998-2007) (NYSE)
Stock Ownership Guideline Compliance								Relevant Skills, Experience, and Other Considerations
See pages 62 to 63 for executive officer stock ownership guideline compliance.								Franchised organization; brand and marketing; senior leadership; real estate; general retail; logistics, warehouse and distribution; restaurant industry; new business development and strategic alliances; and, public company board expertise.

 

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The Hon. Frank Iacobucci Lead Director Since: February 2007 Independent Age: 74 Residence: Toronto, Ontario, Canada Director Since: February 2006										The Hon. Frank Iacobucci has been Counsel to Torys LLP, a major Canadian law firm, since July 2005. Mr. Iacobucci was the Chairman of Torstar Corporation, a newspaper and book publishing company, from July 2005 until May 2009. From September 2004 to June 2005, Mr. Iacobucci served as Interim President of the University of Toronto while the search for a new university president was being conducted. From 1991 to 2004, Mr. Iacobucci served as a Justice of the Supreme Court of Canada. Mr. Iacobucci is Chair of the Higher Education Quality Council of Ontario (from 2005 to present), is a Board Member of Costi Immigration Services, and is a member of the Advisory Committee of General Motors of Canada. Mr. Iacobucci is a member of the Law Society of Upper Canada and holds academic degrees from Cambridge University and the University of British Columbia, and has been the recipient of numerous awards and honours from Canada, the United States, and Italy. In 2007, Mr. Iacobucci was made a Companion of the Order of Canada.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board Meetings Attended						Committee Meetings Attended				Human Resource and Compensation Committee (HRCC) Nominating and Corporate Governance Committee (Chair) (NCGC) Executive Committee (not included for director attendance purposes)
6 of 6			100%			HRCC: 6 of 6		100%
						NCGC: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				None
										Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
26,940			6,607			$1,780,339				Torstar Corporation (2003-2009) (TSX)
Percentage of Achievement of Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
659%										Governance and legal; public company board; government/regulatory; senior leadership; and, human resource and compensation expertise.

 

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John A. Lederer Independent Age: 56 Residence: Toronto, Ontario, Canada Director Since: February 2007								John A. Lederer currently serves as President and Chief Executive Officer, and as a director, of US Foods, a position he has held since September 2010. He served as Chairman of the Board and Chief Executive Officer of Duane Reade, a privately held chain of retail pharmacies located primarily in the New York City area, from April 2008 to August 2010. Mr. Lederer served as President of Loblaw Companies Limited, Canada’s largest food distributor, from 2001 through September 2006 and also served as a director of Loblaw Companies Limited for much of this period, capping a 30-year career with Loblaw and its subsidiary companies during which he held a number of senior leadership positions. In these roles, he was responsible for the operation, performance, innovation and growth of national and regional banners, businesses and divisions. Mr. Lederer is a former director of the Food Marketing Institute. He holds a Bachelor of Arts degree from York University. Mr. Lederer has served as a member of the Board of Directors of the Tim Horton Children’s Foundation since May 2008.
Board and Committee Attendance								Tim Hortons Inc. Board Committee Membership
Board Meetings Attended				Committee Meetings Attended				Human Resource and Compensation Committee (HRCC) Nominating and Corporate Governance Committee (NCGC)
6 of 6		100%		HRCC: 5 of 6		83%
				NCGC: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held								Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares		Value of Securities Held at March 13, 2012				None
								Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
17,622		15,120		$1,737,618				Loblaw Companies Limited (2002-2006) (TSX)
Percentage of Achievement of Stock Ownership Guidelines ($270,000)								Relevant Skills, Experience, and Other Considerations
644%								Senior leadership; general retail; franchised organization; real estate; and, brand marketing expertise.

 

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David H. Lees Independent Age: 67 Residence: Caledon, Ontario, Canada Director Since: February 2006										Dr. David H. Lees is the President and Chief Executive Officer of Cardinal Health in Canada, a major medical product manufacturer, distributor and service provider, and the parent company of Source Medical Corporation and Cardinal Health’s other Canadian operations. From 1999 to 2006, Dr. Lees served as President and Chief Executive Officer of Source Medical. Dr. Lees was President, Chief Executive Officer and a director of Canada Bread Company, Limited/Corporate Foods Limited, a Toronto Stock Exchange- listed manufacturer and marketer of baked goods and other food products, from 1993 until 1999. From 1991 to 1995, Dr. Lees served as a director of Maple Leaf Foods Inc. Dr. Lees holds a Doctorate of Philosophy in Food Science from the University of Massachusetts, a Master of Science in Agriculture from Macdonald College, McGill University, and a Bachelor of Science (Agriculture) from Macdonald College.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board Meetings Attended						Committee Meetings Attended				Audit Committee Nominating and Corporate Governance Committee (NCGC)
5 of 6			83%			Audit: 4 of 4		100%
						NCGC: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				None
										Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
17,489			6,624			$1,279,677				None
Percentage of Achievement of  Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
474%										Senior leadership; manufacturing; logistics, warehouse, and distribution; public company board; and, financial expertise.

 

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Ronald W. Osborne(1) Independent Audit Committee Financial Expert Age: 65 Residence: Toronto, Ontario, Canada Director Since: November 2008										Ronald W. Osborne has been the Chairman of the Board of Directors of Postmedia Network Canada Corp. and its subsidiary Postmedia Network Inc. (collectively, “Postmedia”) since July 2010. Postmedia is a publishing company, the assets of which were formerly owned by Canwest Global Communications Corporation. He is also a director, and from 2005 to November 30, 2011, was Chairman of the board of directors of Sun Life Financial Inc. (“Sun Life”), an international financial services organization, and Sun Life Assurance Company of Canada. Mr. Osborne intends to retire from the Sun Life board of directors at its 2012 annual meeting, which is expected to take place in May 2012. Mr. Osborne served as the President and Chief Executive Officer and a director of Ontario Power Generation Inc., an Ontario-based electricity generation company, from 1998 until December 2003. From 1996 to 1998, Mr. Osborne was a senior executive within the BCE Group of Companies, Canada’s largest communications conglomerate. From 1981 to 1994, Mr. Osborne held various positions at Maclean Hunter, including the position of Chief Executive Officer from 1986 until 1994. Mr. Osborne was also a partner of Clarkson Gordon, Chartered Accountants, in Toronto from 1979 until 1981. Mr. Osborne is a trustee of RioCan Real Estate Investment Trust. He is also a member, and until November 2010, was Chairman of the Board of Governors of the Corporation of Massey Hall. Mr. Osborne also serves as a director of Holcim (Canada) Inc. (formerly St. Lawrence Cement Group Inc.). He was also a director of Brookfield Renewable Power Inc. until November 2010. Mr. Osborne graduated from Cambridge University in England with a Bachelor of Arts degree. In 1972, he became a member of the Institute of Chartered Accountants of Ontario and a Fellow of the Institute in 1988.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board  Meetings Attended						Committee Meetings Attended				Audit Committee
6 of 6			100%			Audit: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
										Sun Life Financial Inc. (TSX; NYSE; Philippines) RioCan Real Estate Investment Trust (TSX) Postmedia Network Canada Corp. (TSX)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
9,220			3,000			$648,515				Brookfield Renewable Power Inc. (public debt) (2009-2010) Four Seasons Holdings Inc. (formerly, Four Seasons Hotel Ltd.) (2003-2007) (formerly listed on the TSX and NYSE) Holcim (Canada) Inc. (formerly St. Lawrence Cement Group Inc.) (2004-current) (formerly listed on the TSX) Nortel Networks Corp. (2005-2006) (formerly listed on the TSX and NYSE) Shell Canada Limited (2001-2007) (formerly listed on the TSX) Torstar Corporation (2003-2009) (TSX)
Percentage of Achievement of Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
240%										Governance and legal; financial expertise; senior leadership; new business development and strategic alliances; public company board; and, human resource and compensation expertise.

 

(1)

Mr. Osborne was a director of Air Canada when it filed for protection under the Companies’ Creditors Arrangement Act (“CCAA”) in April 2003. Air Canada successfully emerged from the CCAA proceedings and was restructured pursuant to a plan of arrangement in September 2004. Mr. Osborne is no longer a director of Air Canada. Mr. Osborne was also a director of Nortel Networks Corporation and Nortel Networks Limited (collectively, “Nortel”) when, on April 10, 2006, the Ontario Securities Commission (“OSC”) issued a management cease trade order prohibiting all directors, officers, and certain other current and former employees of Nortel from trading in securities of Nortel until two business days following receipt by the OSC of all filings required to be made by Nortel pursuant to Ontario securities laws. This order resulted from Nortel’s need to restate certain previously reported financial results and related delays in filing certain of its 2005 financial results. This order was revoked effective June 8, 2006. Mr. Osborne served on the Nortel board from June 29, 2005 to June 29, 2006.

 

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Wayne C. Sales Independent Age: 62 Residence: Jupiter, Florida, United States Director Since: April 2006										Wayne C. Sales has been the Chairman of the Board of Directors of SUPERVALU Inc. (“SUPERVALU”), a grocery retailer and distributor, since June 2010, and a director of SUPERVALU since 2006. Previously, he served as President and Chief Executive Officer, and then as Vice-Chairman, of Canadian Tire Corporation Limited, a Toronto Stock Exchange-listed retail, financial services and petroleum company. He served as Vice-Chairman of Canadian Tire until June 2007 following his tenure as President and Chief Executive Officer, a position that he held from 2000 to 2006. Prior to 2000, Mr. Sales held positions as Executive Vice President and Senior Vice President, Marketing at Canadian Tire Retail, a subsidiary of Canadian Tire. Mr. Sales is a graduate of Harvard Business School’s Advanced Management Program.
Board and Committee Attendance										Tim Hortons Inc. Board Committee Membership
Board  Meetings Attended						Committee Meetings Attended				Human Resource and Compensation Committee (Chair) (HRCC) Nominating and Corporate Governance Committee (NCGC)
6 of 6			100%			HRCC: 6 of 6		100%
						NCGC: 4 of 4		100%
Number of Tim Hortons Securities Beneficially Held										Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)
DSUs		Common Shares				Value of Securities Held at March 13, 2012				SUPERVALU Inc., Chairman (NYSE) Georgia Gulf Corporation (NYSE) Discovery Air Inc. (TSX)
										Other Public Company Board Memberships in Last Five Years (duration of service and stock exchange listing(s) indicated in parentheses)
17,399			11,998			$1,560,099				Canadian Tire Corporation Limited (2000-2006) (TSX)
Percentage of Achievement of  Stock Ownership Guidelines ($270,000)										Relevant Skills, Experience, and Other Considerations
578%										General retail; senior leadership; franchised organization; brand and marketing; and, human resource and compensation expertise.

Required Vote. Each nominee, to be elected, must receive a plurality of the votes cast in person or by proxy at the meeting. Abstentions from voting and broker non-votes will have no effect on the election of directors.

In addition, in November 2010, we adopted a majority voting policy for the election of directors in uncontested elections. Under that policy, if a nominee does not receive in an uncontested election the affirmative vote of at least the majority of votes cast, the director shall promptly tender his or her resignation for consideration by the Nominating Committee and the Board. The full text of the majority voting policy is contained in the Board’s Governance Guidelines.

Recommendation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH OF THESE NOMINEES FOR ELECTION AS A DIRECTOR OF OUR CORPORATION. Unless otherwise indicated, the persons named in the proxy will vote all proxies “FOR” the election of the nine nominees set forth above.

 

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Director Not Standing for Reelection

 

Board and Committee Attendance

Current Public Company Board Memberships (stock exchange listing(s) indicated in parentheses)

Name

Board Meetings Attended

Committee Meetings Attended

Catherine L. Williams (Independent)

6 of 6

100

%

Audit: 3 of 4

75

%

Enbridge Inc. (TSX; NYSE)

Audit Committee

The current members of the Audit Committee are Mr. Endres (Chair), Mses. Greene and Williams, and Messrs. Lees and Osborne, each of whom is independent under our Independence Requirements. The Board of Directors has determined that all current Audit Committee members are financially literate and that Messrs. Endres and Osborne, and Ms. Williams, are “audit committee financial experts,” as such term is defined by applicable U.S. securities laws. Although Ms. Williams is currently a director and a member of the Audit Committee, she will not be standing for reelection at the meeting. The Audit Committee met four times during 2011. Executive sessions comprised only of the independent directors who were members of the Audit Committee were held at each of those meetings.

The Audit Committee’s functions include: providing assistance to the Board of Directors in fulfilling its oversight responsibility relating to our financial statements and the financial reporting process; overseeing compliance with legal and regulatory requirements; evaluating the qualifications and independence of our independent auditor; reviewing our system of internal controls and procedures and the performance of our internal audit function and independent public accountants; monitoring risk assessment and risk mitigation under our enterprise risk management program (described below); and, reviewing and maintaining our Standards of Business Practices and Directors’ Code of Business Conduct and Ethics.

The Audit Committee is also responsible for establishing procedures to receive and investigate, or direct the investigation of, complaints regarding accounting, internal auditing controls, and auditing matters, and for the confidential, anonymous submission by employees and others of concerns regarding questionable accounting or auditing matters. As noted above, the Audit Committee has established an Ethics HotLine through which these matters may be reported.

In addition to the foregoing, the Audit Committee must: prepare the Audit Committee Report included in this proxy circular and in the Form 10-K/A to be filed with the SEC and the CSA in respect of our Form 10-K for the fiscal year ended January 1, 2012; and, review services performed by our independent auditor, make recommendations to the shareholders or the Board, as the case may be, regarding the appointment, retention or termination of the independent auditor, and approve audit and non-audit services to be performed by the independent auditor as well as the corresponding fees for such services. The Audit Committee also periodically reviews with management, including our legal counsel, as appropriate, and with the independent auditor, any correspondence with or inquiries by regulatory authorities and others regarding accounting or auditing matters. Furthermore, the Audit Committee is responsible for reviewing and reporting to the Board regarding our compliance program and for reviewing and approving, as appropriate, the related party transactions proposed to be entered into by us that fall under the Audit Committee’s “related party transactions policy.” For a description of this policy, see below under “Transactions Involving Related Parties”.

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services

The Audit Committee has adopted a policy under which audit and non-audit services to be rendered by our independent auditor are pre-approved. Under this policy, prior to the engagement of the independent auditor for any audit or permissible non-audit services, the engagement (i.e., services and fees) must be approved pursuant to our pre-approval policy or otherwise specifically approved by the Audit Committee. The pre-approval policy provides that the annual audit, review or attestation engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Additionally, Audit Committee approval is required, in advance, for any changes in terms, conditions, and fees resulting

 

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from modifications to audit scope, or other matters. The pre-approval policy also delineates the specific audit-related services, tax services, and other services that have been or may be approved by the Audit Committee on the basis that the performance of such services would not impair the independence of the auditor. Any other permissible services not delineated in the pre-approval policy must be separately pre-approved by the Audit Committee. The pre-approval policy also describes those services that are prohibited and may not be performed by our independent auditor. The pre-approval policy also prohibits the Audit Committee from delegating to management the Audit Committee’s responsibilities for pre-approving audit and non-audit services performed by our independent auditor.

No services were provided by our independent auditor in 2011 that were approved by the Audit Committee under SEC Regulation S-X Rule 2-01(c)(7)(i)(C) or National Instrument 52-110, Section 2.4, which addresses certain de minimis services that may be approved by the Audit Committee after such services have been performed.

Enterprise Risk Management

The Audit Committee has oversight of the processes for risk assessment and management (i.e., identification and evaluation of risks facing the corporation and any risk-mitigation activities) under our enterprise risk management (“ERM”) program. Other committees of the Board consider risks within their areas of oversight accountability. For example, the Compensation Committee considers the risks associated with our executive compensation programs. See below under “Compensation Discussion and Analysis—Governance Policies and Related Items”. The Board has direct oversight for risks associated with our strategic plans and initiatives, as well as any significant transactions we may undertake.

The Chief Risk and Privacy Officer facilitates the ERM program with the assistance of the Director of Internal Audit and representatives of the Legal, Risk Management, Internal Audit, and Ethics and Compliance functions. For the purpose of ERM, the Chief Risk and Privacy Officer reports to the Audit Committee. The risk assessment process also involves the input of senior management of the corporation. The Audit Committee discusses risks facing the corporation at its meetings throughout the year, as needed. The Audit Committee also provides oversight to risk assessment processes under the ERM program.

In addition, the Audit Committee monitors and assesses, on an ongoing basis: (i) the significant risks identified and tracked under the ERM program; (ii) financial risks, in accordance with its mandate and NYSE requirements; and (iii) mitigating activities, as appropriate. Under this approach, the significant risks, as well as applicable remediation plans that have been identified through ERM processes, which are, as discussed above, overseen by the Audit Committee, are reviewed by the full Board annually (or more frequently, if needed). Any significant changes in the risk profile of the corporation would be reported to the Board by the Audit Committee or the corporation’s senior management throughout the year. See above under “Nominating and Corporate Governance Committee—Governance Structure” for a description of the impact of our Board’s leadership structure on the Board risk oversight function.

In early 2012, the Audit Committee formed a Risk Subcommittee comprised of three members of the Audit Committee and supported by management representatives, including the Chief Risk Officer, Director of Internal Audit, General Counsel, a delegate of any of the foregoing, and/or such other members of management as appropriate from time to time. The mandate of the Risk Subcommittee, which meets at least four times each year to enable it to fulfill its responsibilities, is to provide assistance to the Audit Committee and Board in fulfilling their respective responsibilities relating to risk assessment and risk management, including any mitigation plans in connection with identified risks.

 

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Audit and Other Service Fees

The following table sets forth the aggregate fees billed or expected to be billed for professional services rendered by our independent auditor, PricewaterhouseCoopers LLP (“PwC”), for 2011 and 2010, respectively (and out-of-pocket costs incurred in connection with these services):

 

(1)

Includes services rendered for the audit of our annual consolidated financial statements included in our annual reports on Form 10-K for 2011 and 2010, respectively; review of the consolidated financial statements included in our quarterly reports on Form 10-Q in 2011 and 2010, respectively; and, other audit services normally provided by PwC in connection with statutory and regulatory filings or engagements.

 

(2)

Includes assurance and related services reasonably related to the performance of the audit or review of our financial statements not reported as “audit fees.” Audit-related fees also include fees for accounting research, as well as audit and accounting services provided to our advertising funds that collect and administer funds contributed for use in advertising and promotional programs for our corporation and restaurant owners. In addition, these amounts include fees for the audit or review of the financial statements of certain of our subsidiaries and our pension funds, consultations with management as to the accounting or disclosure treatment of certain transactions and/or events, and the actual or potential impact of final or proposed accounting rules and standards. These fees were higher in 2010 due to the number of significant transactions and events over the year, as well as significant new accounting standards implemented in early 2010. Prior year fees have been conformed to align with 2011 presentation.

 

(3)

For 2011 and 2010, these fees were for services related primarily to tax planning in connection with subsidiary reorganizations and transaction-specific tax implications.

 

(4)

Includes use by our employees of PwC software for accounting research and financial reporting disclosure.

 

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Consolidated Financial Statements and Auditor’s Report

Management, on behalf of the Board, has provided to shareholders the consolidated financial statements of the corporation for the fiscal year ended January 1, 2012 and the auditors’ report thereon as part of the corporation’s Form 10-K, which is available on our investor website at www.timhortons-invest.com, as well as at www.sec.gov and www.sedar.com. In addition, the Form 10-K has been delivered to: (i) registered shareholders, except those who have asked not to receive it; and (ii) beneficial shareholders who requested a copy.

Audit Committee Report

In performing its responsibilities, the Audit Committee, in addition to other activities: (i) reviewed and discussed our corporation’s audited financial statements with management; (ii) discussed with PwC the matters required to be discussed by Statement of Auditing Standards 114 (Communication with Audit Committees), as adopted by the Public Company Accounting Oversight Board (“PCAOB”), as modified or supplemented; and (iii) received the written disclosures and the letter from PwC required by the applicable requirements of the PCAOB, as modified or supplemented, regarding the independent auditor’s communications with the Audit Committee concerning independence, and has discussed with PwC the firm’s independence. The Audit Committee also considered whether the provision of non-audit services by PwC was compatible with maintaining such firm’s independence. The Audit Committee has concluded that PwC is independent from our corporation and management.

Based on these reviews, discussions and activities, the Audit Committee recommended to the Board that our corporation’s audited financial statements and management’s discussion and analysis be included in our Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC on February 28, 2012, as amended by the Form 10-K/A to be filed on or about March 23, 2012.

Respectfully submitted,

Audit Committee

Michael J. Endres, Chair

Moya M. Greene

David H. Lees

Ronald W. Osborne

Catherine L. Williams

Human Resource and Compensation Committee

The current members of the Compensation Committee are Mr. Sales (Chair), Mses. Atkins and Greene, and Messrs. Iacobucci and Lederer, each of whom is independent under our Independence Requirements. Additionally, each director satisfies the requirements of “non-employee directors” under Rule 16b-3 of the Exchange Act and of “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended, as required by our Independence Requirements. The Compensation Committee met six times during 2011. As required by the Committee’s Charter, executive sessions comprised only of the independent directors who were members of the Compensation Committee were held at each of those 2011 meetings.

The Compensation Committee oversees and administers our executive compensation programs for our executive officers (designated as such by the Board) and for any other officers that report directly to the CEO, and determines all elements of their compensation, other than for our Executive Chairman and CEO, for whom compensation amounts are determined by the Board upon recommendation from the Compensation Committee. This is consistent with the Committee’s accountability for review and approval, in advance, of any employment, change in control, or severance arrangements extended to any executive officers or officers that report directly to the CEO. The Committee’s recommendations regarding CEO and Executive Chairman compensation are made, as required by the Committee’s Charter, in executive session.

 

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The Executive Chairman typically provides input to the Compensation Committee and Board regarding the CEO’s performance and compensation, and the CEO provides input to the Compensation Committee regarding the performance and compensation for the remaining executive officers, other than the Executive Chairman. The “Compensation Discussion and Analysis” in this proxy circular includes a description of the role that other members of our senior management play in determining executive compensation and a description of the services provided by the Compensation Committee’s independent compensation consultant, currently Mercer (Canada) Limited. The Compensation Committee is also responsible for the annual Compensation Committee Report to be included in our proxy circular and for making recommendations to the Board for the implementation of incentive compensation or bonus plans, equity-based plans, and other benefits, policies, and practices for our executive officers.

In order to carry out the responsibilities set forth above, the Compensation Committee:

 

•

along with the full Board, reviews and approves the annual financial and business goals and objectives established by the CEO;

 

•

evaluates the performance of executive officers in light of these goals and objectives;

 

•

establishes performance objectives, including the weight attributed to each measure, corresponding target performance levels, and payout curves under our annual cash incentive and long-term equity compensation plans;

 

•

makes award (i.e., type of award or vehicle) and grant determinations under equity compensation plans, subject to the Board’s approval of grant amounts for the Executive Chairman and the CEO; and,

 

•

monitors governance and best practice initiatives and trends in executive compensation.

The Compensation Committee also considers and reports at least annually to the Board on Board compensation matters, and periodically reviews the terms of, and monitors compliance on an annual basis with our stock ownership guidelines for directors and officers. The Compensation Committee may delegate its responsibilities to subcommittees if it determines such delegation would be in the best interest of our corporation. The Compensation Committee did not delegate any such duties in 2011. A more detailed narrative of the Compensation Committee’s processes and procedures for the consideration and determination of executive and director compensation is set forth below under “Compensation Discussion and Analysis”.

Succession Planning. The Board’s most fundamental oversight responsibility is the selection, appointment, and continued evaluation of the Corporation’s CEO. The Board is supported in this endeavor by a comprehensive succession planning process and related management development programs. Such process and programs are overseen by the Compensation Committee on an annual basis.

On an annual basis, the Committee reviews the succession plans for each of the executive officer positions. The focus for the executive team discussion with the Committee is the identification of short- and long-term successors to the CEO role, and discussion of development plans for the executive team members as well as for their successors. Where no immediate successors are identified for executive officer roles, management and the Committee consider whether external candidates would be appropriate to fill any such positions.

Through this process, the Board is able to gain a thorough understanding of the potential for internal candidates to succeed the CEO role. Due to the active CEO search that commenced in May of 2011, which included an assessment and review of internal candidates as well as external candidates, the regular annual, succession planning activity was not undertaken in 2011. A CEO profile that describes the characteristics desired in the next CEO to address current and future needs of the corporation relating to strategy, operations, growth, opportunities and other considerations has been developed as a guide in the CEO search to evaluate potential candidates.

In addition to executive officer succession, the organization completes a review of succession plans for all officer-level, director-level and management-level roles on a biennial basis. Succession profiles for employees at these levels are

 

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created and contain information regarding employment and education history, prior year performance, current development plans, succession potential and where applicable, readiness to assume a role at the next level of management. A thorough calibration within and across teams is conducted for each level of management. For reasons noted above, no succession planning activity was undertaken in 2011.

Leadership development has been a particular focus of the corporation for several years at all officer levels within the organization. Development plans for officers may include formal skill-development or leadership-development programs, coaching and mentoring, stretch assignments, or cross-functional project work, to prepare internal candidates for further advancement within the organization.

This focus supports the Board’s commitment to solid succession management and development of the corporation’s high-potential talent.

Compensation Committee—Interlocks and Insider Participation. There were no reportable interlocks or insider participation affecting the Compensation Committee during 2011. That is, none of the current members of the Compensation Committee are or have been officers or employees of our corporation or any of its subsidiaries; and, none of our executive officers served on the board of directors or compensation committee of another company or organization of which one of whose executive officers served on our corporation’s Board or Compensation Committee.

Compensation Committee Pre-Approval Policy. In May 2010, our Compensation Committee adopted a policy governing the pre-approval of independent compensation consultant services and fees, generally similar to the manner of operation of the policy governing the Audit Committee’s pre-approval of services and fees of the corporation’s independent auditor. The policy requires that, prior to the commencement of the succeeding year, the Committee’s independent consultant develop and provide to the Committee a project plan setting forth the known or anticipated services to be performed over the succeeding year, together with an estimate of the fees (expected budget) associated with such services. In addition, under the policy, the Compensation Committee approves the specific terms of the independent consultant’s engagement annually.

Human Resource and Compensation Committee Report

The Human Resource and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy circular with management of our corporation and, based on such review and discussion, the Human Resource and Compensation Committee recommended to the Board of Directors that the information set forth under “Compensation Discussion and Analysis” below be included in this proxy circular and in our corporation’s Form 10-K/A to be filed on or about March 23, 2012, which will amend our corporation’s Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC on February 28, 2012.

Respectfully submitted,

Human Resource and Compensation Committee

Wayne C. Sales, Chair

M. Shan Atkins

Moya M. Greene

The Hon. Frank Iacobucci

John A. Lederer

 

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COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

This Compensation Discussion and Analysis (“CD&A”) describes and explains our executive compensation philosophy, principles and programs for the named executive officers (“NEOs”) who include: the Executive Chairman, President and Chief Executive Officer (“CEO”); the Chief Financial Officer (“CFO”); the three next most highly compensated members of our executive management team; and our former President and CEO.

Our NEOs for 2011 are as follows:

 

•

Paul D. House, Executive Chairman, President and CEO

 

•

Cynthia J. Devine, CFO

 

•

David F. Clanachan, Chief Operations Officer, United States and International

 

•

William A. Moir, Chief Brand and Marketing Officer

 

•

Roland M. Walton, Chief Operations Officer, Canada

 

•

Donald B. Schroeder, Former President and CEO

Our executive compensation program is designed to reflect the Tim Hortons culture and consists of base salary, short-term cash incentives, long-term equity incentives and retirement benefits. Our compensation philosophy is to align the interests of our shareholders and executive officers by tying executive compensation to business performance, and to attract and retain high-performing executive officers.

Consistent with our pay-for-performance philosophy, base salaries are generally targeted at the 25th percentile of our selected comparator group and total compensation is targeted at the 75th percentile. The corporation’s short-term incentive and performance-conditioned restricted stock units (“P+RSUs”) continue to be based on annual targets, primarily because the corporation’s relatively short business cycle makes a shorter performance period more effective in linking compensation to performance.

2011 compensation for our NEOs was impacted by the following:

 

•

Results of a comprehensive study conducted in 2010 (the “2010 study”) that involved a comparative assessment of compensation for our executive officers against certain Canadian and U.S. peer companies, as well as a review of our compensation philosophy, principles, and certain of our executive compensation programs. Beginning in 2011, this resulted in changes in target compensation for each of the NEOs.

 

•

Prior to 2011, compensation for the NEOs was established based on a team approach to compensation in which our NEOs, other than the CEO, received the same level of pay. As a result of the 2010 study, the corporation began a gradual transition away from the team-based approach to compensation to setting compensation based on each NEO’s position compared to the companies in the relevant comparator group, as well as each individual’s experience, performance and other internal considerations.

 

•

Based on the 2010 study and other considerations, it was determined in February 2011 that an increase to CEO compensation for Mr. Schroeder was warranted to better align CEO compensation with the corporation’s compensation philosophy and market competitiveness; and to reflect Mr. Schroeder’s full assumption of responsibilities as President and CEO and Mr. House’s move solely to Executive Chairman accountabilities (effective in 2010).

 

•

In May 2011, following a further succession planning review, a subsequent transitional arrangement could not be reached and the corporation entered into a separation agreement with Mr. Schroeder. Mr. House, the Executive Chairman, was appointed by the Board to replace Mr. Schroeder until a new President and CEO was appointed. In August 2011, the Board determined that for so long as Mr. House is serving as President and CEO, his

 

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compensation should be substantially similar to the compensation that Mr. Schroeder received as President and CEO prior to his departure from the corporation. This resulted in changes to Mr. House’s compensation effective as of May 24, 2011, the date of his appointment as President and CEO.

 

•

The Compensation Committee determined that the impact of expenses related to the separation agreement and the change in CEO should be eliminated for the purpose of determining performance-based compensation for the NEOs. This adjustment, totalling a net charge of $6.3 million, included severance charges, advisory fees, CEO search fees, and other related costs and expenses, offset in part by a reduction in compensation expense because we no longer paid Mr. House as Executive Chairman after his appointment as President and CEO. For additional detail regarding the impact of 2011 performance and these adjustments on executive compensation, as well as one other adjustment for tax impact, see “2011 Compensation Program Details and Impact of 2011 Performance” below. A complete reconciliation of adjustments to reported operating income, or Earnings Before Interest and Taxes (“EBIT”) and Net Income, the corporation’s 2011 performance metrics, is set forth in Appendix A.

 

•

The corporation exceeded targeted performance of our EBIT and Net Income performance objectives, after the adjustments described above were made, as follows:

 

 

•

As a result of the corporation exceeding target performance objectives, the short-term incentive payout for our NEOs was made at 105.3% of target level and the P+RSUs to be awarded in May 2012 will be 105.0% of target level.

 

•

The corporation had solid underlying operational performance in 2011, and achieved other substantial, qualitative objectives that were directly aligned to our long-term strategic objectives. In 2011, these qualitative objectives included introducing new product platforms such as espresso-based beverages, enhancing our brand identity positioning efforts in the U.S. as a unique cafe and bake shop destination focused on freshness and value, and the development of restaurants in the Gulf Cooperation Council (“GCC”) markets through a master licensee based in Dubai.

2012 compensation for our NEOs was based on the following:

 

•

Compensation for the NEOs will remain unchanged from 2011, with the exception of base salary increases of 3% effective February 26, 2012. This is consistent with the average base salary increases implemented for salaried employees of the corporation. Short-term and long-term incentive compensation targets for 2012 will remain unchanged from the prior year level.

 

•

Actual performance against 2012 target EBIT and Net Income objectives will determine the NEO’s short-term incentive payout, and EBIT will continue to be the 2012 performance objective for long-term equity incentive compensation. In 2012, the HRCC with the assistance of independent compensation consultant Mercer (Canada) Limited (“Mercer”), will undertake a review of our executive compensation programs, including performance objectives and other plan design features. In addition, it is our intent to benchmark market data later in 2012 in order to set 2013 target compensation for our NEOs.

On an annual basis, or otherwise more frequently as circumstances may require, the Compensation Committee considers whether our executive compensation programs create or incentivize any inappropriate risk-taking. Because annual performance-based incentives play a large role in our executive compensation programs, it is important that these incentives do not result in our NEOs taking actions that may conflict with the corporation’s long-term interests. No substantial changes occurred with respect to our compensation plans and programs during 2011 that impacted the

 

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Committee’s risk assessment in a significant way and, in January 2012, the Committee concluded that our compensation programs continue to be designed and administered with the appropriate balance of risk and reward in relation to our overall business strategies and do not encourage executives to take unnecessary or excessive risks.

Key executive compensation information can be found under the following main headings:

 

Compensation Philosophy

The Compensation Committee has adopted a compensation philosophy that reflects the Tim Hortons culture and the most significant goals for our executive compensation programs. Our compensation philosophy also includes the Committee’s approach to, and analysis of, risks associated with our compensation programs.

The fundamental objectives of our compensation philosophy are as follows:

 

•

Aligning the interests of our shareholders and executive officers by implementing compensation programs that tie a substantial majority of total executive compensation to business performance (pay-for-performance) without encouraging excessive risk-taking; and,

 

•

Attracting and Retaining high-performing executive officers to drive the continued achievement of strong company results and sustainable shareholder value in the future.

Extent to Which Our Compensation Programs Satisfied the Objectives of Our Philosophy

Under the current executive compensation programs, a substantial portion (over 70%) of our NEOs’ compensation is performance-based and not guaranteed (commonly referred to as “pay-at-risk”). Notwithstanding the competitive business conditions in 2011, our key financial performance objectives of EBIT and Net Income were exceeded, after adjusting for certain events that occurred in 2011 that were unexpected at the time the objectives were established (as previously described). The Compensation Committee also considered the substantial achievement of other, qualitative business objectives and goals set at the beginning of the year that are aligned with our four-year strategic plan and, therefore, are considered to be instrumental in driving our long-term success (for details refer to the “Performance of Business Goals and Objectives” section). As a result of this review, the Committee concluded that the interests of the executive team are closely aligned with the interests of our shareholders.

Although Mr. Schroeder has left the corporation, the tenure of the other NEOs continued to provide a high degree of stability within the Tim Hortons executive team. The current NEOs have a combined total of over 90 years of service with Tim Hortons and have held different positions and been promoted to increasing levels of responsibility over their

 

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respective tenures. Based on the limited number of changes over an extended period of time, the Compensation Committee has concluded that the current executive compensation programs are an effective component of our talent retention efforts for our NEOs. However, as the Board of Directors searches for a new President and CEO, the Committee is mindful of maintaining stability within the executive team.

General Compensation Principles and Guidelines

Based on our philosophy, the Compensation Committee uses the following principles to guide its executive compensation decisions:

 

•

Total Compensation Targeted at 75th Percentile: the Committee compares our executive officer compensation to the 75th percentile of total compensation of our selected comparator group, based on our historical strong performance and growth over several years.

 

•

Pay-at-Risk: approximately 70% of total compensation for our NEOs, with a higher proportion for the CEO, will be “pay-at-risk” in the form of performance-based compensation (annual short-term cash incentives and long-term equity incentives) and, therefore, actual compensation may vary from the target based on performance.

 

•

Base Salaries Targeted at 25th Percentile: base salaries, intended to provide a stable source of income for our executives, are generally targeted at the 25th percentile of our selected comparator group, consistent with our pay-for-performance philosophy.

 

•

Short-Term Cash Incentives: short-term cash incentive awards remain a significant element of executive compensation and will continue to be subject to the achievement of established performance objectives.

 

•

Long-Term Equity Incentives: long-term equity incentive compensation constitutes a significant component of executive compensation, with the CEO’s compensation more heavily weighted to long-term equity incentive compensation than the compensation for the other NEOs; the type of long-term equity awards granted reflects our pay-for-performance philosophy.

 

•

Monitor Compensation Trends: the Committee monitors market and executive compensation trends and makes changes to our compensation plans and policies that are appropriate for the corporation.

Compensation Review Process

The Compensation Committee is responsible for determining and making recommendations to the Board regarding executive compensation. The Committee oversees and administers the compensation programs for our executive officers, including the NEOs, and determines all elements of the compensation of the NEOs other than the Executive Chairman and CEO. The Committee provides compensation recommendations for the Executive Chairman and President and CEO, whose compensation is determined by the Board after its consideration of recommendations from the Committee. The Committee is also responsible for making recommendations to the Board for the implementation of annual incentive plans, long-term equity-based plans, and other benefits, policies and practices applicable to executive officers, and determining the appropriate comparator group(s) for benchmarking. In doing so, the Committee considers input from executive officers and other senior management members and, at the Committee’s discretion, independent advisors.

To meet these responsibilities, the Committee:

 

•

reviews annual financial and other business goals and objectives established by the CEO and evaluates the performance of the NEOs and other executive officers against these goals and objectives;

 

•

establishes performance objectives and payout curves for the short-term incentive and long-term equity compensation plans;

 

•

makes award and grant determinations under equity compensation plans; and,

 

•

monitors governance, best practices and trends in executive compensation.

 

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See “Human Resource and Compensation Committee” in this proxy circular for additional information regarding the Compensation Committee’s responsibilities.

The following is an overview of the process by which the Committee receives relevant information and makes compensation determinations.

Executive Officers and Senior Management

Typically, the Executive Chairman provides input to the Compensation Committee regarding the performance and compensation of the CEO, and insight and input on all other significant compensation determinations that affect the NEOs, other executive officers, and the corporation at large. The Executive Chairman also shares his views on succession planning for the CEO role (and CEO direct-report roles) with the Committee.

The CEO’s input is also critical due to the CEO’s direct day-to-day involvement with the executive officers, as a result of which he is in the best position to assess their performance and achievement of business goals and objectives. The CEO’s assessment includes an annual review of whether such officers may be short- or long-term successors to the CEO role and whether successors are available for direct-report roles to the respective executive officers. See “Human Resource and Compensation Committee” in this proxy circular for additional details regarding the corporation’s succession planning process and programs.

The Senior Vice-President, Human Resources and other members of senior management provide input on compensation levels and mix, compensation policy, programs and administration as well as supporting analysis (e.g., tally sheets and other tools) utilized in setting compensation.

Independent Compensation Consultant

The Compensation Committee has the discretion to retain, at the corporation’s expense, independent consultants to assist the Committee. The Committee engaged Meridian Compensation Partners Inc. (“Meridian”), formerly Hewitt Associates (“Hewitt”), as its independent compensation consultant until August 2011. In 2011, the Committee conducted a search for a new independent compensation consultant and identified potential candidates for consideration. Following an interview and selection process, the Committee engaged Mercer (Canada) Limited (“Mercer”) effective August 2011 as its independent compensation consultant.

In their respective roles as independent compensation consultants, Meridian and Mercer provided the following services:

 

•

market data, benchmarking and analysis required by the Committee;

 

•

independent evaluation of proposals, data, and analysis prepared by our senior management; and,

 

•

commentary on executive compensation principles, trends, and best practices.

In the course of performing its services, the Committee’s independent consultant received instructions from, and consulted on a regular basis with, the Committee Chair and senior management, including members of our Human Resources department. While the Committee takes the information and advice provided by its independent compensation consultant into consideration, the Committee is ultimately responsible for its own decisions and recommendations to the Board.

None of our directors or NEOs has any affiliation or relationship with either Meridian or Mercer. During 2011, Meridian did not provide any services to the corporation (nor did Meridian receive any payments for services), other than those services provided directly to, or reviewed and approved by, the Compensation Committee.

 

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The following table sets forth for 2011 and 2010, respectively: (i) the aggregate fees, before taxes, billed by Meridian for services related to determining compensation for any of the corporation’s directors and executive officers, and (ii) the aggregate fees billed for all other services provided by Meridian, or any of its affiliates:

 

(1)

Fees for 2010 included the cost of the 2010 study which was not repeated in 2011.

The following table sets forth for 2011 and 2010, respectively: (i) the aggregate fees, before taxes, billed by Mercer for services related to determining compensation for any of the corporation’s directors and executive officers, and (ii) the aggregate fees billed for all other services provided by Mercer, or any of its affiliates:

 

(1)

All Other Fees included compensation surveys, and pension, benefits and other consulting services.

The Committee has a pre-approval policy identifying the procedures for approving all services performed by the compensation consultant in advance, as well as the corresponding fees for such services, with the objective of confirming that such services would not impair the compensation consultant’s independence. The Committee has direct responsibility to retain, compensate and oversee the services performed by the consultant. With respect to the fees for other services provided to the corporation by Mercer, in evaluating any impact on Mercer’s independence, the Committee considered that the executive compensation consulting group of Mercer that provided services to the Committee is not influenced by nor has any of its compensation tied to the performance of the other business groups within Mercer that provided services to the corporation. The total fees for other services provided are an insignificant part of the total revenues earned by Mercer. In light of the foregoing policies and established practices, the Committee considers its compensation consultant to be fully independent of management of the corporation.

Compensation Committee—Relevant Experience

Each member of the Compensation Committee is independent and has direct experience in executive compensation that is relevant to service on the Committee, as well as the skills and expertise that enable him or her to make decisions on the suitability of the corporation’s compensation policies and practices. Mr. Sales is the chairman of the compensation committee of Georgia Gulf Corporation and a member of the human resources committee of Discovery Air Inc, and was previously the CEO of Canadian Tire. Ms. Atkins is the chair of the compensation committee of The Pep Boys—Manny, Moe and Jack. Ms. Greene has financial expertise with respect to executive compensation and is a member of the corporation’s Audit Committee. In addition, in her capacity as CEO at the Royal Mail, Ms. Greene is responsible for making recommendations regarding the design and implementation of executive compensation programs. Mr. Iacobucci is the former chair of the salary & organization committee of Torstar Corporation. Mr. Lederer has had extensive senior management experience, including as chief executive officer of large public and private companies. See “Proposal 1-Election of Directors” for more detailed biographical information concerning members of the Compensation Committee.

Benchmarking and Comparator Group Considerations

Benchmarking data has been used by the Compensation Committee as one of many tools to confirm whether our executive compensation is consistent with our compensation philosophy. In particular, the Committee assessed whether base salary levels generally align with the 25^th percentile of the comparator group and total target compensation aligns

 

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with the 75^th percentile of the comparator group. The Committee considers the comparison of our compensation programs and respective pay levels to those of other similarly situated peer companies as an important factor in setting compensation for our executive officers for both general pay and performance-based pay levels. The Committee’s current intent is to conduct a comprehensive compensation benchmarking study for our executive officers every two or three years.

To assist in setting 2011 compensation for our executive officers, a comprehensive compensation study was undertaken in 2010 on our behalf by Meridian. The list of comparator companies was reviewed by the Compensation Committee and management against a list of selection criteria. Changes to the pool of comparator companies reviewed as part of the previous compensation study conducted in 2007 were made so that the pool for the 2010 study continued to represent the most appropriate and relevant comparators based on several factors such as size, operating scope, geographical reach and various financial considerations. For the 2010 study, the Committee attempted to include more companies in the food and beverage, retail and consumer product industries, to better reflect the types of companies with which the corporation competes for talent. Due to our size (i.e., revenues and headcount) relative to other food and beverage companies in Canada, there is a lack of directly comparable Canadian companies in our industry. As such, the final comparator group for the 2010 study also included companies from a broader general industry group. In addition, although the comparator group noted below contains retail organizations that are subsidiaries of U.S. or global companies, they were not generally included in comparing our NEOs’ compensation due to differences in external accountabilities and strategic responsibilities. They were, however, included in comparing our broader officer population.

The 2010 study supported the market norm of differentiating compensation based on the functional responsibility of the executive. The 2010 study also supported an increase in the percentage of “pay-at-risk”, primarily in long-term incentive pay, relative to the prior compensation study conducted in 2007. The Committee’s consideration of the 2010 study, along with other factors described below under “Tools and Additional Factors Considered”, resulted in several changes to executive compensation for 2011, as described under “NEO Compensation Determinations for 2011” below.

Listed below is the Canadian comparator group used for the 2010 study. The Canadian comparator group was the primary market reference used by the Committee in making 2011 compensation determinations for our NEOs.

 

 

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In addition to the Canadian market data for the 2010 study, the Compensation Committee also reviewed compensation data for a “blended North American comparator group” that was created by averaging the results of the Canadian comparator group and the U.S. comparator group set forth below. The blended North American data provided a secondary point of reference, primarily for operational roles, in light of our expanding U.S. presence and the growing need to recruit for senior executive talent on a North American basis. The U.S. data included more public companies from the food and beverage industry due to the more significant number of large quick service restaurant companies in the U.S. as compared to Canada.

 

Tools and Additional Factors Considered

In addition to benchmarking, the Compensation Committee also considered the following additional tools and factors when making compensation decisions.

Performance of Business Goals and Objectives

In February 2011, before making final compensation determinations, the Compensation Committee undertook a review of our performance compared to the internal financial targets under the short- and long-term incentive programs, as well as compared to other financial and non-financial business goals and objectives for 2010. The entire executive management team is collectively responsible for the achievement of the annual business goals and objectives and, before compensation decisions are made for the subsequent year, the Committee evaluates the performance of the executive officers against the prior-year objectives. Performance against qualitative goals and objectives may also impact compensation for the performance year to which they apply, based on the Committee’s ability to make special compensation awards and also to make adjustments to payouts under the short- and long-term incentive plans. In addition, in February 2011, the Committee reviewed our performance against a set of standard financial performance measures, such as revenues, same-store sales, operating income, and others, as compared to external quick service restaurants. Based on these reviews, the Committee concluded that our performance had remained strong in 2010, supporting the 2011 compensation determinations made in February 2011. The Committee undertook a review of internal financial and non-financial goals and objectives in February 2012 relative to 2011 performance, prior to making 2012 compensation determinations for the executive officers.

Tally Sheets

The tally sheets for each NEO provided by the Human Resources department are a valuable tool for the Compensation Committee on all aspects of proposed short- and long-term incentive compensation. The tally sheets set out each element of target compensation for the upcoming year, as well as targeted and actual compensation received for the previous five years. This includes the value of current and previous equity awards, the value of all retirement benefits, perquisites, and change in control benefits. The tally sheets enable the Committee to review all elements of NEO compensation independently to confirm alignment with our compensation philosophy and related guidelines. Tally sheets have also been utilized by the Committee in connection with change in control agreements and in connection with certain other compensation determinations, such as for special awards of restricted stock units and changes in retirement benefits.

 

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Internal Pay Equity Analysis

The Compensation Committee believes that internal pay equity analysis is an important tool in assessing whether compensation delivered to the corporation’s executive officers is appropriate. Before setting compensation for executive officers, the Committee reviews an internal pay equity analysis illustrating the differential in targeted compensation between the CEO and the NEOs as a group for each of base salary, and short- and long-term incentive compensation targets to confirm that the differential is appropriate. The Committee also reviews an internal pay equity analysis of CEO compensation against the next highest paid officers at certain of our quick service restaurant competitors to consider our differential compared to those of the companies reviewed.

In February 2011, prior to setting 2011 compensation for the CEO, the Compensation Committee reviewed the internal pay equity differential between the CEO and the other executive officers when evaluating the increase to the CEO’s target total compensation for 2011. At that time, the CEO’s internal pay equity differential was 2.3 times that of the other NEOs. The Committee believed that this level of compensation differential was appropriate given the CEO’s enhanced responsibility and accountability for our performance, the larger percentage of risk-based compensation included in the CEO’s compensation package compared to the other NEOs, and because it continued to be consistent with external multiples and our general compensation principles. Internal pay equity analysis was also used in a similar manner for the setting of 2011 NEO compensation as in prior years.

Approach to Named Executive Officer Compensation

A fundamental feature of the compensation philosophy and design for our NEOs (excluding the CEO) for years prior to 2011 was that each NEO would receive substantially the same level of each element of total compensation. This approach was based on our belief that, regardless of the functional area of expertise of our NEOs, the role of each of these executives was equally critical to our strategic management and decision-making. Consistent with this approach, the NEOs were compensated as a team for the achievement of company performance objectives established by the Compensation Committee and the other business goals and objectives established annually by our CEO.

While the team approach and behavior is still considered key to our success, beginning in 2011, the NEO positions were individually benchmarked and the corporation began a gradual transition away from the team-based approach to compensation to setting compensation based on each individual role. Each NEO role has its own market comparators for base salary and short-and long-term incentive amounts. This approach to setting NEO target compensation is consistent with the results of the 2010 study, and with other roles within the corporation that are benchmarked to individual roles in the relevant market. While the executive management team is still collectively responsible for the achievement of annual business goals and objectives, each NEO’s individual compensation is compared to external market data for that respective role, and the Compensation Committee may make adjustments that it determines to be appropriate, taking into consideration the role, experience and performance of the individual. Although this did not result in significant differentiation in compensation for each of the NEOs in 2011, nonetheless we believe this is the appropriate manner by which to set compensation levels going forward as we continue to benchmark our compensation against the external market.

 

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2011 Compensation Program Components

Base salary, short-term incentives, long-term equity-based incentives and retirement benefits are the most significant elements of our executive compensation program and, on an aggregate basis, they are intended to substantially satisfy our program’s overall objectives.

 

 

*

Determined based on consideration of the plan design features of each compensation plan or program.

 

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The charts below show the relative mix of the targeted executive compensation components for 2011, and the achievement of our objective to deliver pay-for-performance compensation by maintaining a substantial portion of executive pay-at-risk, with base pay representing a fairly low percentage of overall compensation. For a discussion of actual executive compensation delivered for 2011 and portion of pay-at-risk, see below under “2011 Compensation Program Details and Impact of 2011 Performance”.

 

NEO Compensation Determinations For 2011

Before determining target compensation for 2011 for all of the NEOs, the Compensation Committee considered the corporation’s strong financial performance in 2010, the achievement of our other business goals and objectives, analysis derived from the tally sheets and internal pay equity review, as well as the results of the 2010 study. The Committee determined that targeting 2011 total target compensation for the NEOs at approximately the 75^th percentile of the Canadian comparator group was supported by our historical strong performance and growth over several years. In addition, in February 2011, the Committee believed that establishing an EBIT performance objective for the short-term and long-term incentive programs representing significant growth for 2011 would require strong performance from all of our executives to meet the objective. Executive compensation discussed below represents amounts established in February 2011 based on the 2011 performance objectives.

CEO

Before setting 2011 target compensation for Mr. Schroeder, the corporation’s former President and CEO, the Compensation Committee reviewed the results of Mr. Schroeder’s 2010 performance evaluation, the corporation’s performance against 2010 financial and non-financial goals and objectives, the results of the 2010 study, and the corporation’s goals established for 2011. The Committee also considered that, as of the end of 2010, Mr. Schroeder assumed full responsibilities as CEO and Mr. House assumed solely Executive Chairman accountabilities. The 2010 study indicated that the 2010 targeted compensation level for Mr. Schroeder as CEO was significantly below our compensation philosophy and guidelines, and that the amount of his total compensation “at-risk” was also below market for CEOs, primarily with respect to long-term equity incentive compensation.

As a result, the following changes to the 2011 target compensation for Mr. Schroeder were approved by the Board: annual base salary was increased to $750,000 from $650,000; the annual incentive award opportunity under the EAPP increased to $1.0 million at target (from $900,000); and, the long-term incentive award opportunity increased to $2.0 million at target (from $1.4 million). Under this new arrangement, the total 2011 targeted compensation for the CEO was $3,750,000, of which 80% was “at risk”. The substantial increase took Mr. Schroeder’s compensation initially to the median of the Canadian comparator group reviewed as part of the 2010 study and approximately 18% below the 75^th percentile. The majority of the increase (87.5%) was to be delivered in variable compensation, more heavily weighted to

 

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long-term equity incentive compensation. These changes were intended to more closely align Mr. Schroeder’s compensation with the pay-at-risk profile of CEOs in the Canadian comparator group.

From an internal pay equity perspective, Mr. Schroeder’s 2011 target compensation was approximately 2.7 times that of the other NEOs (on average), which continued to be in line with internal pay equity multiples for external comparable companies.

As of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. Following a further succession planning review, a subsequent transitional arrangement could not be reached and the corporation entered into a Separation Agreement and Final Release with Mr. Schroeder on June 2, 2011, effective May 31, 2011. The agreement provides Mr. Schroeder with severance of up to $5,750,000, which consists of (i) a lump sum payment of $2,250,000 that was paid in June 2011, and (ii) up to $3,500,000 payable in equal monthly installments over 24 months. In addition, under the agreement, Mr. Schroeder has agreed to provide consulting services to the corporation for a period of two years in exchange for the payment of $175,000 per year, payable in equal monthly installments. The factors considered by the Board of Directors in determining the severance amount included, among other things, Mr. Schroeder’s long service, over twenty years, as a senior executive of the corporation; the corporation’s strong financial performance over Mr. Schroeder’s three-year tenure as President and CEO; and, the various covenants and ongoing obligations of Mr. Schroeder set forth in the separation agreement.

Upon Mr. Schroeder’s departure in May 2011, Mr. House, the corporation’s Executive Chairman, was appointed to serve as President and CEO until a successor is appointed. In August 2011, the Board determined that for so long as Mr. House is serving as President and CEO, his compensation should be substantially similar to the compensation that Mr. Schroeder received as President and CEO prior to his departure from the corporation. Due to the expected short-term nature of Mr. House’s tenure as President and CEO at the time of his appointment, coupled with the fact that prior to his appointment as President and CEO, Mr. House’s compensation was structured to be more aligned with non-employee director compensation, the Board concluded that long-term compensation in the form of stock options with tandem SARs, which constituted part of Mr. Schroeder’s compensation, would not be appropriate for Mr. House. Given the foregoing, the following changes were made to Mr. House’s 2011 compensation, the main elements of which consist of base salary, short-term incentive, and long-term equity compensation.

The Board approved an increase in Mr. House’s compensation so that, effective May 24, 2011, Mr. House’s base salary was set at $750,000 (on an annualized basis), and he became eligible for a short-term incentive payout under the EAPP of $1.0 million at target, prorated for the period Mr. House served as President and CEO in 2011 and subject to the performance objectives under the EAPP. Mr. House was also eligible for a long-term equity incentive award in an aggregate amount of $2.0 million at target, prorated for the portion of the year Mr. House served as President and CEO in 2011, consisting of: (i) $1.0 million at target delivered through P+RSUs to be granted in 2012 after the end of the 2011 performance period; and (ii) $1.0 million delivered as time-vested RSUs, reduced in value by the May 2011 RSU award of $200,000 previously granted to Mr. House, also to be granted in 2012. The amount payable to Mr. House on account of P+RSUs was also dependent upon the extent to which the corporation achieved the 2011 EBIT performance objective established for the P+RSUs in February 2011.

On February 23, 2012, consistent with the Board’s historical practice of making compensation decisions annually in February, and in recognition of the fact that, since May 2011, Mr. House assumed immediate accountability for the success of the corporation as its President and CEO and exhibited strong performance in that role, the Board approved a change to Mr. House’s 2011 compensation, such that the 2011 long-term equity incentive compensation described above ($2.0 million at target) would not be prorated. This means that Mr. House will receive the full (not prorated) long-term incentive award for the 2011 plan year, less the value of the $200,000 RSU award previously granted to him in his capacity as Executive Chairman. These equity awards were made on February 28, 2012.

The Committee felt it was appropriate to revisit the original determinations made in August 2011 to recognize that Mr. House has served as President and CEO longer than originally anticipated and, during this period, both his individual performance and corporate performance have been strong. The Committee also considered that the date of Mr. House’s

 

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appointment on May 24, 2011 occurred just one week after the regular annual grant date of May 17, 2011. If Mr. House had been appointed as President and CEO prior to the grant date in 2011, the February 2012 awards would likely have been made on the appointment date (or regular annual grant date) and treated similarly to the awards made to the other NEOs in May 2011 (i.e., one-half reported as 2010 performance-based compensation and one-half reported as 2011 compensation). This treatment is consistent with the forward-looking nature of our long-term incentive awards (i.e., P+RSUs) and the Committee’s historical administrative practice that grant amounts reflect the amount of equity compensation established for the executive immediately prior to the grant date. As a result of the foregoing determination, a P+RSU award of $1,050,000, which will cliff vest 30 months after the date of grant, and a RSU award of $800,000 vesting over a 30-month period in three equal installments, were made to Mr. House in February 2012.

Mr. House also received a cash payment of $113,338 in lieu of a corporate contribution to the Executive Retirement Savings Plan, which was prorated for the portion of the year he served as President and CEO.

Executive Chairman

During the 2011 fiscal year, prior to May 24, 2011, Mr. House served in the role of Executive Chairman solely, and in that capacity provided leadership to the Board of Directors and played a role in developing and analyzing key strategic initiatives, building and maintaining relationships with our key stakeholders, as well as leading our Board of Directors and other accountabilities. As Executive Chairman, Mr. House also provided insight regarding succession planning for the CEO and other NEOs. In February 2011, Mr. House’s compensation in this role was established to be more aligned with non-employee director compensation, as opposed to “executive officer” compensation, in part as a result of the end of the transition in roles with Mr. Schroeder. As such, his base salary was set at $300,000 (a reduction from $350,000) and he received time-vested RSUs (not performance-based) valued at $200,000. The latter is a reduction from long-term incentive compensation targeted in 2010 in the aggregate of $350,000. Upon his appointment as President and CEO in May 2011, Mr. House’s compensation as Executive Chairman ceased and he received the compensation as President and CEO noted above.

Other NEOs

As noted above, in previous years, the Compensation Committee believed that a team approach to compensation for the NEOs was appropriate. However, given that one of the fundamental objectives of our compensation philosophy is that executive compensation programs support our ability to attract and retain high performing executive officers by aligning executive pay with market data for each individual role, commencing in 2011, the Committee reviewed the total target compensation for each NEO, as compared to companies in the relevant comparator groups reviewed as part of the 2010 study, as well as considered the individual’s role, experience and performance to determine the appropriate compensation for each executive. As a result, in 2011, the corporation began a gradual transition away from team-based compensation. In order to align 2011 compensation for the other NEOs with these changes to our compensation principles, some adjustments were made to compensation for certain of our NEOs.

Before determining 2011 compensation for the NEOs (other than the Executive Chairman and CEO), the Committee considered the corporation’s strong financial performance in 2010, the achievement of our other business goals and objectives, and current trends and initiatives in executive compensation. See “2011 Compensation Program Details and Impact of 2011 Performance” below for more details on NEO compensation in 2011.

The specific changes to the 2011 target compensation of Ms. Devine, which reflected her market position primarily against the Canadian comparator group due to the nature of her role, were as follows: annual base salary of $400,000 (representing an increase of $16,500); annual short-term incentive award opportunity under the EAPP of $500,000 at target (the same as 2010); and, long-term incentive award opportunity under the 2006 Stock Incentive Plan of $600,000 at target (representing an increase of $186,918). Under this new arrangement, the total 2011 targeted compensation for Ms. Devine was $1,500,000, of which approximately 73% was “at risk”.

The Compensation Committee determined that the compensation of both of our Chief Operations Officers should be the same given the nature of the roles and similarity of responsibilities and accountabilities. The specific changes to the

 

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2011 target compensation for both Mr. Clanachan and Mr. Walton, which reflected the market position against the blended North American comparator group to include companies that most closely match the role, were as follows: annual base salary of $400,000 (representing an increase of $16,500); annual short-term incentive award opportunity under the EAPP of $500,000 at target (the same as 2010); and, long-term incentive award opportunity under the 2006 Stock Incentive Plan of $500,000 at target (representing an increase of $86,918). Under this new arrangement, the total 2011 targeted compensation for both Mr. Clanachan and Mr. Walton was $1,400,000, of which approximately 71% was “at risk”.

In February 2011, it was determined that the 2011 target compensation of Mr. Moir, which reflected his market position primarily against the Canadian comparator group due to the nature of his role, would remain unchanged from 2010. However, in August 2011 the Committee further considered the contributions of Mr. Moir, including his long tenure and significant experience, among other considerations, and believed it was in the best interest of the corporation that his base salary and equity incentive compensation be increased to the levels of Messrs. Clanachan and Walton. As a result, annual base salary was increased from $383,500 to $400,000; annual short-term incentive award opportunity under the EAPP remained at $500,000 at target; and, a long-term incentive award opportunity under the 2006 Stock Incentive Plan was increased from $413,082 to $500,000 at target. The total 2011 targeted compensation for Mr. Moir was $1,400,000, of which approximately 71% was “at risk”.

Performance-based or variable pay delivered through our EAPP and P+RSU programs constitutes the substantial majority of compensation for our NEOs. The determination of actual EAPP payouts and P+RSUs awards is made by comparing actual EBIT and Net Income performance (as may be adjusted) against payout curves that have a range of established payouts from minimum to maximum levels, as set forth below in “2011 Compensation Program Details and Impact of 2011 Performance”. We also consider options/SARs awarded to our executives to be “at risk” depending on performance, although we do not have performance pre-conditions attached to our annual option/SAR awards.

2011 Compensation Program Details and Impact of 2011 Performance

Base Salaries

As noted above under “General Compensation Principles and Guidelines”, our executive compensation philosophy provides, as a guideline, that base salaries for the corporation’s executive officers will be set at approximately the 25^th percentile of the applicable comparator group. In 2011, we maintained the base salaries of the NEOs at approximately the 25^th percentile of base salaries of the average comparable executive officer positions of companies reviewed as part of the 2010 study. In addition, each individual’s role, experience and performance were taken into consideration when establishing base salaries for 2011. Setting base salaries at the 25^th percentile is consistent with our philosophy of weighting compensation heavily towards performance-based awards, such that the level of total compensation is based on the corporation’s performance, while also providing our executives with a stable source of annual income.

The Committee set the following 2011 base salaries for our NEOs.

 

(1)

For the portion of the year served as President and CEO effective May 24, 2011.

 

(2)

Mr. Moir’s annual salary was initially established at $383,500 for 2011, and was subsequently revised to $400,000.

 

(3)

For the portion of the year served as President and CEO.

 

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Short-Term Incentives (or Annual Cash Bonus)—the Executive Annual Performance Plan

Our short-term (annual) incentive compensation program for executive officers is known as the Executive Annual Performance Plan (“EAPP”). Awards under the EAPP are “at risk” because the corporation must achieve annual financial performance objectives established by the Compensation Committee in order for the executive officers to receive any payments under the EAPP. The Committee believes that the annual cash incentive award should constitute a substantial portion of executive compensation to support our “pay-for-performance” philosophy and because our business tends to work on shorter performance cycles, thus making annual incentive awards effective at matching compensation to our performance. Additionally, given the relatively low level of our executive base salaries, we believe that strong short-term cash incentive compensation assists us to retain, motivate, and attract talented executives.

The two performance objectives for EAPP are operating income, or EBIT, as to 75% of the award, and Net Income, as to 25% of the award. The Compensation Committee believes that EBIT best reflects the financial health and performance of our business and also is a key performance measure used by other quick service restaurant companies, which allows for general comparability of performance. The Committee also believes that Net Income is an appropriate measure as it reflects overall earnings performance and requires management to be responsible for, and manage every line item on, our Consolidated Statement of Operations. Additionally, in making its decision regarding the appropriate performance objectives, the Committee also considered the following factors relative to EBIT and Net Income:

 

•

each executive officer believes that he or she can meaningfully contribute to the achievement of these performance objectives;

 

•

maintaining the consistency of the objectives over a number of years allows for more accurate measurement and comparison of, and reward for, the desired performance from year-to-year;

 

•

EBIT is used in our incentive plans for other employees, and thus, the interests of our entire organization are aligned to achieve the same goals; and,

 

•

they are not overly complex metrics and are easily understood, providing for clear “line-of-sight”.

The Committee reviews the corporation’s performance objectives annually and intends to look at the performance objectives during 2012 in the context of any overall changes to compensation plans and programs. Each year, the Compensation Committee establishes a payout curve with “target”, “threshold”, and “maximum” amounts, and incremental amounts between the “threshold” and “maximum” amounts, for the EBIT and Net Income performance objectives. Payouts range along the curve depending upon the corporation’s financial performance against the targets, with payouts corresponding to incremental performance above or below target performance. In 2011, the payout curve was changed to a linear (formulaic) scale from a step scale to better match corporate performance with the final payout, subject to the following threshold/minimum and maximum payouts. The EBIT payout curve that applied to the short-term incentive program also applied to the long-term P+RSU program.

 

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The following table sets forth the 2011 performance objectives, actual EBIT and Net Income performance (as adjusted) and resulting EAPP payout:

 

(1)

The threshold/minimum is the lesser of: (i) 90% of the current-year target objective, and (ii) actual prior-year EBIT or Net Income, as may be adjusted. The Committee sets the threshold at the lesser of 90% of current year target and actual prior year (as may be adjusted) EBIT and Net Income, recognizing that performance should be rewarded during difficult years, such that if prevailing macro-economic and business conditions affected achievement of targeted performance objectives disproportionately, but the corporation nonetheless achieved or exceeded prior-year actual results, then payouts should be made.

 

(2)

Adjusted EBIT attributable to Tim Hortons Inc. and adjusted Net Income attributable to Tim Hortons Inc. set forth under Actual Performance are non-GAAP measures. The Committee may make adjustments to actual EBIT/Net Income results for comparison to performance against the established performance objectives under the EAPP program, as it may determine in its discretion, either prior to or after the end of the performance period. Unless the Committee was to determine otherwise, the adjustments applied to the EBIT results under the EAPP also apply to the EBIT results under the P+RSU program. See Appendix A for Reconciliation of Adjusted Operating Income (EBIT) Attributable to Tim Hortons Inc. and Net Income Attributable to Tim Hortons Inc., which are non-GAAP financial measures.

The following table sets forth target and actual payouts under the EAPP made to the NEOs for 2011 performance:

 

(1)

Target EAPP was $1,000,000 prorated for the portion of the year during which Mr. House served as President and CEO.

Achievement of EBIT Performance Objective. As described herein, EBIT performance is the primary driver of performance-based compensation under the EAPP and P+RSU programs. For the five years prior to and including 2011, we generally met the target amounts for EBIT performance, as may have been adjusted in accordance with the terms of the EAPP, but we did not achieve the maximum objectives. Between 2007 and 2011, inclusive, our EBIT performance ranged from 95.9% to 101.7% of target.

Achievement of Net Income Performance Objective. Net Income is the secondary driver of performance-based compensation under the EAPP program. For the five years prior to and including 2011, we generally met the target amounts for Net Income performance, as may have been adjusted in accordance with the terms of the EAPP, but we did not achieve the maximum objectives. Between 2007 and 2011, inclusive, our Net Income performance ranged from 99.4% to 102.2% of target.

 

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The Compensation Committee believes that the EAPP effectively continues to deliver short-term incentive compensation in a manner consistent with our compensation philosophy. See below under “Named Executive Officer Compensation—Alignment to Corporate Performance (Pay-for-Performance Linkage)”.

The Committee may make adjustments to awards in the event actual performance goals are not met. If warranted, the Committee may increase or reduce the size of the payout and also has the discretion not to award a payout. The Committee considers the use of discretion to be a factor that mitigates the risk of unintended consequences of executive compensation determinations made earlier in the performance year.

Long-Term Incentives

Consistent with our compensation philosophy, equity-based incentive compensation granted under our 2006 Stock Incentive Plan constitutes the largest part of the CEO’s total compensation and a significant portion of the total compensation for our executive officers. Our equity incentive awards are generally intended to accomplish the following main objectives:

 

•

align our financial and share price performance with the level of compensation realized by executive officers;

 

•

foster the long-term retention of executive officers;

 

•

assist in building share ownership of executive officers to increase alignment with long-term shareholder interests;

 

•

focus on the execution of longer-term strategic plans which form part of our annual financial and non-financial goals and objectives;

 

•

attract and motivate key employees;

 

•

reward participants for performance in relation to the creation of shareholder value; and,

 

•

deliver competitive levels of compensation, consistent with our compensation philosophy.

Currently, our equity incentive compensation consists of performance-conditioned restricted stock units (“P+RSUs”) and stock options with tandem stock appreciation rights (“SARs”). The P+RSUs and options/SARs each represent 50% of the total value of the target equity incentive awards. This mix strengthens the link between pay and performance and, therefore, is more consistent with our compensation philosophy and more effectively aligns our executives’ interests with those of our shareholders than reliance on just one type of equity award. This is aligned with market practice on the average mix of long-term incentive compensation at TSX60 companies. The Compensation Committee believes that the use of these types of awards supports our executive retention objective by providing both mid-term (P+RSUs) and long-term (options/SARs) incentives.

Both the P+RSUs and options/SARs grants are based on specific dollar values. The actual number of P+RSUs granted is determined by dividing the dollar value of the award by the closing price of our common shares on the TSX on the trading day immediately preceding the grant date. The number of options/SARs to be granted is determined by dividing the dollar value of the award by the option value calculated using the Black-Scholes valuation methodology. The Compensation Committee believes that a value-based approach to equity incentive grants is more appropriate than a fixed-number grant because the initial dollar value of the P+RSUs and options/SARs is fixed on the date of grant and, therefore, the number of P+RSUs or options/SARs awarded is equal to the amount of compensation the Committee had determined to award on the grant date. Previous grants of P+RSUs and options/SARs are not taken into account when awarding new grants. For additional detail, see Notes (2) and (3) of the Summary Compensation Table under “Executive and Director Compensation”.

 

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P+RSUs

The annual level of P+RSUs awarded is dependent upon the achievement of performance targets in the fiscal year prior to the year of grant. Upon the performance conditions being met, P+RSUs are awarded as standard, time-vested restricted stock units which vest in 30 months (i.e., “cliff” vest) and have dividend equivalent rights (“DERs”). No DERs accrue during the performance period for P+RSUs. DERs begin to accrue only after the performance condition is satisfied and P+RSUs are granted.

In February of each year, the Compensation Committee sets the performance objectives for the P+RSUs to be granted in the following year. Based on the same factors considered in establishing the performance measures for the EAPP, the Committee considers operating income, or EBIT, as to 100% of the award, to be the most appropriate performance objective for the P+RSU grants. The level of P+RSUs granted is based on a one-year performance target, rather than multiple year targets, primarily because our relatively short business cycle makes a shorter performance period more effective in linking compensation to performance. Because the P+RSUs “cliff” vest, they also have a strong retention component. See below for a discussion of (i) the relevant payout curve for the P+RSU program, and (ii) the achievement of the EBIT performance objective for purposes of P+RSU awards.

The Committee’s established administrative practice is that P+RSU awards are backward-looking in terms of the corporation’s performance target, which is applied to the original grant amount determined at the time the performance target is set. However, P+RSUs are forward-looking in that they have a 30-month “cliff” vesting schedule, which, absent certain exceptions, effectively requires a forward service period of 30 months prior to vesting and settlement. Based on these considerations, the actual grant reflects the amount of equity compensation established for the executive immediately prior to the grant date. This includes the impact of any adjustments to equity incentive compensation (upward or downward) that occurred after the end of the prior-year performance period.

The following table sets forth the 2011 performance objectives, actual EBIT performance (as adjusted) and resulting P+RSU award:

 

(1)

See Appendix A for Reconciliation of Adjusted Operating Income (EBIT) Attributable to Tim Hortons Inc., which is a non-GAAP financial measure.

Based on the foregoing, the following table sets forth the actual P+RSU awards to be granted to the NEOs in May 2012, based on 2011 performance:

 

(1)

As noted above under “NEO Compensation Determinations for 2011”, in February 2012, Mr. House also received an additional full (not prorated) P+RSU award of $1,050,000, recognizing his appointment as President and CEO occurred shortly after the May 2011 grant date and in recognition of both strong individual and corporate performance.

 

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Options/SARs

Stock options with tandem SARs are designed to reward our executive officers for increases in our stock price over long periods of time. Issuing options with tandem SARs provides the option holder with the choice of receiving either our common shares (by exercising the option) or cash (by exercising the SAR), in each case with the value dependent upon the price of our common shares at the time of exercise. Upon the exercise of options, the related SARs are surrendered to the corporation and cancelled to the extent of the number of options exercised. Upon the exercise of SARs, the related options are surrendered to the corporation and cancelled to the extent of the number of SARs exercised. The options/SARs vest in equal proportions over three years and expire after seven years; however, the term is shortened upon death, disability, retirement, or termination. Additionally, because of their completely forward-looking nature, they may provide longer-term incentives in years when our performance results in lower (or no) short-term cash incentive or P+RSU awards.

Options/SARs represent alignment with shareholder interests as they have no value if our share price does not increase (unlike RSUs and P+RSUs), but will increase (or decrease) in value directly in relation to increases (or decreases) in our share price during the exercise period.

All equity awards are made in accordance with our equity grant and settlement policy. Refer to the “Governance Policies and Related Items” section of this CD&A for additional details regarding this policy.

Included in the table below are the value of the 2011 option/SAR awards made to the NEOs in May 2011. Option/SAR awards to be granted to the NEOs in May 2012 will be based on the equity incentive values for 2012 compensation established in February 2012 and will be as set forth in the table below.

 

(1)

As noted above under “NEO Compensation Determinations for 2011”, Mr. House will be awarded RSUs in lieu of stock options. In February 2012, the Board approved a full (not prorated) RSU award of $1,000,000 for the 2011 plan year recognizing his appointment as President and CEO occurred shortly after the May 2011 grant date and in recognition of both strong individual and corporate performance, less the $200,000 RSU award he received in May 2011 as Executive Chairman, effective February 28, 2012. In addition, Mr. House will be eligible to receive an RSU award of $1,000,000 in May 2012.

 

(2)

Mr. Moir received an option/SAR award of $206,541 in May 2011 and a subsequent award of $43,459 in August 2011, for a total award of $250,000 in 2011.

Retirement Benefits

Our retirement plans are designed to provide a competitive level of retirement savings to executive officers and to reward them for continued service with us. The retirement program for our executive officers consists of our defined contribution pension plan (the “DCPP”), which covers all full-time employees, and our Personal Supplemental Executive Retirement Savings Plan (the “Savings Plan”), which covers executive officers and certain other members of senior management.

Defined Contribution Pension Plan

All of our Canadian employees, including executive officers, are required to participate in our Canadian DCPP after they have completed 12 months of continuous service with us. Employees are required to contribute to the DCPP an amount

 

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equal to 2% of base salary, and we contribute an amount equal to 5% of base salary. Participants may also make voluntary additional contributions, which we will match up to a maximum of an additional 1% of base salary. All contributions made under the DCPP are subject to legislated maximum limits (for 2011, $22,970 per individual in the aggregate for both employer and employee contributions). Although a participant’s contribution to the DCPP vests upon enrolment, company contributions to the DCPP do not vest until the participant has participated in the DCPP for two years. Vested amounts may be withdrawn prior to retirement if the employee ceases to be employed by us and otherwise in accordance with Canadian laws and regulations governing the DCPP.

Personal Supplemental Executive Retirement Savings Plan

The purpose of the Savings Plan is to provide participants with additional compensation, which the participants will direct to be held and invested in accordance with the terms of the Savings Plan. Only individuals who are below 69 years of age are eligible to receive additional compensation under the Savings Plan. Participants who have more than three years of service with us are considered vested participants.

Under the Savings Plan, vested participants must direct us to pay compensation received under the Savings Plan to: (i) a non-registered account, (ii) a Tax Free Savings Account (“TFSA”), or (iii) a Registered Retirement Savings Plan (“RRSP”). These accounts are administered by a third-party financial institution, and the amounts held in such accounts are invested in permitted investments at the direction of the respective participant. As a result, the design of the Savings Plan allows the participants to achieve certain tax efficiencies as well as control the investments of their funds. The corporation and participants will agree to pay to, or transfer amounts out of, the vested account upon the occurrence of specified events, including termination, disability or death of a participant, or in certain other circumstances.

After the completion of the plan year, the corporation will make contributions to the Savings Plan at a rate of 12% of earnings (base salary and annual incentive paid during the plan year), less DCPP contributions from the corporation. The contribution rate was selected based on data provided by pension specialists at Hewitt who, based on general industry design considerations, confirmed that 12% was a market competitive contribution rate for these types of programs. All annual payments made to participants under the Savings Plan will be subject to applicable tax withholdings, unless directed to an RRSP. Also, all income earned on permitted investments, other than in an RRSP or TFSA, will be taxable annually to the participant.

Until vesting occurs, the Savings Plan contributions will accrue in notional accounts for the respective executives. Vesting occurs once a participant has completed three years of service, or earlier if: a participant dies, becomes disabled, is terminated after the age of 65, a change of control occurs, or in certain other circumstances, including as otherwise determined by the Committee. All of our NEOs are fully vested in the Savings Plan, having met the three-year service requirement.

Executive Benefits and Perquisites

We use limited amounts of executive benefits and perquisites to provide our NEOs with a competitive total compensation package that allows them to focus on their daily responsibilities and the achievement of the corporation’s objectives. The perquisites provided to executive officers consist of executive medical benefits, life and accidental death and dismemberment insurance premiums, use of a company car, and personal use of our corporation’s airplane in limited circumstances. The value of these benefits, except for the medical benefits, is included as taxable income to the executive. The Compensation Committee does not believe that perquisites and other benefits should represent a significant portion of the compensation package of the executive officers. The amounts reported for perquisites represent the aggregate incremental cost of providing the benefit and not the value of the benefit to the recipient. See the Summary Compensation Table under “Executive and Director Compensation” for additional information regarding the perquisites we provide to our NEOs.

We have a policy limiting the personal use of our aircraft by executive officers and directors to the following circumstances: (i) the spouse or partner and other family members (as well as other officers and/or employees) may accompany an executive officer or director who is traveling on our aircraft for a business purpose, if space permits; and (ii) the executive officers, spouses or partners, and other family members, may use the aircraft in the event of medical emergencies or other extreme hardships.

 

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NEO Compensation Determinations for 2012

Before determining target compensation for 2012 for all of the NEOs, the Compensation Committee considered the corporation’s strong financial performance in 2011, the achievement of our other business goals and objectives, analysis derived from the tally sheets and internal pay equity review, and increases in base salaries made to other employees of the corporation generally.

CEO

Paul D. House joined the corporation as Vice-President of Marketing in 1985 and occupied various senior management positions leading to his appointment in January 1993 as Chief Operating Officer. He then became President and Chief Operating Officer in 1995, and CEO in November 2005. Mr. House was named Chairman of the Board in February 2007. He was a director on the Wendy’s Board from 1998 through February 2007. Mr. House is a member of the Board of Directors of the Tim Horton Children’s Foundation and serves on the Board of Trustees of Brock University, as well as the Advisory Board for Brock University Business School. Mr. House joined Dairy Queen^® Canada in 1972 and held various management positions with that company, including Vice-President of Canadian Operations, responsible for the business in Canada. Mr. House holds a B.A. in Economics from McMaster University. On March 1, 2008, Mr. House became Executive Chairman of the corporation’s Board of Directors. Effective as of May 24, 2011, Mr. House was appointed to serve as the President and Chief Executive Officer of the Company.

In recognition of Mr. House’s effective leadership, the strengthening of the corporation’s competitive position, the creation of a strong foundation for future growth opportunities, and his demonstration of an extremely high level of commitment to employees, restaurant owners and the communities in which we operate, the Board has approved the following compensation for 2012. Effective as of February 26, 2012, Mr. House will receive a base salary of $772,500 (representing a 3% increase from current base salary of $750,000) for the portion of the year he serves as President and CEO plus any transition period necessary to integrate a potential new President and CEO into the role and the corporation. Mr. House will be eligible for a performance-based short-term incentive award under the corporation’s EAPP of $1,000,000 at “target” performance (no change from 2011 level), provided that the short-term incentive payout will be prorated to the period during which Mr. House serves as President and CEO during 2012, including any transition period as mentioned above. The amount payable to Mr. House under the EAPP will be dependent upon the extent to which the corporation achieves EBIT and Net Income performance objectives established for the EAPP in February 2012. Mr. House will be eligible for a long-term incentive award in May 2012 in an aggregate amount of $2,050,000 under the corporation’s 2006 Stock Incentive Plan, consisting of: (i) $1,050,000 delivered through P+RSUs, adjusted by the 2011 performance factor of 105%, which will cliff vest 30 months after the date of grant; and (ii) $1,000,000 delivered as time-vested RSUs, vesting over a 30-month period in three equal installments.

The following outlines the changes to Mr. House’s target total direct compensation as President and CEO for 2012:

 

Other NEOs

Compensation for the other NEOs will remain the same in 2012 as was in place for 2011, with the exception of increases to base salaries of 3%. Keeping the short-term and long-term equity incentive targets the same for 2012 takes into consideration the significant change to the long term incentive target made in 2011 and that benchmarking will be done every two to three years. The following outlines the changes to target total direct compensation for 2012, along with target total direct compensation for the prior two years.

 

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Ms. Devine, Chief Financial Officer (CFO)

Cynthia J. Devine joined the corporation in 2003 as Senior Vice President of Finance and Chief Financial Officer, responsible for overseeing accounting, financial reporting, investor relations, financial planning and analysis, treasury, internal audit, tax and information systems for the corporation. She was promoted to Executive Vice President of Finance and Chief Financial Officer in April 2005. As of May 1, 2008, Ms. Devine was appointed as Chief Financial Officer and assumed additional accountability for the corporation’s manufacturing operations and vertical integration strategy. These manufacturing operations include Maidstone Coffee, Fruition, Fruits and Fills, a fondant and fills facility, and the coffee plant in Hamilton, Ontario. Prior to joining the corporation, Ms. Devine served as Senior Vice President, Finance for Maple Leaf Foods^®, a large Canadian food processing corporation, and from 1999 to 2001, held the position of Chief Financial Officer for Pepsi-Cola^® Canada. Ms. Devine, a Canadian Chartered Accountant, holds an Honours Business Administration degree from the University of Western Ontario. Ms. Devine is a member of the Board of Directors of ING Direct^® Canada. In August 2011, Ms. Devine was elected as a Fellow of the Canadian Institute of Chartered Accountants for contributions to the Chartered Accountant profession.

The following outlines the changes to Ms. Devine’s target total direct compensation for 2012:

 

Mr. Clanachan, Chief Operations Officer (COO), United States and International

David F. Clanachan joined the corporation in 1992 and held various positions in the Operations Department until he was promoted to the position of Vice President, Operations—Western Ontario in 1997. Prior to that time, he was a Director of Operations for an international food corporation, with approximately 12 years of experience in the industry. In August 2001, he was promoted to the position of Executive Vice President of Training, Operations Standards and Research & Development. As of May 1, 2008, Mr. Clanachan was appointed as Chief Operations Officer, United States and International. Mr. Clanachan directly oversees operations, restaurant development and growth strategy for the U.S. segment, as well as the international operations and growth strategy. Mr. Clanachan holds a Bachelor of Commerce degree from the University of Windsor. Mr. Clanachan serves on the School of Hospitality and Tourism, Management Policy Advisory Board for the University of Guelph and as a director of the Canadian Hospitality Foundation.

The following outlines the changes to Mr. Clanachan’s target total direct compensation for 2012:

 

Mr. Moir, Chief Brand and Marketing Officer

William A. Moir joined the corporation in 1990 as Vice President of Marketing, and was promoted to Executive Vice President of Marketing in 1997. As of May 1, 2008, Mr. Moir was appointed as Chief Brand and Marketing Officer, and

 

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as the President of the Tim Horton Children’s Foundation and assumed responsibility for research and development, aligning product research and innovation programs with the corporation’s brand and marketing activities. Prior to joining the corporation, Mr. Moir gained extensive marketing management experience, holding key positions with K-Tel^®, Shell Oil^® and Labatt Breweries^®. He is a director and past Chairman of the Coffee Association of Canada, a director of The Trillium Health Centre Foundation, a director of the Baycrest Foundation, as well as the President of and a member of the Board of Directors of the Tim Horton Children’s Foundation. Mr. Moir holds an Honours Business degree from the University of Manitoba.

The following outlines the changes to Mr. Moir’s target total direct compensation for 2012:

 

Mr. Walton, Chief Operations Officer (COO), Canada

Roland M. Walton joined the corporation in 1997 as Executive Vice President of Operations, responsible for operations in both Canada and the U.S. As of May 1, 2008, Mr. Walton was appointed as Chief Operations Officer, Canada. Mr. Walton directly oversees operations, restaurant development and growth strategy for the Canadian segment and also assumed responsibility for operations standards and training for the Tim Hortons brand. His restaurant industry experience includes Wendy’s Canada, Pizza Hut^® Canada and Pizza Hut USA. In 1995, Mr. Walton held the position of Division Vice President for Pizza Hut USA’s Central Division. Mr. Walton holds a Bachelor of Commerce degree from the University of Guelph.

The following outlines the changes to Mr. Walton’s target total direct compensation for 2012:

 

Written Change in Control (Employment) Agreements and Post-Employment Covenants

In September 2006, the Compensation Committee requested that Hewitt review market practices and general industry precedents to determine whether the change in control agreements that our executive officers had when the corporation was owned by Wendy’s International, Inc. were consistent with current market practice. Based on Hewitt’s review and recommendations, the Committee recommended that our Board adopt change in control agreements for each of the NEOs containing provisions the Committee believed, based on the information provided by Hewitt, were consistent with typical benefits offered under change in control agreements by general industry companies.

Change in control agreements are provided to our NEOs to facilitate the stability of our leadership during the course of a change in control transaction, which is a time of increased uncertainty for our NEOs and other employees. The benefits are intended to allow these officers to make reasonable decisions about potential changes in ownership that are in the best interests of our shareholders. Change in control transactions frequently result in job losses to executive officers and, therefore, the Compensation Committee believes that appropriate change in control benefits encourage the ongoing

 

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commitment of executive officers to the best interests of shareholders during such times. As mentioned above, these benefits also help to ensure stability and continuity of management as the change in control transaction is implemented and beyond. Furthermore, based on Hewitt’s review and recommendations, the Committee believed that these types of change in control benefits are typical for large public companies and are, therefore, intended to provide our NEOs with benefits similar to those obtainable at comparable companies, which serves to further our objective of attracting and retaining high-performing talent. Other than these change in control agreements, and as provided under the terms of the 2006 Stock Incentive Plan, we do not have any individual agreements with our NEOs that guarantee continued employment or that establish payments on termination of employment.

In December 2009, the Board adopted new change in control agreements with the following provisions:

 

(i)

a “double trigger” before any benefits are paid, meaning both a change in control and termination of employment need to occur before any benefits are paid;

 

(ii)

severance equal to two times base salary and short-term incentive awards for NEOs other than the CEO and three times base salary and short-term incentive awards for the CEO and the then Executive Chairman (see below for a change to Mr. House’s agreement implemented in 2012); and,

 

(iii)

employment protection for no more than two years following a change in control.

The corporation’s change in control agreement with Mr. House previously provided for a change in control payment of three times cash compensation, plus certain additional benefits for a period of three years following a termination of employment. With a view to aligning to market practice and the other NEOs, Mr. House’s change in control agreement was amended, in March 2012, to decrease his change in control payment from three times to two times cash compensation, and to reduce his entitlement to additional benefits from three years to two years.

In February 2010, Mr. House and Mr. Schroeder each entered into post-employment covenant agreements containing non-compete, non-solicitation, confidentiality, and related covenants. The change in control agreement for each of Mr. House and Mr. Schroeder was amended to incorporate these additional covenants as well. Following the termination of his employment with the corporation, Mr. Schroeder agreed under his Separation Agreement and Final Release to extend the term of various covenants and obligations under his existing post-employment covenant agreement.

Governance Policies and Related Items

Share Ownership Policy for Executive Officers

In January 2009, the Compensation Committee reviewed our share ownership guidelines for our officers to confirm they remained appropriate in light of market trends and best practices. The share ownership guidelines, which were established after consideration of data provided by Hewitt describing the stock ownership guidelines of Canadian retail (and other) companies and certain U.S. peer companies, were established and are maintained because we believe that share ownership further aligns the goals and interests of all of our officers, particularly our NEOs, with those of our shareholders. As indicated in the table below, the guidelines require our executives to accumulate and hold shares (including vested, but unexercised options) equal to a multiple of their base salaries. The guidelines also provide that disciplinary action may be taken in the event a NEO does not achieve compliance with the guidelines within four years from the date of hire.

 

Executive Level		Stock Ownership Guideline
President and CEO		4 x Base Salary
Executive Chairman		3 x Base Salary
Other Named Executive Officers		3 x Base Salary
Executive Vice Presidents/Senior Vice Presidents		1 x Base Salary
Vice Presidents		$80,000

 

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The stock ownership guidelines do not apply to officers who are within five years of a planned retirement as we do not currently impose “hold to” or “through” retirement under our guidelines. However, RSUs and options/SARs continue to vest in accordance with their normal vesting schedules, such that vesting of these awards does not accelerate upon retirement. Our share ownership guidelines also strictly prohibit our officers from entering into any transaction that would operate as a hedge against an officer’s share ownership position. Compliance with the guidelines is reviewed by the Compensation Committee annually.

In January 2012, the Committee reviewed the degree to which individuals have satisfied the applicable ownership guidelines as well as the applicable guideline for each executive level. As of the end of 2011, all of our NEOs were in compliance with our stock ownership guidelines. The following table indicates NEO holdings as compared to the share ownership guidelines.

 

(1)

Amounts are based on the average price for our common shares on the TSX over the 2011 calendar year ($45.99).

Risk-Taking Analysis

On an annual basis, or otherwise more frequently as circumstances require, the Compensation Committee considers whether our executive compensation programs create or incentivize any inappropriate risk-taking. Because annual performance-based incentives play a large role in our executive compensation programs, it is important that these incentives do not result in our NEOs taking actions that may conflict with the corporation’s long-term interests. No substantial changes occurred with respect to our compensation plans and programs during 2011 that impacted the Committee’s risk assessment in a significant way and, in January 2012, the Committee concluded that our compensation programs continue to be designed and administered with the appropriate balance of risk and reward in relation to our overall business strategies, and do not encourage executives to take unnecessary or excessive risks. In making this determination, the Committee considered the following key elements of our existing compensation programs.

Performance Objectives and Committee Review

In connection with the adoption of the annual target performance objectives for 2011 and 2012, the Committee considered the extent to which annual performance metrics as opposed to multi-year targets, could potentially incentivize unnecessary or inappropriate risk-taking or short-term decision-making. The Committee concluded that the absence of multiple-year performance objectives did not lead to the assumption of undue risk. The potential for short-term decisions to drive excessive compensation is limited because the performance awards are subject to “caps” or maximum amounts of compensation that can be received in the event the corporation’s performance exceeds established performance targets. This minimizes any incentive to enter into large transactions for the purpose of attempting to generate substantial short-term gains. In addition, consistent declines in budgeted target growth due to short-term decision-making also would be visible to the Committee and Board through the annual budget review and establishment of annual performance objectives. Therefore, short-term decisions resulting in increased compensation in the current year would impact the budget and performance objectives for the following year.

In addition, the Committee retains discretion to make adjustments to minimize the impact of extraordinary events or circumstances so that the compensation paid to executives more closely matches underlying operating performance. For example, in 2011 the Committee considered the net impact of the Separation Agreement with our former President and Chief Executive Officer, which included severance charges, advisory fees and other related costs and expenses, on

 

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compensation. The Committee made adjustments to minimize the net impact of these changes on compensation because the Committee believed it was appropriate to do so given the relative magnitude of the changes, the extraordinary nature of the agreement (which was unrelated to underlying operating performance), and the inability of executives to control the occurrence of the changes. The Committee’s ability to review the amount of performance awards and the underlying factors driving the amount of such awards prior to payment thereof, as was done in 2011, acts as another means by which risks inherent in the design of compensation plans are mitigated.

Also, as mentioned above, annual EBIT performance is the objective that determines incentive payments for our employees at-large (including our executive officers) and has been for a number of years. Over this time period, our financial performance has been strong, and the Committee has therefore concluded that EBIT has been an effective performance objective which has not led to imprudent management practices. This consistent approach reflects our commitment to discouraging inappropriate risk-taking at all levels within the organization.

Other Factors Mitigating Risk in Compensation Programs

In addition to the metrics selected for performance-based compensation, discussed above, the Committee believes that certain of our other tools and policies mitigate an incentive to take excessive risks by limiting the amount of benefit that could be obtained by executives through undue focus on short-term results and/or through excessive risk-taking. These tools and policies include:

 

•

the balance between short-and long-term incentives;

 

•

the vesting period which applies to long-term incentives (e.g., P+RSU awards do not vest for 30 months, so a gain in the short-term would not be immediately realizable);

 

•

an annual review of the corporation’s short-and long-term incentive plans and corresponding targets and milestones to assess continued relevance and applicability;

 

•

consideration of qualitative as well as quantitative performance factors in determining short-and long-term compensation payouts and in the setting of future compensation, including minimum and maximum performance thresholds; and, actual results are measured against pre-approved financial metrics that are clearly defined, directly linked to our financial performance, and capped at 150% of target value;

 

•

stock ownership policies;

 

•

an anti-hedging policy which prohibits the corporation’s executive officers from participating in speculative activity related to the corporation’s equity;

 

•

not accelerating the vesting of equity awards upon retirement;

 

•

recoupment or (“clawback”) policy that allows us to recover compensation paid on the basis of errors or misconduct;

 

•

the continued monitoring of internal pay equity to ensure a proper balance of risk and reward with lower-tier officers;

 

•

utilizing tally sheets to monitor trends and unusual impacts on compensation over a number of years; and

 

•

our equity award program has a “double trigger” prior to payout upon a change in control.

Recoupment or “Clawback” Policy

In February 2009, the Compensation Committee adopted the Recoupment Policy Relating to Performance-Based Compensation (“Recoupment Policy”). The Recoupment Policy provides that if our consolidated financial statements are required to be restated for any reason other than a change in accounting policy with retroactive effect, our Board of Directors will review all performance-based compensation awarded to or earned by our senior executives (and certain other employees) for all fiscal periods materially affected by the restatement, provided that the Recoupment Policy shall

 

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apply to all such compensation awarded or paid on or after February 19, 2009. If the Board determines that performance-based compensation was paid based on the achievement of financial results that were subsequently corrected as part of a restatement, and a lower incentive payment or award would have been made based on the restated financial results, then the Board will, to the extent permitted by applicable law, seek recoupment from those subject to the Recoupment Policy. Recoupment will be sought for the extent of such performance-based compensation as the Board deems appropriate, after a review of all relevant facts and circumstances.

Equity Grant and Settlement Policy

The Compensation Committee has adopted an equity grant and settlement policy to reflect best practices and confirm internal policies and procedures. This policy provides for, among other things, specific parameters that apply to all grants and settlements of equity compensation awards, as well as hedging activities undertaken by the corporation at the time of the award and/or settlement thereof. The general purpose of the policy is that no exercise price, settlement value, or grant-date value of any equity award made by the corporation and, that no entry into or settlement of hedging transactions in connection with such equity awards, is subject to, or at risk of, any manipulation by any director or member of management. This policy is also intended to avoid using a stock price for determination of equity grants or settlement amounts on a date when we are arguably in possession of material, undisclosed information that is not reflected in the market price of our common shares. Otherwise, grants would not be reflective of our intent to assign an appropriate value-based award. In furtherance of the policy, specific practices were adopted and must be followed when grants and settlements of equity-based awards are made and when hedging activities by the corporation are undertaken in connection therewith. In particular, the Committee believes that establishing fixed grant and settlement dates, as well as establishing hedging practices, in advance to the extent possible, will maintain the integrity of the award, settlement, and hedging process. Accordingly, grant and settlement dates of equity-based compensation awards to non-employee directors and employees are predetermined, as set forth in the policy, as are the dates of corresponding hedging activities. In addition, certain other administrative and internal control measures were confirmed as part of the adoption of the policy, including an override by the Committee if certain events or circumstances should occur or arise.

Tax Treatment of Certain Equity Compensation

Pursuant to the 2006 Stock Incentive Plan, the corporation currently awards equity-based incentive compensation to certain employees, including our NEOs, in the form of stock options with tandem SARs. The employee can exercise the stock option to receive common shares or exercise the SAR and receive a cash payment, in each case with the value dependent upon the price of our common shares at the time of exercise. In Canada, the cash payment upon exercise of the SAR is taxable income to the employee. Prior to 2010, Canadian tax rules permitted Canadian employees to claim a stock option deduction equal to 50% of this income inclusion and also permitted the Canadian employer to claim a tax deduction for the cash payments made. Changes to the applicable Canadian tax legislation in 2010 provided that either the Canadian employer or the Canadian employee may claim a deduction for cash payments arising on the exercise of the SAR feature, but not both. In each of 2010 and 2011, the corporation made annual elections to forgo its corporate tax deduction in Canada to enable Canadian employees to receive favorable tax treatment on an exercise of the SAR feature in those years.

Other Developments

As a foreign private issuer in the U.S., we are not required to disclose executive compensation according to the requirements of Regulation S-K that apply to U.S. domestic issuers, and we are otherwise not required to adhere to the U.S. requirements relative to certain other proxy disclosures and requirements. As described in the “Explanatory Notes Regarding the Content and Format of this Document” above in this proxy circular, our executive compensation and other proxy disclosures will be in compliance with Canadian requirements, which are, in most respects, substantially similar to the U.S. rules. We do generally attempt to comply with the spirit of the U.S. executive compensation and other proxy rules when possible and to the extent that they do not conflict, in whole or in part, with required Canadian corporate or securities requirements or disclosure, with the exception that we have determined to monitor and follow the development of say on pay practices in Canada and, therefore, we did not adopt the U.S. say on pay advisory vote on executive compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 

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Performance Graph

The following graph compares the corporation’s cumulative total shareholder return on the TSX and NYSE over the five years ended December 30, 2011 of the common shares of the corporation, against the cumulative total return of the S&P/TSX Composite Index, S&P/TSX Consumer Discretionary Index, and S&P 500 (assuming a $100 investment was made on December 29, 2006 and the reinvestment of dividends at the closing price on the dividend payment date). The information provided under the heading “Performance Graph” shall not be considered “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference in any filing under the Securities Act or the Exchange Act.

 

 

(1)

The majority of the corporation’s operations, income, revenues, expenses, and cash flows are in Canadian dollars, and the corporation reports financial results in Canadian dollars. As a result, our Canadian-dollar earnings per share may be translated to U.S. dollars by investors, analysts and others. Fluctuations in the foreign exchange rates between the U.S. and Canadian dollar can affect the corporation’s share price. See “Risk Factors” in Part 1A of our Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC on February 28, 2012, as amended by our Form 10-K/A to be filed on or about March 23, 2012. The primary cause of the appreciation in the U.S. dollar share price relative to the Canadian share price during 2007, 2009 and 2010 is the percentage by which Canadian dollar appreciated against the U.S. dollar as noted below. Conversely, in 2008 and 2011, the Canadian dollar depreciated relative to the U.S. dollar by the percentages set forth below causing the opposite effect, resulting in a decline in the U.S. dollar share price as a result of currency fluctuation that is not directly attributable to changes in the Company’s underlying business or financial condition aside from the impact of foreign exchange.

 

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Year		F/X Change Cdn.$ compared to US$
2007		+16%
2008		-23%
2009		+13%
2010		+5%
2011		-2%

 

(2)

Since September 29, 2006, the corporation has been included in the S&P/TSX Composite Index and the S&P/TSX Consumer Discretionary Index.

Named Executive Officer Compensation—Alignment to Corporate Performance (Pay-for-Performance Linkage)

Total Shareholder Return

As set forth in the graph above, in our last five fiscal years, the corporation’s share price on the TSX has increased 55.7% assuming the reinvestment of dividends. During this period, aggregate NEO compensation as reflected in the Summary Compensation Table has not significantly increased, ranging from between $10.2 million to $12.0 million (including the impact of the 2011 long-term incentive awards delivered in 2012 for Mr. House), which provides substantial support for our pay-for-performance philosophy. In 2008, the application of our pay-for-performance philosophy was also demonstrated as total compensation delivered to the NEOs was impacted by lower-than-target EAPP payouts (at 80% of target) and no P+RSU grant in 2009 due to not achieving the performance objectives set for 2008. This coincides with and aligns to the drop in cumulative total shareholder return value during 2008 outlined in the graph above. Over 2010 and 2011, our financial performance, after excluding certain significant events, was strong, which was reflected in the improvement of the corporation’s share price over this period. The majority of our performance-based compensation (EAPP payouts (75%) and P+RSUs (100%)) during this period was based on our operating income, or EBIT, performance. As such, we have provided below a comparison of aggregate NEO compensation to the corporation’s EBIT performance.

Operating Income (EBIT) Performance

The following graph compares aggregate annual compensation paid to our NEOs from fiscal 2007 to fiscal 2011 to actual EBIT as reported in our Form 10-K for the fiscal year ended January 1, 2012, under “Selected Financial Data”. As outlined on the graph, aggregate NEO compensation has remained relatively flat over this period while reported EBIT has steadily increased. The increase in EBIT in fiscal 2010 reflects the impact of the gain on the sale of our 50% joint venture interest in Maidstone Bakeries which was excluded from compensation determinations for our NEOs. During the past five years, Reported EBIT has increased by 23.9%, while aggregate NEO compensation as a percentage of reported EBIT, has remained relatively flat from 2.2% in 2007 to 2.1% in 2011. We believe that these results, coupled with the analysis discussed above with respect to total shareholder return, support that EBIT as a performance objective is effective in delivering compensation to our executives over time in a manner consistent with our pay-for-performance philosophy and in a manner that represents alignment with long-term shareholder value.

 

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(1)

NEO compensation is based on the NEOs for each applicable year. Aggregate NEO compensation includes base salary, short-term (annual cash) incentive, grant-date value of equity awards, and other compensation, as reported in the Summary Compensation Table and includes the impact of the 2011 long-term incentive awards delivered in 2012 to Mr. House. For comparison purposes, Mr. House has been included in the amounts even though he was not a NEO in 2010. Mr. Schroeder is included as a NEO in 2011; however, his severance payment and consulting fees have been excluded from Aggregate NEO Compensation.

 

(2)

Operating Income or EBIT as reported in our Form 10-K for the fiscal year ended January 1, 2012, under “Item 6. Selected Financial Data”.

 

(3)

Reported 2010 EBIT and resulting NEO Compensation as a % of EBIT reflect the gain on the sale of our 50% joint venture interest in Maidstone Bakeries, as well as other significant events that occurred in 2010. If we had eliminated the impact of these events, NEO Compensation as a % of EBIT would have been 2.0%.

 

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APPENDIX A

Reconciliation of Adjusted 2011 Operating Income Attributable to Tim Hortons Inc. and Adjusted 2011 Net Income Attributable to Tim Hortons Inc., Non-GAAP Financial Measures

Adjusted operating income (EBIT) attributable to Tim Hortons Inc. and adjusted Net Income attributable to Tim Hortons Inc. are non-GAAP measures used for compensation determinations (see table below). EBIT or operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests. Prior to the adoption of a new accounting standard at the beginning of the first quarter of 2010, operating income was, for the most part, unaffected by noncontrolling interests, which is not the case post-adoption. This new accounting standard requires the consolidation of variable interest entities of which we are considered to be the primary beneficiary and we believe should not be included in determining corporate performance for compensation purposes.

Adjusted operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests, as described above, and costs relating to the CEO separation. This includes severance charges, advisory fees, CEO search fees, and other related costs and expenses. These expenses were offset in part by a reduction in compensation expense because we no longer paid Mr. House as Executive Chairman after his appointment as President and CEO.

Adjusted Net Income attributable to Tim Hortons Inc. for compensation determinations excludes the impact of costs relating to the CEO separation on a tax-adjusted basis and a tax adjustment representing lower tax expenses and charges than originally budgeted. The exclusion of the tax adjustment had a negative (lower) impact on executive compensation.

Management believes that adjusted operating income attributable to Tim Hortons Inc. and adjusted Net Income attributable to Tim Hortons Inc. provide important information for comparison purposes to prior periods and for purposes of evaluating the corporation’s operating income performance without the effects of significant items, noted above, which have a disproportionate impact on the overall performance of our consolidated business.

These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. The corporation’s use of the terms adjusted operating income and adjusted net income for compensation determinations may differ from similar measures reported by other companies.

For compensation purposes, the adjusted measures more closely reflect our operating performance to which the corporation seeks to align executive compensation. That is, the adjusted measures remove what we consider to be disproportional impacts of unusual, non-operating transactions on the overall performance of our corporation’s business and, therefore, on executive compensation that is based on the corporation’s financial results.

Reconciliation of 2011 Adjusted Operating Income (EBIT) Attributable to Tim Hortons Inc.

and 2011 Adjusted Net Income Attributable to Tim Hortons Inc. (Non-GAAP Measures)

 

*

difference in total due to rounding.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

Summary Compensation Table

The following table lists all elements of compensation directly or indirectly awarded to, earned by, or paid or payable by the corporation to each NEO for the fiscal years ended 2011, 2010 and 2009.

 

Name and Principal Position		Year				Salary ($)(1)				Share- Based Awards ($)(2)				Option Based Awards ($)(3)				Non-Equity Incentive Plan Compensation ($)								Pension Value ($)(5)				All Other Compensation ($)(6)				Total Compensation ($)(7)
																		Annual Incentive Plans(4)				Long- Term Incentive Plans
Paul D. House Executive Chairman, President and Chief Executive Officer			2011				$583,069				$2,900,000				$              0				$645,107				$0				$16,407				$   153,595				$4,298,178
			2010				$373,071				$   200,000				$   175,000				$210,000				$0				$16,036				$     35,326				$1,009,433
			2009				$538,454				$   175,000				$   273,823				$500,000				$0				$15,714				$     33,119				$1,536,110
Cynthia J. Devine Chief Financial Officer			2011				$397,393				$   315,000				$   300,000				$526,500				$0				$16,407				$   126,724				$1,682,024
			2010				$381,802				$   315,000				$   206,541				$525,000				$0				$16,036				$   120,756				$1,565,135
			2009				$386,821				$   306,541				$   206,541				$500,000				$0				$15,714				$     93,488				$1,509,105
David F. Clanachan Chief Operations Officer, United States and International			2011				$397,393				$   262,500				$   250,000				$526,500				$0				$16,407				$   137,303				$1,590,103
			2010				$381,802				$   262,500				$   206,541				$525,000				$0				$16,036				$   155,128				$1,547,007
			2009				$386,821				$   306,541				$   206,541				$500,000				$0				$15,714				$   152,679				$1,568,296
William A. Moir Chief Brand and Marketing Officer			2011				$397,393				$   262,500				$   250,000				$526,500				$0				$16,407				$   123,401				$1,576,201
			2010				$381,802				$   262,500				$   206,541				$525,000				$0				$16,036				$   158,500				$1,550,379
			2009				$386,821				$   306,541				$   206,541				$500,000				$0				$15,714				$   157,199				$1,572,816
Roland M. Walton Chief Operations Officer, Canada			2011				$397,393				$   262,500				$   250,000				$526,500				$0				$16,407				$   128,548				$1,581,348
			2010				$381,802				$   262,500				$   206,541				$525,000				$0				$16,036				$   148,739				$1,540,618
			2009				$386,821				$   306,541				$   206,541				$500,000				$0				$15,714				$   157,056				$1,572,673
Donald B. Schroeder(8) Former President and Chief Executive Officer			2011				$380,540				$              0				$1,000,000				$           0				$0				$15,096				$5,842,731				$7,238,367
			2010				$646,144				$1,050,000				$   700,000				$945,000				$0				$16,036				$   229,364				$3,586,544
			2009				$649,029				$   700,000				$   483,500				$700,000				$0				$15,714				$   237,042				$2,785,285

(1)

Base salary for Mr. House in 2009 and 2010 reflect the continued transition of Executive Chair and CEO roles. For 2011, Mr. House’s base salary for his role as Executive Chairman was decreased to $300,000 but was subsequently increased to $750,000, reflecting his appointment to the additional roles of President and CEO effective May 24, 2011. Mr. House did not receive any additional compensation for his service as a director.

 

For 2011, the base salary for the other NEOs (excluding Mr. House and Mr. Schroeder) was increased to $400,000 from $383,500 as of March 1, 2011. Base salary paid in 2009 to the NEOs was higher than the base salary established for 2009 due to an extra week in fiscal year 2009.

 

Base salary for Mr. Schroeder includes base salary paid for the portion of the year he served as President and CEO ($278,457) and consulting fees paid to Mr. Schroeder in 2011 as part of his separation agreement ($102,083).

 

(2)

Amounts shown represent the grant-date fair value of P+RSU/RSUs. P+RSUs and RSUs are valued based on the closing price of our common shares on the TSX on the trading day immediately preceding the grant date. The 2011 amounts represent P+RSUs earned in respect of 2011 performance to be awarded in May 2012.

 

In February 2012, Mr. House received a P+RSU award of $1,050,000 and an RSU award of $800,000, both of which were earned in respect of 2011 performance and reflected the time he served in the role as President and CEO in 2011, as well as strong individual and corporate performance during 2011. As P+RSUs and RSUs are also forward-looking in nature, these February 2012 awards reflected Mr. House’s contribution as President and CEO since the time of his appointment in May 2011, which occurred just one week after the regular annual grant date of May 17, 2011. As previously described in the “Compensation Discussion and Analysis—NEO Compensation Determinations for 2011”, if Mr. House had been appointed as President and CEO prior to the grant date in 2011, the February 2012 awards would likely have been made on May 17, 2011, as was the case for the other NEOs and treated similarly (i.e., one-half reported as 2010 performance-based compensation and one-half reported as 2011 compensation). This treatment is consistent with the

 

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forward-looking nature of our long-term incentive awards (i.e., P+RSUs) and the Committee’s historical administrative practice that grant amounts reflect the amount of equity compensation established for the executive immediately prior to the grant date. Provided Mr. House continues his service with the corporation as of the May 2012 grant date, he will also receive a P+RSU award of $1,050,000, reflective of the forward-looking nature of the awards and the 2011 performance factor, for a total award of $2,900,000 for 2011. In addition, contingent on continued service, he is also eligible for an RSU award of $1,000,000 in May 2012 which will be reflected as 2012 compensation, consistent with how stock options are reported for the other NEOs.

 

Mr. Moir received a P+RSU award in May 2011 of $216,868 and an additional P+RSU award in August 2011 of $45,632, both of which were earned in respect of 2010 performance, for a total P+RSU award for the 2010 performance year of $262,500.

 

Amounts shown for 2009 for the NEOs (other than Mr. House and Mr. Schroeder) also include a special performance award of RSUs valued at $100,000.

 

Accounting Treatment: The period over which the P+RSUs are expensed differs depending upon whether the grantee is retirement-eligible. If the grantee is retirement-eligible, then the expense period is shorter than for P+RSUs held by grantees that are not retirement-eligible. That is, the accounting expense for P+RSUs is determined by spreading the compensation award value set forth in the table above equally over the number of months in the period starting from the date the performance target is set for a particular award (in February) through either (i) the date of grant (May of the following year) for retirement-eligible participants—a total of 15 months; or, (ii) the end of the 30-month vesting period for those participants that are not retirement eligible—a total of 45 months. We do not have accelerated vesting of awards upon retirement; however, the accounting rules require that P+RSUs be fully expensed on the date of grant for retirement-eligible participants because they have satisfied all performance conditions and are subject only to vesting restrictions.

 

(3)	Amounts shown represent the grant-date fair value of stock options with tandem SARs. For compensation purposes, the number of options/SARs granted was determined using a Black-Scholes valuation methodology with the following variables:

 

		2011				2010				2009
Maturity Date or Term			7 years				7 years				7 years
Risk-free Interest Rate			2.82%				3.02%				2.36%
Expected Dividends		$	0.68			$	0.52			$	0.40
Share Price Volatility			25.67%				23.37%				24.99%
Black-Scholes Value		$	11.23			$	8.18			$	6.13

 

The following exercise prices were used to determine the number of options/SARs awarded based on the intended compensation value: $45.76 (2011); $35.23 (2010); and $28.87 (2009). The option/SAR granted to Mr. Moir on August 16, 2011 was based on an exercise price of $45.84 and a black-scholes value of $10.06 (maturity date or term: 7 years; risk-free interest rate: 2.5%; expected dividends: $0.68; and share price volatility: 23.25%). To determine the number of option/SARs, we reduce the intended compensation value (the numerator) by a factor that considers the impact of vesting and other plan design features that are also considered in the calculation of the Black-Scholes value (the denominator). The Committee chose the Black-Scholes valuation methodology for determining the appropriate number of options/SARs to grant based on the intended compensation value because it is a long-standing and common valuation methodology used by public companies. As such, its use facilitates benchmarking studies intended to yield market comparisons, making it equitable to both the corporation and our executives.

 

Accounting Treatment: The grant-date fair value determined for compensation purposes will differ from the accounting fair value disclosed in our financial statements. The main difference for options/SARs grants is the use of a shorter maturity date or term for accounting purposes, which also impacts variables such as the risk-free interest rate and share price volatility for accounting purposes. Further, we determine the compensation expense associated with options/SARs based on different Black Scholes values for retirement-eligible and non-retirement-eligible participants due to the much shorter term, for accounting purposes, for retirement-eligible participants and the resulting impact on the Black Scholes value. The grant date accounting value for grants of options with tandem SARs was based on the following Black-Scholes values by year for retirement-eligible NEOs (Messrs. Moir and Schroeder) and non-retirement-eligible NEOs, respectively: $7.62 ($6.21 for

 

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the additional August grant for Mr. Moir) and $8.87 (2011); $6.04 and $7.49 (2010); and $5.01 and $6.28 (2009). As such, the accounting value of the option/SAR awards granted to the NEOs, retirement-eligible and non-retirement-eligible, respectively, on an aggregate basis, were as follows for each year: $803,910 and $600,774 (2011); $611,133 and $517,978 (2010); and $514,898 and $579,556 (2009).

 

(4)

Non-equity incentive plan compensation reflects annual cash incentive compensation earned by each NEO under the EAPP. The annual incentive compensation awarded to Mr. House for 2011 was prorated for the portion of time he served as President and CEO in 2011. Under the EAPP, the NEOs may earn annual cash awards based on their achievement of pre-established annual performance objectives. These objectives may include a variety of financial performance metrics for our corporation as a whole or for an operating unit, including: (i) earnings per share, (ii) Net Income or earnings (which may be expressed as earnings before specified items), (iii) return on assets, (iv) return on invested capital, (v) revenue, (vi) operating income (EBIT), (vii) cash flow, (viii) total shareholder return, and (ix) any combination of these measures. Performance objectives may be absolute, or relative to prior performance or to the performance of one or more other companies or external indices, and may be expressed as a progression within a specified range. For 2009, 2010 and 2011, these performance objectives included operating income or EBIT (as to 75% of the award), and Net Income (as to 25% of the award). In 2011, the payout curve was changed to a linear (formulaic) scale from a step scale to better match corporate performance with the final payout. The payouts for 2011 were at 105.3% of target, compared with 105% of target in 2010 and 100% of target in 2009. For details on 2011 EBIT and Net Income, and the adjustments made prior to the determination of payouts under the EAPP, refer to the CD&A section of this proxy circular.

 

(5)

These amounts represent employer contributions to the company-wide defined contribution pension plan (refer to the “Defined Contribution Plans Table” below). No above-market or preferential earnings on non-qualified deferred contribution plans were paid or credited in 2011, 2010 or 2009. We do not maintain or otherwise contribute to any defined benefit or other actuarial plans.

 

(6)	The amounts shown in this column are comprised of the items listed in the table below. All of these items are treated as taxable benefits to the executive officer with the exception of the executive medical benefit.

 

		Year		Company Car		Life Insurance Coverage		Executive Medical		Contributions to Savings Plan		Service Awards		DERs on RSUs/ P+RSUs		Other		Total
Paul D. House		2011		$20,405		$1,215		$       0		$           0		$       0		$  5,669		$   126,306		$   153,595
		2010		$20,919		$1,215		$1,595		$           0		$4,772		$  6,825		$              0		$     35,326
		2009		$19,586		$1,267		$1,840		$           0		$       0		$10,427		$              0		$     33,119
Cynthia J. Devine		2011		$20,356		$2,657		$1,595		$  94,280		$       0		$  7,836		$              0		$   126,724
		2010		$21,035		$2,657		$1,890		$  89,781		$       0		$  5,393		$              0		$   120,756
		2009		$22,061		$2,773		$1,545		$  62,968		$       0		$  4,141		$              0		$     93,488
David F. Clanachan		2011		$19,376		$2,657		$       0		$  94,280		$       0		$  7,249		$     13,741		$   137,303
		2010		$18,107		$2,657		$       0		$116,235		$       0		$  5,393		$     12,736		$   155,128
		2009		$17,476		$2,773		$1,875		$125,914		$       0		$  4,141		$          500		$   152,679
William A. Moir		2011		$17,458		$2,657		$1,928		$  94,280		$       0		$  7,078		$              0		$   123,401
		2010		$29,957		$2,657		$1,595		$116,235		$2,663		$  5,393		$              0		$   158,500
		2009		$22,306		$2,773		$2,065		$125,914		$       0		$  4,141		$              0		$   157,199
Roland M. Walton		2011		$22,434		$2,657		$1,928		$  94,280		$       0		$  7,249		$              0		$   128,548
		2010		$21,974		$2,657		$2,480		$116,235		$       0		$  5,393		$              0		$   148,739
		2009		$22,458		$2,773		$1,770		$125,914		$       0		$  4,141		$              0		$   157,056
Donald B. Schroeder		2011		$17,232		$1,167		$1,595		$           0		$       0		$25,476		$5,797,261		$5,842,731
		2010		$24,524		$2,657		$       0		$185,886		$2,663		$13,634		$              0		$   229,364
		2009		$22,977		$2,773		$1,840		$201,911		$       0		$  7,541		$              0		$   237,042

 

The values for the company car were determined on the basis of aggregate incremental costs of the lease payment, gas costs, and maintenance costs for the vehicle. Executive medical costs are the actual costs to us of executive medical assessments performed and paid for by us. The value associated with DERs on unvested RSUs and P+RSUs on the payment date is

 

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included in “All Other Compensation” and not included in the grant-date fair value associated with the underlying P+RSU award set forth in the “Share-Based Awards” column of the Summary Compensation Table.

 

Amounts in the “Other” column above include the following: Mr. House: $113,338 received as a cash payment in lieu of a corporate contribution to the Executive Retirement Savings Plan for the portion of the year he served as President and CEO; and transportation costs of $12,968 (inclusive of tax costs) commencing in May 2011 to facilitate Mr. House’s immediate appointment and his continued service to the corporation as President and CEO. This amount reflects allocated costs of the corporation’s employee that provides executive and other transportation services for the corporation and the variable costs associated with the corporation’s vehicle; Mr. Clanachan: $13,741 in 2011, $12,736 in 2010, and $500 in 2009 for tax preparation (grossed-up amounts as Mr. Clanachan is required to work in the U.S. and obligated to file U.S. tax returns, and therefore the corporation does not require Mr. Clanachan to be responsible for the costs associated with his tax return preparation); and, Mr. Schroeder: $5,750,000 as part of his separation agreement, which includes (i) a lump sum payment of $2,250,000 and (ii) $3,500,000 payable in 24 monthly installments of $145,833 each; $42,827 as a taxable benefit for transferring ownership of the corporate-owned vehicle that was in Mr. Schroeder’s possession; and $4,433 in expenses as part of Mr. Schroeder’s consulting arrangement (consulting fees have been reported in the “Salary” column of the Summary Compensation Table).

 

In 2011, the corporation changed the method for measuring the benefit associated with guests flying with executives for business purposes to reflect that there is no incremental cost to the company when the primary purpose of the trip is business-related. As a result of the policy change, there is no reported value for the personal use of the aircraft for any executive during the prior 3 years. The corporation does not pay its NEOs any amounts in respect of taxes (grossed-up amounts) on income imputed to them for non-business aircraft usage. Over the past three years, there has been very limited personal use of the aircraft and only in connection with business use.

 

(7)

CEO Compensation: The increase in Mr. House’s total compensation in 2011 resulted from his appointment as President and CEO upon Mr. Schroeder’s departure including the impact of the 2011 long-term incentive awards delivered in 2012 for Mr. House. After assuming the position of President and CEO, Mr. House became accountable for the performance of the corporation’s financial and business goals and objectives along with the remainder of the executive team. For additional commentary regarding the compensation of Mr. House, see “Compensation Discussion and Analysis—NEO Compensation Determinations for 2011”.

 

Other NEO Compensation: In 2011, compensation for the NEOs increased primarily as a result of the 2010 study. Total compensation in 2010 remained relatively flat or decreased slightly for most NEOs. Although there were increased payouts under the EAPP and P+RSU programs in 2010, for most NEOs (other than the CEO and CFO), the increases were less than the values of the special performance award of RSUs made in 2009.

 

(8)	Effective as of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. Mr. Schroeder did not receive any additional compensation for his service as a director during his tenure as President and CEO.

 

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Incentive Plan Awards

Outstanding Share-Based Awards and Option-Based Awards

The following table lists all option-based or share-based awards outstanding as of January 1, 2012 that have been made to the NEOs of the corporation.

 

						Option-Based Awards																Share-Based Awards(6)
Name		Grant Date				Number of securities underlying unexercised Options (#)(1)				Option exercise price ($)(2)				Option expiration date				Value of unexercised in-the-money Options ($)(3)				Number of shares or units of shares that have not vested  (#)(4)				Market or payout value of share- based awards that  have not vested ($)(5)
Paul D. House			May 17, 2011				n/a				n/a				n/a				n/a				4,419				$    218,109
			May 18, 2010				19,532				$35.23				May 15, 2017				$   275,987				5,093				$    251,414
			May 15, 2009				40,783				$28.87				May 15, 2016				$   835,644				No grant				No grant
			May 15, 2008				39,393				$33.02				May 15, 2015				$   643,682				—				—
			Total				99,708												$1,755,312				9,512				$    469,523
Cynthia J. Devine			May 17, 2011				25,399				$45.76				May 15, 2018				$     91,436				6,960				$    343,534
			May 18, 2010				23,052				$35.23				May 15, 2017				$   325,725				6,011				$    296,716
			May 15, 2009				30,762				$28.87				May 15, 2016				$   630,313				No grant				No grant
			May 15, 2008				20,189				$33.02				May 15, 2015				$   329,888				—				—
			Total				99,402												$1,377,363				12,971				$    640,251
David F. Clanachan			May 17, 2011				21,166				$45.76				May 15, 2018				$     76,198				5,800				$    286,287
			May 18, 2010				23,052				$35.23				May 15, 2017				$   325,725				6,011				$    296,716
			May 15, 2009				30,762				$28.87				May 15, 2016				$   630,313				No grant				No grant
			May 15, 2008				20,189				$33.02				May 15, 2015				$   329,888				—				—
			Total				95,169												$1,362,124				11,811				$    583,003
William A. Moir			Aug 16, 2011				4,107				$45.84				May 15, 2018				$     14,457				1,002				$      49,465
			May 17, 2011				17,487				$45.76				May 15, 2018				$     62,953				4,792				$    236,526
			May 18, 2010				23,052				$35.23				May 15, 2017				$   325,725				6,011				$    296,716
			May 15, 2009				30,762				$28.87				May 15, 2016				$   630,313				No grant				No grant
			May 15, 2008				20,189				$33.02				May 15, 2015				$   329,888				—				—
			Total				95,597												$1,363,336				11,805				$    582,708
Roland M. Walton			May 17, 2011				21,166				$45.76				May 15, 2018				$     76,198				5,800				$    286,287
			May 18, 2010				23,052				$35.23				May 15, 2017				$   325,725				6,011				$    296,716
			May 15, 2009				30,762				$28.87				May 15, 2016				$   630,313				No grant				No grant
			May 15, 2008				20,189				$33.02				May 15, 2015				$   329,888				—				—
			Total				95,169												$1,362,124				11,811				$    583,003
Donald B. Schroeder			May 17, 2011				84,666				$45.76				May 15, 2018				$   304,798				23,201				$  1,145,198
			May 18, 2010				78,129				$35.23				May 15, 2017				$1,103,963				20,375				$  1,005,708
			May 15, 2009				24,004				$28.87				May 15, 2016				$   491,842				No grant				No grant
			Total				186,799												$1,900,602				43,576				$  2,150,906

 

(1)

Represents the number of outstanding options/SARs granted to the NEOs since 2008. The options/SARs vest in equal installments on the first, second, and third anniversaries of the grant date and expire on the seventh anniversary of the grant date, absent death, disability, retirement or termination. In March 2009, the Committee reviewed the practice of including a tax premium assumption in the Black-Scholes methodology for valuing options/SARs and determined to discontinue the

 

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practice, which resulted in a lower Black-Scholes value. As a result, because the calculation of the number of options/SARs involved dividing the intended compensation value by the Black-Scholes value, approximately 40% more options/SARs were granted in 2009 than if the tax premium assumption had continued to be applied.

 

(2)

For grants made in 2009 and 2008, the exercise price is the mean of the high and low stock price of our common shares on the TSX (the “fair market value” as defined under the 2006 Stock Incentive Plan) on the date of grant. In October 2009, the exercise price of options/SARs granted became the closing price of our common shares as reported on the TSX for the trading day immediately preceding the grant date (also “fair market value” under the 2006 Stock Incentive Plan).

 

(3)	The value of unexercised in-the-money options is equal to the difference between the exercise price and the closing price of our common shares on the TSX on December 30, 2011 of $49.36.

 

(4)

Represents the number of P+RSUs and/or RSUs granted to the NEOs that had not vested as of January 1, 2012, plus unvested dividend equivalent rights (“DERs”). Each NEO automatically accumulates additional RSUs on outstanding RSUs each time we pay a dividend on our common shares to shareholders. In 2011, dividends were declared quarterly at a rate of $0.17 per share (or per RSU). These additional RSUs vest at the same time as the underlying RSUs to which they relate. The value of these DERs is set forth in the Components of All Other Compensation Table in Note (6) to the Summary Compensation Table. DERs do not accrue until after the performance condition is satisfied and the P+RSUs are granted (as RSUs).

 

P+RSUs, based on the financial results of the prior completed fiscal year, were not granted in May 2009 as the 2008 EBIT performance target was not met.

 

(5)	The market or payout value of share-based awards is based on the closing price of our common shares on the TSX on December 30, 2011 of $49.36.

 

(6)	The NEOs currently do not have any vested share-based awards that have not been paid out or distributed.

Incentive Plan Awards—Value Vested or Earned During the Year

The following table lists, with respect to each NEO, the value of all option-based and share-based awards that have vested, and all non-equity incentive plan compensation earned, during the fiscal year ended January 1, 2012.

 

(1)

Represents the total value of options/SARs that vested in 2011 based on the closing price of our common shares on the TSX on the business day immediately preceding the vesting date (May 13, 2011) of $46.40. Only one-third of the options/SARs granted on May 18, 2010 and two-thirds of the options/SARs granted on May 15, 2009, have vested. None of the options/SARs granted in 2011 had vested as of January 1, 2012. No options/SARs have been exercised by the NEOs, except Mr. Schroeder, since the adoption of options/SARs in 2008. Based on the December 30, 2011 closing share price on the TSX of $49.36, the value of option-based awards that vested in 2011 was $1,117,301 and $585,151 for Mr. Schroeder and Mr. House, respectively, and $428,664 for the other NEOs.

 

(2)

Consists of the special performance award of RSUs made in March 2010, of which 50% vested in May 2010 and the remaining 50% vested in May 2011 at a settlement price of $45.76. The NEOs did not have any other RSUs vest in 2011 as the 2008 EBIT performance objective was not satisfied under the P+RSU program and therefore no P+RSU grant was made in May 2009.

 

(3)

Represents the total value of annual cash incentive awards under the EAPP for 2011 at a payout of 105.3%. These amounts are also reported in the Summary Compensation Table.

 

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Defined Contribution Plans Table

The table below shows the accumulated value at the beginning and end of the fiscal year ended January 1, 2012 for each NEO participating in the corporation’s defined contribution pension plan (“DCPP”). Contributions for the personal supplemental executive retirement savings plan, the “Savings Plan,” are not included in this table, but are described below and reported in the Summary Compensation Table under the heading “All Other Compensation”.

 

(1)

Represents contributions made by the corporation to each NEO’s account under the DCPP during 2011.

 

(2)

Represents actual accumulated value of company and employee contributions and gains/losses from investments as of January 1, 2012.

 

(3)

As of May 24, 2011, Mr. Schroeder was no longer a participant in the DCPP.

For additional information on the DCPP, see “Compensation Discussion and Analysis—Retirement Benefits”.

Personal Supplemental Executive Retirement Savings Plan

As described in the “Compensation Discussion and Analysis—Retirement Benefits” section, effective January 1, 2009, our Board approved the Personal Supplemental Executive Retirement Savings Plan (“Savings Plan”) for our NEOs. After each plan year we contribute to the Savings Plan an amount (expressed as a percentage of base salary and annual cash bonus received by a participant during the year) for each participant who was actively employed by us on December 31 and was less than 69 years old. The participants in the Savings Plan are not permitted to make contributions to the plan. All NEOs in the Savings Plan are fully vested. Contributions made by the corporation to the NEOs’ accounts under the Savings Plan are directed to a vested account, and the amounts held in such accounts will be invested in permitted investments at the direction of the respective participant.

The table below shows the accumulated value at the beginning and end of the fiscal year ended January 1, 2012 for each NEO participating in the Savings Plan.

 

(1)

Represents contributions made during 2011 by the corporation to each NEO’s account under the Savings Plan. Actual contributions made to the Savings Plan, as reflected in this column, were net of required withholding taxes that are the responsibility of each NEO unless directed to an RRSP. These contributions (on a gross basis) have been included in the Summary Compensation Table under the heading “All Other Compensation” for the year in which the compensation was earned.

 

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(2)

Represents actual accumulated value of company contributions net of all required tax withholdings and gains/losses from investments, as of January 1, 2012.

 

(3)

Mr. House is not a participant in the Savings Plan. He received a cash equivalent payment of $113,338 in February 2012 in lieu of a contribution to the Savings Plan.

 

(4)

As of May 24, 2011, Mr. Schroeder was no longer a participant in the Savings Plan.

General Description of the Tim Hortons 2006 Stock Incentive Plan

The 2006 Stock Incentive Plan is an omnibus plan that is designed to allow us to compensate employees in a variety of ways through a broad range of equity-based awards. The 2006 Stock Incentive Plan authorizes the issuance of up to 2,900,000 common shares (or 1.5% of our issued and outstanding common shares at inception of the 2006 Stock Incentive Plan) pursuant to awards of restricted stock, stock units, stock options, stock appreciation rights, performance shares, performance units, dividend equivalent rights, and share awards. As of January 1, 2012, there were outstanding equity awards covering 1,487,757 common shares, which represent less than 1% of our issued and outstanding common shares on that date. The 2006 Stock Incentive Plan provides that the maximum number of common shares for which awards may be granted to any participant in any calendar year may not exceed 250,000 for performance shares and 250,000 for options and stock appreciation rights, collectively. The value of performance units that any participant may receive in any year may not exceed U.S.$4,000,000. There are no comparable limits applicable to RSU (including P+RSU) grants. The 2006 Stock Incentive Plan provides that the number of shares issuable to all insiders (as defined in the TSX Company Manual), on an aggregate basis, at any time under all security-based compensation arrangements, may not exceed 10% of our issued and outstanding common shares.

The corporation’s practice has been to deliver common shares purchased through the facilities of the TSX to grantees upon the exercise of their equity awards, which does not have a dilutive effect on shareholders. Since the public company reorganization in 2009, no common shares have been issued from treasury to settle equity awards issued under the 2006 Stock Incentive Plan. Should the corporation alter its current practice such that common shares are issued from treasury upon a grantee’s exercise or settlement of outstanding equity awards issued under the 2006 Stock Incentive Plan, then a maximum of 2,147,703 common shares (representing 1.37% of our issued and outstanding common shares as at March 13, 2012) may be issued in the future, of which 1,453,496 common shares (representing 0.93% of our issued and outstanding common shares as at March 13, 2012) may be issued pursuant to currently outstanding equity awards.

Under the 2006 Stock Incentive Plan, awards that are subject to vesting or performance conditions are not transferable until they have vested or until the performance conditions have been satisfied, as applicable; however, they become fully vested upon the grantee’s death or disability (as defined under the 2006 Stock Incentive Plan). Furthermore, options/SARs are not transferable and are only exercisable by the grantee during his or her lifetime or by his or her estate or legal representative following the death or disability of the grantee, unless otherwise provided for in a separate agreement or at the determination of the Compensation Committee. Except in the case of the retirement, death or disability of a grantee, or upon termination of a grantee’s employment in connection with the sale of a subsidiary, unvested awards will be immediately forfeited and any vested options/SARs will be exercisable for 90 days following termination, subject to extension until the next trading window during which the grantee could trade in our securities, if the expiration of the 90-day period occurs outside of a trading window.

Refer to “Proposal 4—Approval of Tim Hortons Inc. 2012 Stock Incentive Plan” for a description of the new 2012 Stock Incentive Plan being recommended by our Board for approval by shareholders. If approved by shareholders at the meeting, then the 2012 Stock Incentive Plan will be effective as of, and govern awards granted following, the date that shareholder approval is obtained. The terms of the 2006 Stock Incentive Plan will continue to govern awards granted prior to the effective date of the 2012 Stock Incentive Plan.

 

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Equity Compensation Plan Information

The following table sets forth, as of the end of the corporation’s last fiscal year: (a) the number of securities that could be issued upon exercise of all outstanding options/SARs and vesting of all outstanding RSUs under the corporation’s equity compensation plans, (b) the weighted average exercise price of outstanding options/SARs under such plans, and (c) the number of securities remaining available for future issuance under such plans, excluding securities that could be issued upon the exercise of outstanding options/SARs or the settlement of outstanding RSUs.

Equity Compensation Plan Information

 

(1)

Awards issuable under the 2006 Stock Incentive Plan included in the 1,487,757 total number of securities in column (a) above are approximately 305,674 RSUs (including RSUs issued as a result of P+RSUs) and DERs associated with the RSUs, all subject to vesting requirements, and 1,182,083 stock options and related SARs. Of the 1,182,083 options/SARs outstanding at January 1, 2012, 408,208 were exercisable as of that date due to vesting requirements having been satisfied.

 

(2)

The average exercise price in this column is based only on stock options and related SARs because RSUs (including P+RSUs) have no “exercise price” required to be paid by the recipient upon vesting and settlement. Under the corporation’s equity grant and settlement policy, the exercise price of options/SARs is equal to the market price for such securities as of the grant date (set as the closing price of our common shares on the TSX on the business day immediately preceding the grant date). Although there is no purchase price for RSUs, the number of RSUs awarded is also determined based on the grant-date market value, as determined under the equity grant and settlement policy.

Refer to “Proposal 4—Approval of Tim Hortons Inc. 2012 Stock Incentive Plan” for a description of the new 2012 Stock Incentive Plan being recommended by our Board for approval by shareholders.

Before making annual equity awards, the Compensation Committee considers the impact of the new awards on such factors as dilution and overhang, as well as the burn rate of annual grants against the number of total common shares outstanding. As set forth in the table below, management considers that the corporation’s dilution, overhang, and burn rates are low by industry standards.

 

Equity Award Factor		% as of January 1, 2012
Dilution—total number of equity awards outstanding divided by the total number of common shares outstanding		0.94%
Overhang—total number of equity awards available to grant plus equity awards outstanding, divided by total number of common shares outstanding		1.36%
Burn Rate—number of equity awards issued in 2011, divided by the total number of common shares outstanding		0.32%

 

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The corporation has entered into award agreements in connection with each of its RSUs (including P+RSUs) and option/SAR awards. The corporation may amend the terms of these arrangements, and the corporation may amend the terms of the 2006 Stock Incentive Plan (except as may otherwise be provided by applicable tax and regulatory requirements, including stock exchange requirements), as the Board sees fit without shareholder approval; provided, however that the following amendments to the 2006 Stock Incentive Plan or outstanding equity awards would require the approval of both the Board and the corporation’s shareholders as described in Section 22 of the 2006 Stock Incentive Plan: (i) an increase in the maximum number of common shares that may be made the subject of awards under the plan, including option-based awards; (ii) any adjustment (other than in connection with a stock dividend, recapitalization or other transaction where an adjustment is permitted or required under the terms of the 2006 Stock Incentive Plan) or amendment that reduces or would have the effect of reducing the exercise price of an option or SAR previously granted under the 2006 Stock Incentive Plan, whether through amendment, cancellation or replacement grants, or other means; (iii) an increase in the express limits on certain awards that may be made to participants under the 2006 Stock Incentive Plan; and, (iv) an extension of the term of an outstanding option or SAR beyond the expiration date thereof, except as expressly set forth in the 2006 Stock Incentive Plan for certain awards that expire outside of an established trading window. In addition to the foregoing, no change to an outstanding award under the 2006 Stock Incentive Plan that will impair the rights of the grantee may be made without the consent of the grantee. No amendments to security-based arrangements were entered into with any NEO during 2011. The amendment provisions in the proposed 2012 Stock Incentive Plan differ from those set forth in the 2006 Stock Incentive Plan, as described above.

Termination and Change in Control Benefits

As described under “Compensation Discussion and Analysis—Written Change in Control (Employment) Agreements and Post-Employment Covenants”, other than the change in control agreements with our NEOs and the Separation Agreement and Final Release with Mr. Schroeder (discussed below), we do not have any employment or other agreements or arrangements that provide for payments to be made to the officers following a termination of employment, and we do not have a formal severance policy for the NEOs. However, the NEOs will receive certain benefits under our compensation plans and programs upon termination of employment, including in connection with a change in control, as described below. We would also be required to pay severance in accordance with applicable law upon termination of a NEO’s employment without cause.

Former President and CEO – Mr. Donald B. Schroeder

As of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. In May 2011, following a further succession planning review, a subsequent transitional arrangement could not be reached and the corporation entered into a separation agreement with Mr. Schroeder. The corporation and Mr. Schroeder entered into a Separation Agreement and Final Release (the “Separation Agreement”) on June 2, 2011, effective May 31, 2011. The Separation Agreement provides Mr. Schroeder with severance of up to $5.75 million, consisting of: (i) a lump sum payment of $2.25 million, payable within three weeks of the effective date of termination; and (ii) up to $3.5 million, payable in equal monthly installments over 24 months. In addition, under the agreement, Mr. Schroeder has agreed to provide consulting services to the corporation for a period of two years in exchange for the payment of $175,000 per year, payable in equal monthly installments. As of the date of Mr. Schroeder’s departure from the corporation, Mr. Schroeder was retirement-eligible under the 2006 Stock Incentive Plan. As a result, all of Mr. Schroeder’s outstanding, unvested P+RSUs and options/SARs will continue to vest in accordance with the original vesting schedule. Mr. Schroeder is also fully vested in the DCPP and the Savings Plan. In addition to the foregoing, Mr. Schroeder will be entitled to certain health and dental benefits until June 1, 2013. Mr. Schroeder has also agreed to various covenants under the Separation Agreement for the benefit of the corporation, including covenants relating to co-operation and confidentiality. He has also agreed to extend the term of various covenants and obligations under his existing post-employment covenant agreement, which include non-competition, non-solicitation, non-disparagement and others.

 

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2006 Stock Incentive Plan

The 2006 Stock Incentive Plan contains provisions concerning the treatment of awards upon termination of employment, including a change in control, which apply unless the Compensation Committee determines otherwise in a separate agreement with the NEO. These provisions are as follows:

 

(1)

The definition of “change in control” in the 2006 Stock Incentive Plan is substantially the same as in our change in control agreements (for details, refer to “Applicable Definitions and Certain Implications” later in this section).

Refer to “Proposal 4—Approval of Tim Hortons Inc. 2012 Stock Incentive Plan” for a description of the new 2012 Stock Incentive Plan being recommended by our Board for approval by shareholders.

 

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EAPP

Under the EAPP, absent a change in control (see below), annual cash incentives are not payable unless the NEO is employed by us on the date that the payment is made (usually in February of each year). However, subject to the Compensation Committee’s discretion, if the executive officer’s employment is terminated by reason of death, disability, or retirement after the executive reaches the age of 60 with ten years of continuous service with us prior to the end of the year for which the incentive is to be paid, he or she may be entitled to a pro rata portion (or 100%, if termination occurs after the end of the year) of the cash incentive otherwise payable for that year, when paid.

The EAPP provides that, upon the occurrence of a change in control of our corporation, the cash incentive payable to each NEO in the year of the change in control will be the greatest of: (i) the cash incentive payment received by the executive officer in the fiscal year prior to the year in which the change in control occurs, (ii) the cash incentive that would be payable in the year of the change in control assuming that the target level of performance was obtained, and (iii) the cash incentive that would be payable in the year of the change in control based on our corporation’s actual performance for that year through the date of the change in control. The definition of “change in control” in the EAPP (see below) is substantially the same as in our change in control agreements. For executive officers whose employment is terminated without cause or by the officer for good reason in connection with a change in control, the cash incentives under the EAPP will be paid as if they had remained employed through the usual payment date under the EAPP. The definitions of “cause” and “good reason” in the EAPP are similar to those in our change in control agreements. Any payments made under the EAPP as a result of a change in control will reduce the amount payable under the NEO’s change in control agreement as short-term incentive compensation for the year in which termination occurs.

The Compensation Committee believes the approach to setting minimum guaranteed EAPP payments in the event of a change in control (as described above) is appropriate because change in control transactions can result in increased costs to us, which might adversely affect our financial results and thus the awards that would otherwise be payable to the officers under the EAPP, regardless of our business performance. The Committee believes that such factors should not adversely affect cash incentive payments to be paid in the year of the change in control. See “EAPP Payout” in Note (1) to the Payments Following a Termination of Employment table below for quantification of these payments, which will be the same as those provided under the change in control agreements (but not duplicated) in the year in which termination occurs.

Personal Supplemental Executive Retirement Savings Plan

Absent a change in control and the occurrence of certain other events, distributions under the Savings Plan may be made after vested participants retire from employment after: (i) having attained age 60 and completed at least ten years of service, or (ii) having attained age 65. Participants are also entitled to receive distributions under the plan (after vesting requirements have been met) if: (i) their employment is terminated for any reason, (ii) they die or become disabled, (iii) they are terminated after a change in control, or (iv) other circumstances designated by the Compensation Committee have occurred. Under the Savings Plan, participants become 100% vested in benefits accrued to them if there is a “change in control”, which is defined somewhat differently in the Savings Plan than under the change in control agreements. However, similar to the change in control agreements, payments under the Savings Plan are not triggered unless an executive’s employment is terminated following a change in control (i.e., a “double trigger”). Additionally, under both the EAPP and the Savings Plan, if a NEO’s employment is terminated without cause prior to a change in control but the executive officer can reasonably demonstrate that the termination: (i) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a change in control, or (ii) otherwise arose in connection with, or in anticipation of, a change in control, the termination will be treated as if it occurred after a change in control, if a change in control actually occurs.

Under the Savings Plan, a change in control means:

 

•

the direct or indirect acquisition of a majority of the voting shares of our corporation or our subsidiary, The TDL Group Corp. (“TDL”), by an unaffiliated entity;

 

•

the merger or amalgamation of our corporation or TDL into an unaffiliated entity, the effect of which is that a majority of the voting shares of our corporation or TDL are acquired, directly or indirectly, by an unaffiliated entity;

 

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•

the acquisition of all or substantially all of the assets of our corporation or TDL by an unaffiliated entity; or

 

•

with respect to any participant who is and continues to be employed by a person other than our corporation or TDL, such employer ceases to be an affiliate of our corporation for any reason whatsoever.

Notwithstanding the foregoing, the following events are deemed not to constitute a change in control under the Savings Plan:

 

•

the amalgamation or merger of our corporation, TDL or an affiliate with our corporation, TDL or an affiliate;

 

•

the dissolution of our corporation, TDL or an affiliate into our corporation, TDL or an affiliate; or

 

•

the acquisition of all or substantially all of the assets or voting shares of our corporation, TDL or an affiliate by an affiliate.

Payments Following a Termination of Employment

The following table sets forth the aggregate amounts our NEOs (other than Mr. Schroeder) would have received upon a termination of employment if such termination occurred on January 1, 2012. References to Termination for “Cause” or “Without Cause” in the table below are actions that may be taken by the corporation. References to Termination for “Good Reason” in the table below are actions that may be taken by the NEOs. See the definitions, and certain related implications, provided after the table below for additional information. As of May 24, 2011, Mr. Schroeder no longer served as President and CEO. For a description of the aggregate amount Mr. Schroeder received upon termination of his employment, see “Termination and Change in Control Benefits” above.

As noted above, under applicable law, we may be required to pay severance to executives upon a termination by us without cause, in addition to the amounts set forth in the table below. These amounts would be negotiated on a case-by-case basis and would vary depending upon the executive’s tenure, date of separation from service with us, and other factors. As such, we have not attempted to quantify those amounts.

 

 

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(1)

Amounts paid under the EAPP after “Termination Without Cause” or “Termination For Good Reason” following a change in control, reduce dollar for dollar any amount payable in respect of the short-term incentive payment in the year of termination under the change in control agreements such that there is no duplication of payment. The EAPP establishes a minimum short-term incentive payment under the EAPP for the year in which the change in control occurs. Reported amounts reflect amounts discussed in the Summary Compensation Table.

 

(2)

The value of the unvested P+RSUs is based on the closing price of our common shares of $49.36 on the TSX on December 30, 2011 (our last business day in Canada during our fiscal year ended January 1, 2012). The value of unexercised, in the money options/SARs is based on the difference (or spread) between the 2009, 2010 and 2011 exercise prices of $28.87, $35.23 and $45.76, respectively, and the closing price of our common shares on the TSX on December 30, 2011 of $49.36, multiplied by the number of unvested options/SARs.

 

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Included in the amounts set forth under “Termination Following a Change in Control” (“Without Cause” or for “Good Reason”), is the total value of all unvested equity awards as of January 1, 2012, although, in respect of awards made prior to May 2010, all restrictions on the exercise or vesting of awards lapse upon a change in control of our corporation whether or not the NEO remains employed by us or any successor corporation after the change in control due to the “single trigger” nature of these awards prior to the modification to the 2006 Stock Incentive Plan in February 2010. These awards include only option/SAR grants in May 2009, which had the following values for each NEO as of December 30, 2011, based on the closing price of our common shares on the TSX on December 30, 2011 of $49.36: $278,541 (House); $210,104 (Devine); $210,104 (Clanachan); $210,104 (Moir); and $210,104 (Walton).

 

(3)

Represents gross contribution under the Savings Plan for the 2011 plan year made after December 31st of that year. The actual contribution by the corporation was net of all applicable withholding taxes for which the respective NEOs are responsible unless directed to an RRSP. Reported amounts reflect amounts included in All Other Compensation in the Summary Compensation Table.

 

(4)

Represents accumulated Savings Plan and DCPP amounts as of December 31st to which the NEOs are entitled in the event of termination for any reason, including following a change in control (i.e., the change in control does not result in additional payments relative to these accumulated balances).

 

(5)

Cash Severance with respect to a termination following a change in control for each NEO consists of:

 

•

a lump sum payment equal to the greater of: (i) two times (three times Mr. House) the current year’s base salary, and (ii) two times (three times for Mr. House) the average base salary for the current year and the two prior years; and,

 

•

a lump sum payment equal to the greater of: (i) two times (three times for Mr. House) the current year’s target cash incentive payment under the EAPP and (ii) two times (three times for Mr. House) the average target cash incentive payment for the current year and the two prior years.

 

However, the change in control agreement for Mr. House was amended in March 2012 to consist of:

 

•

a lump sum payment equal to the greater of: (i) two times the current year’s base salary, and (ii) two times the average base salary for the current year and the two prior years; and,

 

•

a lump sum payment equal to the greater of: (i) two times the current year’s target cash incentive payment under the EAPP and (ii) two times the average target cash incentive payment for the current year and the two prior years.

 

Based on a multiple of two times, the cash severance paid to Mr. House would be $2,725,274, and Other Benefits would be $476,867. The EAPP Payout ($645,107), Equity ($932,054), and Accumulated Balances in Savings Plan and DCPP ($610,692) would remain unchanged, for a total of $5,389,994.

 

Lump sums are to be paid out within 10 days of the termination date, except that, to the extent that Mr. Clanachan is subject to the taxation laws of the United States and is a “specified employee” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and the Treasury Regulations promulgated thereunder, he will not receive any of such sums until the first business day of the seventh month following his termination date.

 

(6)

Other Benefits with respect to a termination following a change in control for each NEO consist of:

 

•

a lump sum payment equal to the present value of the employer contributions the NEO would have accrued under the Savings Plan and DCPP for the two years following the change in control (three years for the CEO). Various assumptions were required in connection with determining these values, including future base salaries remaining at 2012 levels, achievement of cash incentives at “target” for 2012 and 2013 fiscal years, employer contributions to the DCPP remaining at 2012 levels, and the use of the long-term bond rate to determine present value;

 

•

continuation of life insurance and other medical and health insurance for the two years (three years for the CEO) following termination; and,

 

•

payment of a monthly car allowance for the two years (three years for the CEO) following termination based on a pre-determined amount for the car, gas, maintenance and insurance for the grade level of the executive officer, as established by us from time to time.

 

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(7)

Executives who are approved as retirement-eligible can receive EAPP awards and receive their unvested P+RSUs and options/SARs, which will continue to vest over the scheduled vesting period, upon voluntary retirement. Accordingly, we have included these amounts in the table above under the description “Retirement/Resignation” and “Termination Without Cause” (by the corporation). Ms. Devine and Messrs. Clanachan and Walton are not currently retirement-eligible; consequently, no amounts are shown as being payable pursuant to the EAPP and the 2006 Stock Incentive Plan for termination under those circumstances.

 

(8)

Pursuant to the change in control agreements, a NEO’s right to terminate his or her employment for “good reason” is not affected by his or her incapacity due to physical or mental illness.

Termination without “good reason” by a NEO may include retirement or resignation. NEOs who are retirement-eligible, however, may be able to receive EAPP awards if the Compensation Committee approves.

Applicable Definitions and Certain Implications

Under our change in control agreements, a “change in control” is defined as the occurrence of any of the following events:

 

•

An acquisition by any person or group of persons of shares representing more than 30% of our outstanding shares entitled to vote generally for the election of directors (excluding acquisitions made by us or a subsidiary of ours, an employee benefit plan or trust forming a part thereof established for the benefit of our employees or our subsidiaries, or any person in connection with the foregoing);

 

•

The directors who as of September 28, 2009 (the “Incumbent Board”) cease for any reason to constitute at least 70% of the directors (provided that if the election or nomination for election by shareholders of any new director was approved by at least two-thirds of the Incumbent Board, such new director shall be considered a member of the Incumbent Board, and provided further that no director will be considered a member of the Incumbent Board if he or she initially assumed office as a result of an actual or threatened proxy contest);

 

•

The consummation of a merger, consolidation or reorganization with or into our corporation or in which our securities are issued, unless such transaction is a “Non-Control Transaction”. A Non-Control Transaction is one where: (i) our shareholders before such transaction hold at least 70% of the voting power of the corporation surviving the transaction in substantially the same proportion as their ownership of voting power before the transaction; (ii) the members of the Incumbent Board immediately before such transaction constitute at least two–thirds of the board of the surviving corporation; and (iii) no person other than our corporation, a subsidiary of ours, an employee benefit plan or trust for the benefit thereof, or any person who immediately before such transaction had beneficial ownership of at least 30% of the voting power of our corporation, has beneficial ownership of more than 30% of the voting power of the surviving corporation;

 

•

The complete liquidation or dissolution of our corporation; or,

 

•

The sale or other disposition of all or substantially all of our assets to any person (other than to a subsidiary of ours).

Mr. Clanachan’s change in control agreement was amended effective January 1, 2009 for compliance with the requirements of Section 409A of the Internal Revenue Code, if and only to the extent applicable. As a result, to the extent Section 409A applies, the definition of “change in control” in Mr. Clanachan’s agreement deviates in certain respects from the definition set forth above.

Termination Without Cause or For Good Reason

Under the change in control agreements, a NEO will receive the benefits noted in the above table if we (or a successor corporation) terminate the officer’s employment without cause or if the officer terminates his or her employment with us (or a successor corporation) for “good reason”. “Good reason” means the occurrence after a change in control of any of the following events or conditions:

 

•

A change in the NEO’s status, title, position or responsibilities which, in the officer’s reasonable judgment, does not represent a promotion from his or her status, title, position or responsibilities in effect immediately prior thereto;

 

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•

The assignment to the NEO of any duties and responsibilities which, in the officer’s reasonable judgment, are inconsistent with his or her status, title, position or responsibilities;

 

•

Any removal of the NEO from or failure to reappoint or reelect him or her to any such positions (except in connection with a termination for disability, cause, as a result of his or her death, or by the executive officer other than for good reason);

 

•

A reduction in the NEO’s base salary;

 

•

We (or a successor corporation) require the NEO to be based more than 50 kilometers from the officer’s business office location immediately prior to the change in control (except for reasonably required business travel that is not materially greater than such travel requirements prior to the change in control);

 

•

The failure to provide the executive officer with compensation and benefits substantially similar (in terms of benefit levels and/or reward opportunities) to those provided prior to the change in control or the taking of any action by the employer that would directly or indirectly materially reduce any benefit or deprive the executive officer of any material benefit enjoyed by him or her prior to the change in control; or,

 

•

Any material breach by us (or a successor corporation) of the change in control agreement.

Termination For Cause

If a NEO is terminated for cause at any time, the officer will receive only his or her base salary and accrued vacation pay to the termination date, plus any other benefits or compensation that have been earned or become payable prior to that date.

Under the change in control agreements, “cause” means that the executive officer:

 

•

willfully and continually fails to substantially perform his or her duties to us (other than a failure resulting from the executive officer’s incapacity due to physical or mental illness) for at least 14 days after we have notified the officer that he or she is not substantially performing such duties;

 

•

willfully engages in conduct that is demonstrably and materially injurious to us; or

 

•

otherwise materially breaches his or her employment agreement with us, including by voluntarily terminating employment with us.

A NEO’s action or failure to act will be “willful” if the officer acts (or fails to act) without good faith and without a reasonable belief that the action or failure to act was in our best interest.

Payments Upon Death

If a NEO dies during the two years following a change in control, the officer’s beneficiaries will be entitled to receive his or her base salary and accrued vacation pay through the date of death, plus any other benefits or compensation that have been earned or become payable prior to that date. The NEOs’ beneficiaries would also be entitled to receive a pro rata portion of any cash incentives or other incentive awards the executive officer would have received if he or she had continued employment until the end of the year, payable at the same time such cash incentives or awards are payable to other employees.

Other Provisions

The change in control agreements also contain non-competition covenants for the term of the NEOs’ employment with us and further impose confidentiality obligations on the NEOs both during and after termination of their employment. The NEOs will also be required to pre-clear with us any trades in our securities for one year after termination of their employment to ensure compliance with our insider trading policies and applicable law. The Executive Chairman and President and CEO, Mr. House, has also entered into a post-employment covenant agreement. See “Compensation Discussion and Analysis—Written Change in Control (Employment) and Post-Employment Covenants” for additional details.

Following the termination of his employment with the corporation, Mr. Schroeder agreed to various covenants under the Separation Agreement for the benefit of the corporation, including covenants relating to co-operation, confidentiality, non-disparagement and non-solicitation. He also agreed to extend the term of various covenants and obligations under his existing post-employment covenant agreement.

 

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Director Compensation

The Board has approved a compensation program for our directors that rewards directors, through retainers and meeting fees, for the time and effort they are expected to spend on company matters. Additionally, it places a significant emphasis on aligning the interests of directors with the interests of our shareholders by requiring compliance with stock ownership guidelines and providing that two-thirds of the directors’ annual retainer be paid in equity, until such stock ownership guidelines are achieved.

Under our director compensation program, during 2011, all of our directors received: an annual cash retainer of $30,000 and an additional $60,000 annual retainer that must be taken as equity until the director stock ownership guidelines are satisfied; Committee retainers; and, meeting fees. The Committee retainer is $3,000 per year for serving as a member of a Committee, other than as Chair.

In early 2011, the Compensation Committee reviewed the results of a director compensation study conducted by Meridian, the Compensation Committee’s independent compensation consultant. The results of the director compensation study indicated that the overall level of compensation for directors was generally competitive and appropriate; however, it also showed upward adjustments for Committee Chairs were warranted. Based on the compensation study and other considerations, commencing in 2011, the Audit Committee Chair and Compensation Committee Chair retainer fees were increased to $15,000 per year and $12,000 per year, respectively, and the retainer for the Chair of the Nominating Committee, when not also serving as Lead Director, was increased to $8,000 per year. The increases were determined appropriate in order to better align compensation with the market data and to take into account factors such as the relative workload of each role, and the increasing complexity of subject matter of respective Committees. A narrowing of the differential between the Compensation Committee and Audit Committee Chair fees was approved due to the increased complexity regarding governance and disclosure requirements for compensation committees.

In addition to the foregoing adjustments for Committee Chairs, the Board increased the annual retainer for the Lead Director, who also serves as the Chair of the Nominating Committee, to $108,000 per year. The 2011 compensation adjustment was based on the increased workload and relative contribution of the Lead Director over time since his appointment in February 2007, with particular emphasis on and consideration of Board leadership of succession planning, oversight of strategic and business planning, and significant direct involvement with senior members of management.

Until our stock ownership guidelines are achieved, directors must receive their annual equity retainer ($60,000) in DSUs granted pursuant to our Non-Employee Director Deferred Stock Unit Plan. DSUs are notional shares that track the value of our common shares and are settled in cash based on the value of our common shares on the TSX upon the director’s separation of service with us. Dividend equivalent rights accompany the DSUs. DERs represent the right to receive an amount of additional DSUs equal to the cash dividends that would be paid if the DSUs held by a director were common shares. Directors may elect to receive their Board retainers, Committee retainers and meeting fees (and, after stock ownership guidelines are achieved, their equity retainer) in cash, DSUs, or a combination of both.

 

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The following table sets forth the compensation paid to or earned by the independent members of the Board for the fiscal year ended January 1, 2012. All of the share-based awards represent DSUs which vest upon grant, but do not settle until a director’s separation from service with us.

 

Director		Fees Earned ($)(1)				Share-Based Awards ($)(2)(4)				Sub-Total ($)				All Other Compensation ($)(3)(4)				Total ($)
M. Shan Atkins			$57,000				$  60,000				$117,000				$  6,639				$123,639
Michael J. Endres			$29,625				$  89,625				$119,250				$  9,306				$128,556
Moya M. Greene			$27,750				$  90,000				$117,750				$  6,628				$124,378
The Hon. Frank Iacobucci			$         0				$223,500				$223,500				$16,717				$240,217
John A. Lederer			$         0				$118,500				$118,500				$10,918				$129,418
David H. Lees			$         0				$115,500				$115,500				$10,828				$126,328
Ronald W. Osborne			$47,250				$  60,000				$107,250				$  5,709				$112,959
Wayne C. Sales			$         0				$127,500				$127,500				$10,673				$138,173
Catherine L. Williams(5)			$         0				$105,750				$105,750				$  5,449				$111,199
															Total:				$1,234,867

(1)

Amounts listed under “Fees Earned” represent cash payments made to directors, in accordance with their elections.

 

(2)

Amounts listed under “Share-Based Awards” represent the amount of fees awarded in DSUs in accordance with each director’s election.

 

(3)

These amounts represent the value, as at the date dividends were paid, of DERs that accumulated on each director’s outstanding DSUs during 2011 as a result of the 2011 quarterly dividends of $0.17 per common share paid in March, June, September, and December.

 

(4)

DSUs vest upon grant, but are not payable until a director’s separation from service with us. Amounts in the table below represent the value of all DSUs that have vested during 2011, using the values of such awards on the date of grant. These values represent the combination of amounts in the “Share-Based Awards” column and the “All Other Compensation” column in the table above. The amounts will vary among the directors based on their respective compensation elections, as described above.

 

Director		Total Value of DSUs Vested During the Year
M. Shan Atkins		$  66,639
Michael J. Endres		$  98,931
Moya M. Greene		$  96,628
The Hon. Frank Iacobucci		$240,217
John A. Lederer		$129,418
David H. Lees		$126,328
Ronald W. Osborne		$  65,709
Wayne C. Sales		$138,173
Catherine L. Williams		$111,199

 

(5)

Ms. Williams will not be standing for reelection as a director at the meeting.

The fees noted above and the DERs represent all payments to our directors in 2011, other than reasonable expense reimbursements. We did not provide for any amounts to be set aside as retirement benefits for our directors. No director who is also an officer of the corporation (i.e., Mr. House) receives any compensation for his or her service as a director.

 

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Director Stock Ownership Guidelines

Under our Governance Guidelines, directors are required to maintain stock ownership (which, for this purpose, includes DSUs) with a value equal to three times their annual cash and equity retainers for Board service (currently $90,000, for a total of $270,000). Once the stock ownership guidelines have been met, directors may elect to receive their annual equity retainers ($60,000) in cash, DSUs, or a combination of both. Our guidelines allow directors five years after their initial appointment to achieve the required ownership level. As of the Record Date, all of our directors had holdings in excess of the stock ownership guidelines requirements.

The Compensation Committee reviews compliance with our stock ownership guidelines for directors annually, most recently in early 2012. In addition, the Compensation Committee periodically reviews the appropriateness of the levels and other considerations for director stock ownership guidelines, with the most recent review in early 2011. More detail regarding our stock ownership guidelines for directors is contained in our Governance Guidelines, which are available on our corporate and investor website at www.timhortons-invest.com.

 

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TRANSACTIONS INVOLVING RELATED PARTIES

Under our Governance Guidelines, the Board, after consulting with legal counsel, if necessary, determines whether conflicts of interest exist between us and any of our directors on a case-by-case basis. Directors are not permitted to vote on any issue in which they have a personal interest and are expected to disclose actual or potential conflicts to the Nominating Committee, which evaluates the matter and reports its assessment to the Board. In addition, not less than annually, each director affirms the existence or absence of any actual or potential conflicts.

Certain Transactions Involving Officers and Directors

A trust for the benefit of Paul D. House, our Executive Chairman, President and CEO is the sole stockholder of a corporation that purchased a shopping center property in Tottenham, Ontario, Canada from an unrelated third party in 1998. As part of the shopping center purchase transaction, the corporation now leases a Tim Hortons restaurant to one of our subsidiaries. The remaining term of the lease is three years, with two five-year renewal terms. The amount of rent paid by us to the corporation in fiscal 2011 was $63,000, which will also be the amount of yearly rent for the remaining three years of the original term of the lease. In our opinion, the terms of this lease are no less favourable than we could have obtained from an unrelated third party.

R.L. Schroeder Holdings Inc. (“R.L.”), a 31-year restaurant owner of ours that operates a Tim Hortons store in Chatham, Ontario, Canada, is wholly owned by Richard Schroeder, who is the brother of Donald B. Schroeder, our former President and CEO. As a restaurant owner, R.L. paid us $339,190 in royalties and rent, and paid $91,409 to the Canadian advertising fund in fiscal 2011, consistent with rates paid by other, unrelated restaurant owners. R.L. also purchases, in the normal course of its operations, certain food products, supplies, and other items from us on terms offered to our other restaurant owners with no preferential terms or provisions. R.L. previously entered into our standard franchise agreement, and the terms of this agreement are the same as the agreements governing our other restaurant owners with no preferential terms or provisions. Prior to his departure from the corporation in May 2011, Donald B. Schroeder made no decisions regarding arrangements with R.L., and renewals or new arrangements with R.L. were reviewed by the Audit Committee under our related party transactions policy. The Audit Committee approved and ratified a ten-year renewal of the franchise arrangement with R.L., effective February 1, 2008, on terms that were comparable to those extended to other, unrelated restaurant owners.

No person who has been a director or executive officer of the corporation at any time since the beginning of the last fiscal year, nor any proposed nominee for election as a director of the corporation, nor any associate or affiliate of any of the foregoing, has any material interest, directly or indirectly, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon other than the election of directors.

Review, Approval or Ratification of Transactions with Related Parties

The Board has delegated to the Audit Committee responsibility for reviewing related party transactions. The Audit Committee has adopted a written policy pursuant to which all transactions in excess of $75,000, between us or any of our direct or indirect subsidiaries, and: (i) any director or officer thereof or nominee for director thereof; (ii) any “immediate family member” of a director or officer thereof or nominee for director or officer thereof; (iii) any entity (A) in which any of the foregoing individuals has a direct or “indirect” legal or beneficial ownership interest (other than an interest that arises solely as a result of such individual’s ownership of less than 5% of the outstanding shares of a publicly traded entity), or (B) which employs any of the foregoing individuals; or, (iv) any registered or beneficial holders of greater than 5% of the total number of outstanding shares of the corporation, shall be submitted to the Audit Committee for consideration of “all relevant facts and circumstances” prior to the consummation of the transaction.

As used in the Audit Committee’s policy, the following terms have the meanings as set forth below:

“all relevant facts and circumstances” shall include, but not be limited to, the following: the nature of the related person’s interest in the transaction; the material terms of the transaction, including whether the terms of the transaction are fair to the corporation and on the same basis as would apply if the related transaction did not involve a

 

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related party; the significance of the transaction to the related person and also, if applicable, to the person or entity that is a party to the transaction; the significance of the transaction to the corporation; whether the transaction would impair the judgment of a director or executive officer to act in the best interests of the corporation; compliance with all applicable laws; and any other matters, facts, events or circumstances the Audit Committee deems appropriate;

“immediate family member” shall include: a spouse, parents, step-parents, children, step-children, siblings, aunts, uncles, nieces, nephews, cousins, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law, including for purposes of this definition any person (other than a tenant or employee) sharing the household of an officer, director, director-nominee, employee, or any registered or beneficial holders of greater than 5% of the total number of outstanding shares of the corporation; and

“indirect” interests shall include, among other things, interests in trusts, companies or other entities which have transactions or relationships with the corporation or any of its subsidiaries (ownership of a nominal amount of another corporation’s publicly traded stock is excluded).

Members of the Audit Committee with an interest in a transaction do not participate in the review of the transaction by the Audit Committee, and the majority vote of the disinterested members of the Audit Committee is required to approve any such transaction. If we become aware of a related party transaction that has not been approved under the policy, the matter is referred to the Audit Committee. The Audit Committee will consider “all relevant facts and circumstances” and may ratify or cause the revision or termination of the transaction. The Audit Committee reports to the Board on any significant related party transactions reviewed.

 

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PROPOSAL 2—REAPPOINTMENT OF AUDITOR

The Audit Committee and Board have recommended that the shareholders reappoint PricewaterhouseCoopers LLP (“PwC”) as our independent auditor for the 2012 fiscal year. PwC has served as the independent auditor of the corporation since fiscal 2006, the first year that the corporation’s predecessor was a stand-alone public company. Management expects that representatives of PwC will be present at the meeting with the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. If the reappointment of PwC is not approved, under the terms of the Canada Business Corporations Act, PwC will remain as the incumbent independent auditor until such time as a replacement independent auditor is appointed, in which case, the Audit Committee will reconsider the selection of our independent auditor.

Required Vote. For the reappointment of the independent auditor for the fiscal year ending December 30, 2012 to be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast at the meeting in person or by proxy. For purposes of this vote, abstentions and broker non-votes will have no effect on the proposal.

Recommendation. THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND A VOTE “FOR” THE REAPPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT AUDITOR FOR OUR CORPORATION FOR THE FISCAL YEAR ENDING DECEMBER 30, 2012. Unless otherwise indicated, the persons named in the proxy will vote all proxies “FOR” the reappointment of PwC as our independent auditor for fiscal 2012.

 

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PROPOSAL 3—RECONFIRMATION OF TIM HORTONS INC. SHAREHOLDER RIGHTS PLAN

The Tim Hortons Inc. Shareholder Rights Plan (“Rights Plan”) is reflected in an agreement between Tim Hortons Inc. and Computershare Trust Company of Canada, which was adopted and confirmed at a special shareholders’ meeting on September 22, 2009. Pursuant to the terms of the Rights Plan, the Rights Plan must be reconfirmed by the shareholders every three years. The Rights Plan contains the same terms and conditions as those contained in the Rights Plan initially adopted and confirmed in 2009. No changes have been made to the Rights Plan or are proposed to be made in connection with the proposed reconfirmation.

On February 23, 2012, our Board unanimously approved, and recommended that our shareholders vote “FOR” the reconfirmation of, the Rights Plan.

Required Vote. For the reconfirmation of the Rights Plan to be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast at the meeting in person or by proxy.

Recommendation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RECONFIRMATION OF THE RIGHTS PLAN. Unless otherwise indicated, the persons named in the proxy will vote all proxies “FOR” the reconfirmation of the Rights Plan.

Summary of Certain Key Provisions of the Rights Plan

The following is a summary of the material provisions of the Rights Plan. The objectives of the Rights Plan are to provide the Board with sufficient time to assess and evaluate a take-over bid and to permit the Board to identify and explore other alternatives, if appropriate, designed to maximize shareholder value.

Under the Rights Plan, one right to purchase a common share (a “Right”) was issued in respect of each of the outstanding common shares to holders as of the effective date of the Rights Plan (i.e., September 28, 2009), as well as in respect of each common share issued after the effective date and prior to the Separation Time (as defined below).

Under the Rights Plan, a bidder making a Permitted Bid (as defined below) for common shares may not take up any shares before the close of business on the 60^th day after the date of the bid and then only if more than 50% of common shares not beneficially owned by the person making the bid and certain related parties are deposited, in which case the bid must be extended for 10 business days on the same terms. The Rights Plan is intended to encourage an offeror to proceed by way of Permitted Bid or to approach the Board with a view to negotiation by creating the potential for substantial dilution of the offeror’s position, making the acquisition much more costly. The Permitted Bid provisions of the Rights Plan are designed so that, in any take-over bid, all shareholders are treated equally, receive the maximum available value for their investment and are given adequate time to properly assess the bid on a fully informed basis. Under the Rights Plan, a bid for less than all of the common shares may be a Permitted Bid.

It was not the intention of the Board in adopting the Rights Plan to secure the continuance of existing members of the Board or management in office, or to avoid a bid for control of the corporation. Through the Permitted Bid mechanism, described in more detail below, shareholders may tender to a bid which meets the Permitted Bid criteria without triggering the Rights Plan, regardless of the acceptability of the bid to the Board. Even in the context of a bid that does not meet the Permitted Bid criteria, the Board will continue to be bound by its fiduciary duties to consider any bid for the common shares in deciding whether to exercise its discretion under the Rights Plan to waive its application to the offer. In discharging that responsibility, the Board must act honestly and in good faith with a view to the best interests of the corporation.

In addition, the Rights Plan was not adopted, and reconfirmation of the Rights Plan is not being sought, in response to, or in anticipation of, any acquisition or take-over offer. The Rights Plan does not inhibit any shareholder from using the proxy mechanism set out in the Canada Business Corporations Act to promote a change in the management or direction of the corporation, including the right to requisition the directors to call a meeting of shareholders to transact any proper business to be considered by the shareholders.

 

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Trading of Rights

The Rights are not exercisable until the Separation Time (as defined below), and certificates representing the Rights have not been, and will not be, sent to shareholders. Until the Separation Time, or earlier termination or expiration of the Rights, the Rights are evidenced by and transferred with the associated common shares and the surrender for transfer of any common shares will also constitute the surrender for transfer of the Rights associated with those common shares. After the Separation Time, the Rights will become exercisable and begin to trade separately from the associated common shares. The initial “Exercise Price” under each Right in order to acquire a common share is $150.

Separation of Rights

The Rights will become exercisable and begin to trade separately from the associated common shares at the “Separation Time,” which is generally the close of business on the tenth trading day after the earliest to occur of: (a) a public announcement that a person or a group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 20% or more of the outstanding common shares other than as a result of (i) a reduction in the number of common shares outstanding, (ii) a “Permitted Bid” or “Competing Permitted Bid” (both as defined below), (iii) acquisitions of common shares in respect of which the Board has waived the application of the Rights Plan, or (iv) other specified exempt acquisitions in which shareholders participate on a pro rata basis; (b) the date of commencement of, or the first public announcement of an intention of any person to commence, a take-over bid where the common shares subject to the bid owned by that person (including affiliates, associates and others acting jointly or in concert therewith) would constitute 20% or more of the outstanding common shares; and (c) the date upon which a Permitted Bid or Competing Permitted Bid ceases to be such.

As soon as practicable following the Separation Time, a separate book entry will be made evidencing the Rights, and the book entry alone will evidence the Rights. The Rights Plan will remain in effect until September 28, 2018 (the “Expiration Date”), subject to being reconfirmed by the shareholders every three years.

When Rights become Exercisable

After the Separation Time, each Right entitles the holder thereof to purchase one common share at the Exercise Price. Following a transaction which results in a person becoming an Acquiring Person (a “Flip-in Event”), the Rights entitle the holder thereof (other than a holder who is an Acquiring Person) to receive, upon exercise, common shares with a market value equal to twice the Exercise Price of the Rights. For example, if, at the time of such announcement, the Exercise Price is $150 and the common shares have a market price of $25, the holder of each Right would be entitled to receive $300 in market value of the common shares (12 common shares) after paying $150 for such shares (i.e., the shares may be purchased at a 50% discount). In such event, however, any Rights directly or beneficially owned by an Acquiring Person (including affiliates, associates and others acting jointly or in concert therewith), or a transferee or any such person, will be void. A Flip-in Event does not include acquisitions pursuant to a Permitted Bid or Competing Permitted Bid.

Permitted Bids

The Rights Plan includes a “Permitted Bid” concept whereby a take-over bid for the corporation will not trigger the Rights if the bid meets certain conditions. A “Permitted Bid” is defined as an offer to acquire common shares or securities that are eligible to be converted into common shares for cash or securities made by means of a take-over bid circular where the common shares (including common shares that may be acquired upon conversion of securities convertible into common shares) subject to the offer, together with shares directly or beneficially owned by the offeror at the date of the offer (including its affiliates, associates and others acting jointly or in concert therewith), constitute 20% or more of the outstanding common shares and that also complies with the following additional provisions:

 

(i)

the bid must be made to all the holders of common shares other than the offeror;

 

(ii)

the bid must contain an irrevocable and unqualified condition that no common shares will be taken up or paid for prior to the close of business on a date which is not less than 60 days following the date of the bid and then only if more than 50% of the common shares held by Independent Shareholders (as referred to below) have been deposited or tendered to the bid and not withdrawn;

 

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(iii)

common shares may be deposited pursuant to the bid, unless it is withdrawn, at any time prior to the date shares may be taken up or paid for under the bid, and common shares deposited pursuant to the bid may be withdrawn until taken up or paid for; and

 

(iv)

if the deposit condition referred to in (ii) above is satisfied, the offeror will make a public announcement of that fact and the bid will remain open for deposit and tenders of common shares for at least 10 business days from the date such extension is publicly announced.

“Independent Shareholders” are defined as holders of common shares other than: (i) an Acquiring Person, (ii) any offeror making a take-over bid, (iii) any affiliate or associate of an Acquiring Person or offeror, (iv) persons acting jointly or in concert with an Acquiring Person, and (v) employee benefit, stock purchase or certain other plans or trusts for employees of the corporation or its wholly-owned subsidiaries unless the beneficiaries of such plans or trusts direct the voting or tendering to a take-over bid of the common shares.

The Board, when a Permitted Bid is made, will continue to have the duty and power to take such actions and make such recommendations to shareholders as are considered appropriate.

Competing Permitted Bids

A “Competing Permitted Bid” is a take-over bid made after a Permitted Bid has been made and prior to its expiry that satisfies all components of the definition of a Permitted Bid, except that it must remain open for acceptance until no earlier than the later of 35 days after it has been made or the 60^th day after the earliest date on which another Permitted Bid then in existence was made. The reduction in the time for acceptance of a Competing Permitted Bid is designed to allow, as nearly as practicable, all bids to be dealt with by the shareholders of the corporation, within substantially the same time frame.

Redemption and Waiver; Termination of the Rights Plan

The Rights may be redeemed by the Board, with the prior approval of the holders of common shares or Rights, as the case may be, at any time prior to the occurrence of a Flip-in Event at a redemption price of $0.00001 per Right. Rights are deemed to have been redeemed if a bidder successfully completes a Permitted Bid. Additionally, see “Separation of Rights,” regarding the termination of the Rights Plan and if it is not reconfirmed at the third and sixth annual meetings of the shareholders following its initial adoption in 2009.

Under the terms of the Rights Plan, the Board can waive the application of the plan to enable a particular take-over bid to proceed, in which case the terms of the Rights Plan will be deemed to have been waived with respect to any other take-over bid made prior to the expiry of any bid subject to such waiver.

Protection against Dilution

The Exercise Price, the number and nature of securities which may be purchased upon the exercise of Rights, and the number of Rights outstanding are subject to adjustment from time to time to prevent dilution in the event of stock dividends, subdivisions, consolidations, reclassifications or other changes in the outstanding common shares, pro rata distributions to holders of common shares and other circumstances where adjustments are required to appropriately protect the interests of the holders of Rights.

 

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PROPOSAL 4—APPROVAL OF TIM HORTONS INC. 2012 STOCK INCENTIVE PLAN

Our board of directors has approved the Tim Hortons Inc. 2012 Stock Incentive Plan (the “2012 Plan”), subject to regulatory and shareholder approval. At the meeting, shareholders will be asked to pass a resolution approving the adoption of the 2012 Plan, as described in more detail below. If approved by shareholders at the meeting, the 2012 Plan will be effective as of, and govern awards granted following, the date that shareholder approval is obtained (the “Effective Date”). Awards granted under the 2006 Stock Incentive Plan (the “2006 Plan”) shall continue to be governed by the terms of the 2006 Plan but, if the 2012 Plan is approved by shareholders and becomes effective, then no awards will be issued under the 2006 Plan following the Effective Date of the 2012 Plan.

Similar to the current 2006 Plan, the 2012 Plan is an omnibus plan, designed to allow for a broad range of equity-based compensation awards, which will afford flexibility to compensate management and employees. We believe equity compensation aligns the interests of employees and non-employee directors with the interests of our other shareholders. The purpose of the 2012 Plan is to strengthen the corporation by providing an incentive to the employees and non-employee directors of the corporation, and employees of its subsidiaries, and thereby encouraging them to devote their abilities and industry to the success of the corporation.

Key employees may include not only our executive officers but also other officers or employees who are able to contribute significantly to our success and growth.

The following is a brief summary of the material provisions of the 2012 Plan.

The 2012 Plan provides for equity compensation awards in the form of stock options, restricted stock, stock appreciation rights, dividend equivalent rights, performance shares, performance units, share awards and stock units (collectively, “Awards”) to eligible employees and directors of us or our subsidiaries.

The 2012 Plan authorizes up to a maximum of 2,900,000 common shares (representing 1.8% of our issued and outstanding common shares as of March 13, 2012) for grants of Awards. Common shares that have never been subject to awards granted under the 2006 Plan and remain available to be granted under the 2006 Plan as of the Effective Date, as well as common shares that are subject to outstanding awards granted under the 2006 Plan but that are forfeited or otherwise cease to be subject to such awards following the Effective Date (other than to the extent they are exercised for or settled in vested and non-forfeitable common shares) shall be transferred to and may be made available as Awards under the 2012 Plan, provided that the aggregate number of common shares authorized for grants of Awards under the 2012 Plan shall not exceed 2,900,000 common shares. Accordingly, notwithstanding that the terms of the 2006 Plan shall continue to govern awards granted under the 2006 Plan prior to the Effective Date, following the Effective Date: (i) no further awards will be made under the 2006 Plan, and (ii) an aggregate maximum of 2,900,000 common shares will be authorized under both the 2006 Plan and the 2012 Plan.

The common shares issued to settle Awards under the 2012 Plan may be authorized but unissued shares, shares which have been acquired by or on behalf of a trust established by the corporation (or a subsidiary thereof) and held for future delivery, or shares acquired by delivery of cash to a broker to acquire shares on behalf of eligible participants, or any combination thereof. To the extent any Award expires, is cancelled, is settled in cash or is otherwise terminated without having been exercised or payment having been made in respect of the Award, the common shares subject to that Award will be available for other Awards. Upon settlement of a stock appreciation right in common shares, the excess of the number of shares covered by the stock appreciation right over the number of common shares so issued in settlement may again be made available for other Awards. In addition, in connection with the granting of dividend equivalent rights, the number of shares available for Awards shall not be reduced, unless shares are issued in settlement of a dividend equivalent right, in which case the number of shares available for issuance under the 2012 Plan shall be reduced by the number of shares so issued.

The 2012 Plan will be administered by the Compensation Committee. Each member of the Committee must be a non-employee director (within the meaning of Securities and Exchange Commission Rule 16b-3). The Committee has

 

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the authority to determine the individuals to whom, and the time or times at which, Awards will be granted, the number of common shares to be subject to each Award, the terms and conditions of each Award, and the treatment of Awards granted to eligible individuals during leaves of absence. In its discretion but subject to applicable law, the Committee may delegate to one or more persons any administrative or ministerial duties or non-material determinations under the 2012 Plan and any determinations under the 2012 Plan that do not relate to executive officers.

The Committee cannot make any adjustment (other than in connection with a stock dividend, recapitalization or other transaction where an adjustment is permitted or required under the terms of the 2012 Plan) or amendment where the adjustment or amendment would reduce or have the effect of reducing the exercise price of an option or stock appreciation right previously granted under the 2012 Plan, whether through amendment, cancellation, replacement grants or other means, unless our shareholders have approved the adjustment or amendment.

The 2012 Plan sets forth a number of limitations regarding the issuance of Awards to participants, including:

 

(i)

no more than 50% of the common shares issued under the 2012 Plan may be issued from treasury;

 

(ii)

no more than an aggregate of 1,000,000 common shares may be made the subject of Incentive Stock Options (as described and defined below under “Awards Available under the 2012 Plan—Stock Options”);

 

(iii)

the aggregate number of common shares that may be made the subject of Awards granted to non-employee directors shall not exceed 0.25% of our issued and outstanding common shares at the time of the Award, and the aggregate value of Awards granted to any one non-employee director in any calendar year shall not exceed $100,000;

 

(iv)

no more than 250,000 common shares may be made subject to options, stock appreciation rights or performance awards that are meant to qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) of the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) (“162(m) Awards”) may be granted in any calendar year to any U.S. resident grantee;

 

(v)

the aggregate dollar amount of cash and the fair market value of shares that may be made the subject of 162(m) Awards (at the time of issuance of such award) designated in dollars granted in any calendar year to any U.S. resident grantee shall not exceed U.S.$4,000,000 in any calendar year;

 

(vi)

the number of shares issuable to all insiders, on an aggregate basis, at any time, under all security-based compensation arrangements, may not exceed 10% of our issued and outstanding common shares; and

 

(vii)

the number of shares issuable to all insiders, on an aggregate basis, within any one year period, under all security-based compensation arrangements, may not exceed 10% of our issued and outstanding common shares.

For the purposes of the 2012 Plan, “fair market value” of the common shares on any relevant date is equal to the closing price of the common shares on the TSX or, if the Committee elects on or prior to such date, the New York Stock Exchange, on the trading day immediately preceding such date.

Our practice under the 2006 Plan has been to deliver common shares acquired through the facilities of the TSX to grantees upon the exercise of their awards. Since the public company reorganization in 2009, no common shares have been issued from treasury to settle equity awards issued under the 2006 Plan. We currently expect that this practice will continue for Awards granted under the 2012 Plan. Should we alter this current practice such that common shares are issued from treasury upon a grantee’s exercise or settlement of outstanding equity awards granted under the 2012 Plan, then a maximum of 1,450,000 common shares (representing 0.9% of our issued and outstanding common shares as at March 13, 2012) may be issued in the future to settle Awards.

Awards Available under the 2012 Plan

Set forth below is a description of the performance objectives that may apply to the Awards issuable under the 2012 Plan, as well as a description of the types of Awards that are available to be granted under the 2012 Plan.

 

 

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Performance Objectives. Under the 2012 Plan, the Committee has the discretion to apply performance objectives to any type of Award available to be issued under the 2012 Plan. Performance objectives may be expressed in terms of earnings per share, earnings (which may be expressed as earnings before specified items), return on assets, return on invested capital, revenue, operating income, cash flow, total shareholder return, operational metrics such as new restaurant openings, same-store sales and employee satisfaction, or any combination thereof, or, other than with respect to 162(m) Awards, any other metric approved by the Committee, and may be in respect of the performance of the corporation, any of our subsidiaries, operating units or a combination thereof (the “Performance Objectives”). Performance Objectives may also include, if determined by the Committee, individual performance metrics applicable to one or more participants. Performance Objectives may be absolute or relative (to prior performance of the corporation or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range. Grants of Awards will be made on the terms and conditions as the Committee may determine in its discretion, including the attainment of Performance Objectives prior to the grant date of the Award.

The Committee has the power to modify the Performance Objectives after they have been established as may be appropriate, including, for example, to reflect specified corporate transactions, accounting or tax law changes and other extraordinary or nonrecurring events. However, no modification may be made with respect to a 162(m) Award if it would cause it to be non-deductible under Section 162(m) of the Internal Revenue Code. Prior to the lapse of restrictions on 162(m) Awards, the Committee must certify the extent to which the Performance Objectives have been satisfied.

Restricted Stock. The 2012 Plan provides for Awards of restricted stock, which will contain such restrictions, terms and conditions as the Committee shall determine. Unless the Committee determines otherwise, the grantee of an Award of restricted stock will have the right to vote the shares and to receive all dividends and other distributions on the shares prior to vesting. However, the Committee may, in its discretion, determine that dividends on the restricted stock will be deferred until the lapsing of the restrictions imposed on the restricted stock and either held in cash or reinvested in shares of restricted stock. If deferred dividends are to be held in cash, the Committee may determine, in its sole discretion, whether interest should be credited on such deferred dividends (if applicable, at a rate per annum as the Committee may determine). Any dividends deferred (together with any interest accrued thereon, if applicable) in respect of restricted stock shall be forfeited upon the termination, cancellation or forfeiture of such restricted stock.

Stock Units. The Committee may make Awards of stock units under the 2012 Plan, which will represent the right of the grantee to receive a payment upon the vesting of the stock unit or on any later date specified by the Committee, equal to the fair market value of common shares as of the date the stock unit was granted, the vesting date or any other date as determined by the Committee at the time the stock unit was granted. Any Award of stock units may be made contingent upon such conditions as may be established by the Committee in connection with such Award. The Committee may place a limitation on the amount payable in respect of each stock unit at the time of grant and may provide for the settlement of stock units in cash or in common shares having an aggregate fair market value equal to the payment to which the grantee has become entitled, or a combination thereof.

Stock Options. The 2012 Plan provides for both incentive stock options as defined under Section 424 of the Internal Revenue Code (“Incentive Stock Options”) and non-qualified stock options (“Non-Qualified Options” and, collectively with Incentive Stock Options, “Options”). The 2012 Plan provides that the purchase price for all common shares covered by each Option granted cannot be less than 100% of the fair market value of the common shares on the date of grant. In the case of an Incentive Stock Option granted to an individual who, on the effective date of grant, owns shares possessing more than 10% of our total combined voting power, the exercise price per share must be at least 110% of the fair market value of the common shares on the date of grant, and the Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted.

The purchase price for common shares covered by an Option must be paid in full at the time of exercise of the Option by cash, cheque, bank draft or by tender of other property acceptable to the Committee. Furthermore, the Committee shall have the discretion to establish a cashless exercise procedure for the exercise of Options.

 

 

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No individual may be granted Incentive Stock Options under the 2012 Plan if the grant would cause the aggregate fair market value (determined as of the date the Incentive Stock Options are granted) of the common shares with respect to which Incentive Stock Options are exercisable for the first time by the optionee during any calendar year under all stock option plans maintained by us and our subsidiaries to exceed U.S.$100,000.

The Committee has the authority to determine the term of an Option, up to a maximum of 10 years (subject to the limitations described above), and each Option will be exercisable as determined by the Committee. The Committee may accelerate the exercisability of an Option at any time. Furthermore, the Committee may, subsequent to the granting of any Option, extend the exercise period thereof, but it shall not be extended beyond the earlier of the latest date upon which the Option could have expired by its original terms, or the 10th anniversary of the grant date of the Option. Under our Insider Trading and Window Trading Policies, the directors, officers and certain employees of the corporation and its subsidiaries are not permitted to trade in our securities outside of specified “trading windows”. Unless otherwise set forth in an Option agreement, if an Option (other than an Incentive Stock Option) expires outside of a trading window, then the expiration of the term of the Option shall be the later of: (i) the date the Option would have expired by its original terms, or (ii) the end of the 10th trading day of the immediately succeeding trading window. In no event, however, shall the Option expire later than the 10th anniversary of the date of grant of the Option.

At any time after an Option becomes exercisable, the Committee has the right, in its sole discretion and without the consent of an optionee, to cancel the Option and pay to the grantee the excess of the fair market value of the common shares covered by the Option over the option exercise price at the date the Committee provides written notice of its intention to exercise the right. Such amount may be paid in cash, in common shares or a combination thereof, as the Committee may determine. To the extent payment is made in common shares, the number of such common shares will be determined by dividing the amount of the payment to be made by the fair market value of the common shares on the date of the notice of election to the optionee.

Stock Appreciation Rights. A stock appreciation right (“SAR”) may be granted under the 2012 Plan either alone or in conjunction with an Option. A SAR related to an Option generally terminates upon the expiration, forfeiture or exercise of the related Option, and is exercisable only to the extent that the related Option is exercisable. The Committee will determine the exercisability, vesting and duration of a SAR unrelated to an Option, provided that the maximum term of a SAR may not exceed 10 years. Unless otherwise set forth in an agreement evidencing a SAR unrelated to an Option, if a SAR unrelated to an Option expires outside of a trading window, then the expiration of the term of the SAR shall be the later of: (i) the date the SAR would have expired by its original terms, or (ii) the end of the 10th trading day of the immediately succeeding trading window. In no event, however, shall the SAR expire later than the 10th anniversary of the date of grant of the SAR.

Upon the exercise of a SAR related to an Option, the related Option will be canceled to the extent of the number of shares for which the SAR is exercised, and, upon the exercise of an Option issued in conjunction with a SAR, the related SAR will be canceled to the extent of the number of shares for which the Option is exercised. Upon exercise of a SAR, the grantee will receive, in the discretion of the Committee, cash, common shares, or a combination of both in an amount determined by multiplying: (i) the excess of the fair market value of common shares on the date the SAR was exercised over the option price (or, for SARs unrelated to an Option, over the fair market value of the common shares on the date the SAR was granted), by (ii) the number of shares as to which the SAR is being exercised. At the time of grant, the Committee may place a limitation on the amount payable upon exercise of a SAR.

Performance Shares. Performance shares are common shares issued to eligible individuals under the 2012 Plan, which shares will become vested on the terms, conditions and satisfaction of Performance Objectives as the Committee may determine. Unless the Committee determines otherwise, the grantee of an Award of performance shares will have the right to vote the performance shares and to receive all dividends and other distributions on the performance shares prior to vesting. However, the Committee may, in its discretion, determine that dividends on the performance shares will be deferred until the lapsing of the restrictions imposed on the performance shares and either held in cash or reinvested in performance shares. If deferred dividends are to be held in cash, the Committee may determine, in its sole discretion, whether interest should be credited on such deferred dividends (if applicable, at a rate per annum as the Committee may

 

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determine). Any dividends deferred (together with any interest accrued thereon, if applicable) in respect of any performance shares shall be forfeited upon the cancellation or termination of such performance shares.

Performance Units. The Committee may grant performance units to eligible individuals under the 2012 Plan. The value of a performance unit may be denominated in common shares or a specified dollar amount. Each performance unit will represent the right to receive, in the case of share-denominated units, the fair market value of a share (or a percentage thereof (which may be more than 100%) depending on the level of Performance Objective attainment) on the date the performance unit was granted, the date the performance unit became vested or any other date specified by the Committee or, in the case of dollar-denominated units, the specified dollar amount (or a percentage thereof (which may be more than 100%) depending on the level of Performance Objective attainment). At the time of grant, the Committee may place a limitation on the maximum amount payable in respect of a vested performance unit. Payment may be made in common shares, cash, or a combination thereof, including restricted stock if the Committee so determines at the time of grant.

Dividend Equivalent Rights. Dividend equivalent rights may be granted in conjunction with an Award or as a separate Award. Grantees of dividend equivalent rights will be entitled to receive payments in single or multiple installments, as determined by the Committee, equivalent to all or some portion of the cash dividends payable with respect to common shares (as specified in the applicable Award agreement). Payments may be made in cash, common shares or a combination thereof. Amounts payable in respect of dividend equivalent rights may be payable currently or, if applicable, deferred until the lapsing of restrictions on the dividend equivalent rights or until the vesting, exercise, payment, settlement or other lapse of restrictions on the Award to which the dividend equivalent rights relate. If the amounts payable are deferred, the Committee will determine whether the deferred amounts are to be held in cash, reinvested in shares or deemed notionally to be reinvested in shares. If the amounts deferred are to be held in cash, the Committee may determine, in its sole discretion, whether interest should be credited on such deferred dividends (if applicable, at a rate per annum as the Committee may determine). Notwithstanding the foregoing, with respect to a dividend equivalent right granted in connection with an Option or a SAR that is subject to Section 409A of the Internal Revenue Code, amounts payable in respect of such dividend equivalent right may not be contingent upon, or otherwise payable on, the exercise of the Option or the SAR, and must be treated in a manner that will not result in the related Option or SAR being treated as providing for deferred compensation under Section 409A of the Internal Revenue Code and the regulations promulgated thereunder.

Share Awards. The Committee may grant an Award of common shares as additional compensation for services rendered or in lieu of cash or other compensation to which an eligible employee or non-employee director is entitled. Grants of share awards will be made on the terms and conditions as the Committee may determine in its discretion.

Additional Terms of the 2012 Plan

Deferral of Payments or Vesting. Except with respect to an Option or SAR, the Committee may provide for the deferral of the issuance or vesting in common shares or the payment of cash in respect of an Award granted under the 2012 Plan, provided that such deferral shall be provided at the time of grant of the Award. The terms of any such deferral will be set forth in the applicable Award agreement.

Change in Control. The 2012 Plan provides that, except as otherwise provided in an Award agreement or another agreement between the grantee and the company (or a subsidiary thereof), in the event that, within 24 months following the occurrence of a “change in control”, a grantee’s employment is terminated without cause or a grantee terminates his or her employment for good reason, then all Options and SARs outstanding on the termination date, whether or not exercisable, will become immediately exercisable, the restrictions applicable to outstanding restricted stock will lapse, and stock units will become fully vested. In addition, all restrictions on outstanding performance shares and restricted stock that are intended to be performance awards will lapse, and outstanding performance units and stock units that are intended to be performance units, will become vested, in each case as if all Performance Objectives had been satisfied at the highest level by us and the grantee. In addition, regarding performance units and stock units that are intended to be performance awards, the grantee will be entitled to receive a cash payment within 60 days after the change in control in respect of the performance units and stock units that are intended to be performance awards, that become vested as a result of a change in control.

 

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The definition of “change in control” in the 2012 Plan is substantially similar to the definition set forth in the 2006 Plan and our change in control agreements, except that the “incumbent board” under the definition in the 2012 Plan shall refer to those members of the Board as at May 11, 2012. See “Applicable Definitions and Certain Implications”.

Adjustments. The 2012 Plan provides that the Committee will determine the appropriate adjustments, if any, to outstanding Awards and the shares available for future Awards in connection with an increase or reduction in the number of shares, or any change (including in the case of a spin-off, dividend or other distribution in respect of shares, a change in value) in the shares or exchange of shares for a different number or kind of shares or other securities of the corporation or another corporation, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants, rights or debentures, stock dividend, stock split, reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise (a “Change in Capitalization”). Adjustments may be made to the maximum number and class of common shares or other securities with respect to which Awards may be granted under the 2012 Plan; the number and class of common shares or other securities which are subject to outstanding Awards granted under the 2012 Plan and their exercise price, the maximum number and class of common shares or other securities which may be granted under the 2012 Plan or to any individual in any calendar year, and the Performance Objectives. If the grantee of an Award is entitled to new, additional or different shares of our securities or any other corporation by reason of a Change in Capitalization, the new, additional or different shares will be subject to all of the conditions, restrictions and performance criteria that were applicable to the common shares subject to the Award prior to the Change in Capitalization.

In the event we are involved in a liquidation, dissolution, merger or consolidation of the corporation, or an acquisition of all of the issued and outstanding shares by any person, unless such acquisition is a non-control transaction, outstanding Awards will be treated as provided for in the agreement entered into in connection with the transaction or, if not so provided in the agreement, grantees will be entitled to receive the same consideration that each holder of one of our common shares was entitled to receive in the transaction in respect of a common share. However, the consideration will remain subject to all of the conditions, restrictions and performance criteria which were applicable to the Awards prior to the transaction.

Transferability. Awards granted under the 2012 Plan are generally non-transferable and, in the case of Options and SARs, may be exercised, during a grantee’s lifetime, only by the grantee. However, in the case of Options, if the grantee becomes incapacitated or if the option agreement so provides, the optionee’s legal representative or estate may exercise the Option or SAR.

Termination of Employment. The 2012 Plan contains provisions concerning the treatment of Awards upon termination of employment. These provisions will apply unless otherwise set forth in an applicable Award agreement, or unless otherwise determined by the Committee at any time prior to or after the applicable grantee’s termination of employment, with the consent of the grantee.

Under the 2012 Plan provisions, if a grantee dies or becomes disabled, the grantee’s Options and SARs will become immediately exercisable and may be exercised for a period of four years following death or disability (but in no event beyond the maximum term of the Option or SAR). The grantee’s performance awards will remain outstanding, and the grantee or the grantee’s estate will be entitled to a pro rata portion of the payment otherwise payable in respect of the performance awards on the date the performance awards would have been paid if the grantee had remained employed with us or a subsidiary. Finally, the grantee’s restricted stock and stock units that are not intended to be performance awards will become immediately vested.

If a grantee’s employment is terminated by reason of such individual’s retirement, the grantee’s Options and SARs will remain outstanding for a period of four years (but in no event beyond the maximum term of the Option or SAR) and unvested Options and SARs will continue to vest in accordance with their applicable vesting schedule. The grantee’s performance awards will remain outstanding, and the grantee will be entitled to a pro rata portion of the payment otherwise payable in respect of the Award on the date the performance awards would have been paid if the grantee had

 

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remained employed with us or a subsidiary. Finally, the grantee’s restricted stock that are not intended to be performance awards will become immediately vested, and unvested stock units that are not intended to be performance awards will continue to vest in accordance with their applicable vesting schedules.

If a grantee’s employment is terminated without cause in connection with a sale or other disposition of a subsidiary, the grantee’s Options and SARs will remain outstanding for one year (but in no event beyond the maximum term of the Option or SAR) and unvested Options and SARs will become immediately vested on the termination date. The grantee’s performance awards will remain outstanding, and the grantee will be entitled to a pro rata portion of the payment otherwise payable in respect of the Award on the date the performance awards would have been paid if the grantee had remained employed with us or a subsidiary. Finally, the grantee’s restricted stock and stock units that are not intended to be performance awards will become immediately vested.

If a grantee’s employment terminates for any reason other than those described above, all Awards the grantee holds will be forfeited immediately unless otherwise determined by the Committee at any time prior to or after termination with the grantee’s consent, except any vested Options or SARs the grantee holds will remain exercisable for a period of 90 days following termination of employment or, in the event such grantee dies during such 90 day period, remain exercisable for a period of one year following the termination date but, in no event, beyond the maximum term of the Option or SAR.

Forfeiture for Misconduct. If a grantee has used for profit or disclosed to unauthorized persons our or our subsidiaries’ confidential information or trade secrets, breached any contract with or violated any fiduciary obligation to us or our subsidiaries, or engaged in unlawful trading in our securities or securities of another company based on information gained as a result of that grantee’s employment or directorship with us or our subsidiaries, all Awards the grantee holds will automatically be forfeited, unless the Committee determines otherwise.

Recoupment Policy Relating to Performance-Based Compensation. All Awards or any proceeds therefrom, granted under the 2012 Plan are subject to the corporation’s (or an affiliate of the corporation’s) right to reclaim, or require forfeiture of, such payments or other amounts in the event of a financial restatement in accordance with the corporation’s Recoupment Policy Relating to Performance-Based Compensation adopted by the Committee, as amended from time to time; or in accordance with the terms of any separate agreement between a grantee and the corporation or any affiliate of the corporation. See “Recoupment or ‘Clawback’ Policy”, above.

Tax Withholding. If a grantee recognizes taxable income in connection with the receipt of common shares or cash under the 2012 Plan, the grantee will pay the federal, state, provincial and local income taxes and other amounts required by law to be withheld by us in connection with the receipt prior to the issuance of the shares or payment of the cash. Under the 2012 Plan, the corporation may require or permit payment of the withholding taxes through payment in cash, bank draft, cheque or other manner acceptable to the Committee; by withholding such amount from other amounts due to the grantee; by withholding a portion of the common shares issuable or deliverable to the grantee with a fair market value equal to the withholding taxes; or by withholding such amount from the cash then issuable in connection with the Award.

Employees in Multiple Jurisdictions. Eligible participants under the 2012 Plan are or may be subject to taxation under the Internal Revenue Code, the laws of Canada and/or the laws of other jurisdictions. Accordingly, without amending the 2012 Plan, the Committee may grant, settle or administer Awards on terms and conditions different from those specified in the 2012 Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote the achievement of the purposes of the 2012 Plan given the limitations of applicable law. Subject to the 2012 Plan amendment provisions described below, the Committee may make such modifications as may be necessary or advisable to comply with the provisions of the laws of various jurisdictions in which the corporation or its subsidiaries operate or have employees.

Term. The 2012 Plan shall terminate and no Award may be granted or made after the 10th anniversary of the date the 2012 Plan is approved by shareholders, provided that Incentive Stock Options may not be granted after the 10th anniversary of the earlier of the date the 2012 Plan was adopted by the board of directors, or the date on which the 2012 Plan is approved by shareholders.

 

 

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Differences Between the 2012 Plan and the 2006 Plan

The terms and conditions of the 2012 Plan are substantially similar to those of the 2006 Plan, except as follows:

Performance Objectives. The 2012 Plan expands the scope of Performance Objectives that may be applied to performance awards, so that, as described above, operational metrics such as restaurant development, same-store sales or employee engagement and satisfaction, and/or individual performance metrics may be used as performance objectives. In addition, the 2012 Plan provides the Compensation Committee with greater flexibility to link performance objectives to various types of awards issued under the 2012 Plan.

Non-Employee Director Participation in the 2012 Plan. The corporation has not issued awards to its non-employee directors under the 2006 Plan, and does not currently expect to issue awards to non-employee directors under the 2012 Plan. However, in the event that this practice changes in the future, the 2012 Plan caps the participation of non-employee directors in the plan to a maximum of $100,000 in value per director per calendar year, and the number of shares issuable under the plan to a director at 0.25% of shares (based on outstanding shares at the time of the Award grant).

Dilution Limitations. Historically, as noted above, the corporation has settled awards issued under the 2006 Plan through a transfer of shares purchased on the open market. The corporation currently expects to continue this practice but, with a view to limiting the potential dilution to our current shareholders, the 2012 Plan does not permit more than 50% of the common shares deliverable under the 2012 Plan to be issued from treasury.

Retirement Considerations. With a view to providing additional clarity on the post-employment entitlements of participants, the 2012 Plan clarifies that a participant will be entitled to “Retirement” benefits under the plan solely if the proposed retirement is approved by the corporation as a “Retirement” under the terms of the 2012 Plan.

Plan Amendment Provision. Under the 2012 Plan, the corporation may amend, suspend, discontinue or terminate the 2012 Plan and any outstanding Awards, in whole or in part, at any time without notice to or approval by shareholders, provided, however that the following amendments to the 2012 Plan or outstanding equity awards would require the approval of both the Board and the corporation’s shareholders, unless the change results from application of the adjustment provisions of the 2012 Plan: (i) an increase in the maximum number of common shares that may be made the subject of Awards under the plan; (ii) any adjustment (other than in connection with a stock dividend, recapitalization or other transaction where an adjustment is permitted or required under the terms of the 2012 Plan) or amendment that reduces or would have the effect of reducing the exercise price of an Option or SAR previously granted under the 2012 Plan, whether through amendment, cancellation or replacement grants, or other means; (iii) an increase in the express limits on certain Awards that may be made to non-employee directors and insiders under the 2012 Plan; (iv) an extension of the term of an outstanding Option or SAR beyond the expiration date thereof, except as expressly set forth in the 2012 Plan for certain Awards that expire outside of an established trading window; (v) an amendment that would permit Options granted under the 2012 Plan to be transferable or assignable other than for normal estate settlement purposes; and (vi) any amendment to the 2012 Plan amendment provisions, which is not an amendment made to maintain continued compliance with applicable laws or regulations, or amendments of a “housekeeping” nature. In addition to the foregoing, no change to an outstanding Award under the 2012 Plan that will materially adversely impair the rights of the grantee may be made without the consent of the grantee, unless made to maintain continued compliance with applicable laws or regulations.

Examples of amendments that may be made without shareholder approval include: (i) maintaining continuing compliance with applicable laws, regulations, requirements, rules or policies of any governmental authority or stock exchange; (ii) amendments of a “housekeeping” nature, which include amendments to eliminate any ambiguity or correct or supplement any provision; (iii) changing the vesting provision of the 2012 Plan or any Award; (iv) changing the termination provisions of any Award that does not entail an extension beyond the original expiration date thereof; (v) adding a cashless exercise feature payable in securities, whether or not such feature provides for a full deduction of the number of underlying securities from the plan reserve and any amendment to a cashless exercise provision; (vi) adding a form of financial assistance and any amendment to a financial assistance provision that has been adopted; (vii) changing

 

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the process by which a grantee who wishes to exercise an Award may do so; and (viii) delegating any or all of the powers of the Committee to administer the 2012 Plan to officers of the corporation.

On February 23, 2012, our Board unanimously approved, and recommended that our shareholders vote “FOR” the approval of the 2012 Plan.

Required Vote. For the adoption of the 2012 Plan to be approved by shareholders, this proposal must receive the affirmative vote of a majority of the votes cast in person or by proxy, provided that the total votes cast represent over 50% in interest of all common shares entitled to vote on the proposal.

Recommendation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE 2012 PLAN. Unless otherwise indicated, the persons named in the proxy will vote all proxies “FOR” the approval of the 2012 Plan.

 

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OTHER MATTERS

Shareholder Proposals

Under the Canada Business Corporations Act (“CBCA”), shareholder proposals may be made by certain registered or beneficial holders of shares entitled to be voted at an annual meeting of shareholders. To be eligible to submit a proposal, other than a nomination for director, a shareholder must be the registered or beneficial holder of, or have the support of the registered or beneficial holders of: (i) at least 1% of the total number of outstanding voting shares of the corporation; or (ii) voting shares whose fair market value is at least $2,000. Such registered or beneficial holder(s) must have held such shares for at least six months immediately prior to the day upon which the shareholder submits the proposal. In order for a proposal to include nominations of directors, it must be signed by one or more holders of shares representing not less than 5% of the shares (or shares of a class) entitled to vote at the meeting. The CBCA also requires that a proposal include the name and address of the person submitting the proposal, the names and addresses of the person’s supporters (if applicable), the number of shares of the corporation owned by such persons, and the date upon which such shares were acquired.

Our By-Laws contain certain procedures for shareholder proposals to be considered by the corporation, as described below. There were no material changes to the procedures by which shareholders may recommend director nominees in 2011 (for the 2012 meeting). Our 2013 Annual Meeting of Shareholders will be held on Thursday, May 9, 2013 at 10:30 a.m., EDST, at a location to be determined and announced subsequent to the issuance of this proxy circular.

Director-Nominees by Shareholders

Under Section 3.5 of our By-Laws, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors, except as may be otherwise provided by the terms of one or more series of preferred shares, none of which are currently outstanding. For shareholders proposing to make nominations of persons for election to the Board at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors as set forth in the corporation’s notice of such special meeting, such nominations may only be made by a shareholder of the corporation entitled to vote at such meeting. In addition, the nomination proposal must be signed by one or more shareholders representing in the aggregate not less than 5% of the shares entitled to vote at such meeting, and the shareholder submitting the nomination proposal must comply with the notice and other procedures set forth in Section 3.5. The procedure provided for under Section 3.5 requires that a shareholder wishing to make a nomination must deliver notice thereof in proper written form to the Secretary of the corporation at the corporation’s principal executive offices: (i) in the case of an annual meeting of shareholders, not later than the close of business on the 90th day, nor earlier than the opening of business on the 120th day, before the first anniversary of the corporation’s immediately preceding annual meeting of shareholders; provided, however, that for any annual meeting that is called for a date that is not within 30 days before or 60 days after such anniversary date, notice by the shareholder to be timely must be so received not earlier than the opening of business on the 120th day before the meeting and not later than the close of business on the 90th day before the meeting or, if the first public announcement of the date of such meeting is less than 100 days prior to the annual meeting, the close of business on the 10th day following the day on which public announcement of the date of the annual meeting was first made by the corporation; and (ii) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which public announcement of the date of the special meeting is first made by the corporation. Any public announcement of an adjournment of an annual meeting or special meeting will not commence a new time period for the giving of a shareholder’s notice as described in Section 3.5. In the case of a management proxy circular for an annual meeting of shareholders that nominates fewer than the number of directors that are to be elected at the meeting, a shareholder’s notice required by Section 3.5 shall also be considered timely, but only regarding nominees for the additional directorships that are to be filled by election at such annual meeting, if it shall be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the date on which such management proxy circular was first mailed to the shareholders by the corporation. Under the above procedures, shareholder proposals for the nomination of directors for the 2013 annual meeting must be received no later than February 8, 2013.

 

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To be considered in proper written form under Section 3.5, a shareholder’s notice to the Secretary must set forth: (i) as to each person whom the shareholder proposes to nominate for election as a director: (A) the name, age, business address and residence address of the proposed nominee, (B) the principal occupation or employment of the proposed nominee, (C) the class or series and number of shares in the capital of the corporation, if any, held or owned by the proposed nominee and the date the shares were acquired, (D) any relationships, agreements or arrangements, including financial, compensation and indemnity-related relationships, agreements or arrangements, between the proposed nominee or any of its affiliates or any person or entity acting jointly or in concert with the proposed nominee and the nominating shareholder, and (E) any other information relating to the proposed nominee that would be required to be disclosed in a management proxy circular or other filings required to be made in connection with the solicitation of proxies for the election of directors pursuant to the CBCA and applicable securities legislation; and (ii) as to the shareholder giving the notice: (A) the name and record address of such shareholder, (B) the class or series and number of shares in the capital of the corporation held or owned by the shareholder and the date the shares were acquired, (C) any derivatives or other economic or voting interests in the corporation and any hedges implemented with respect to the shareholder’s interests in the corporation, and (D) in the case of a special meeting of shareholders called for the purpose of electing directors, whether such shareholder intends to deliver a proxy circular and form of proxy to any shareholders of the corporation in connection with such shareholder proposal. In addition, such notice must be accompanied by a completed and signed questionnaire, representation and agreement in form and substance described in our By-Laws and a written consent of each proposed nominee to being named as a nominee and to serve as a director, if elected.

Other Proposals by Shareholders

Under Section 2.7 of our By-Laws, no business may be transacted at an annual meeting of shareholders, other than business that is: (i) specified in the corporation’s notice of meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the annual meeting by or at the direction of the Board, or (iii) otherwise properly brought before the annual meeting by any shareholder of the corporation who complies with the proposal procedures set forth in our By-Laws. For business to be properly brought before an annual meeting by a shareholder of the corporation, such shareholder must submit a proposal to the corporation for inclusion in the corporation’s proxy circular in accordance with the requirements of the CBCA; provided that any proposal that includes nominations for the election of directors shall be submitted to the corporation in accordance with advance notice requirements in Section 3.5 of our By-Laws. Under the CBCA, proposals must be submitted at least 90 days before the anniversary date of the notice of meeting sent to shareholders in connection with the previous annual meeting. Shareholder proposals for the 2013 annual meeting, other than for director-nominees, must be received no later than December 21, 2012.

Communications with the Board of Directors

Shareholders and other interested parties may communicate with the Board of Directors or one or more directors by sending a writing addressed to the Board or to any one or more directors in care of Secretary, Tim Hortons Inc., 874 Sinclair Road, Oakville, Ontario, Canada, L6K 2Y1, in an envelope clearly marked “Shareholder and/or Other Interested Party Communication—Direct to Board of Directors” or by indicating instead the name of the specific director. The Secretary’s office will forward all such correspondence unopened to either The Hon. Frank Iacobucci, the Lead Director of the Board, or to another independent director as the Board of Directors may specify from time to time, or to the director specifically named on the outside of the envelope, if applicable.

Householding of Proxy Materials

Prior to our public company reorganization in 2009, we had adopted an SEC procedure known as “householding,” which allows multiple shareholders residing at the same address the convenience of receiving a single copy of our meeting materials. While there are no similar Canadian provisions, we are permitted to ask shareholders to consent to our use of householding. Householding limits the impact to the environment of annual meetings and saves money by reducing the number of documents that must be printed and mailed.

 

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Householding is available to registered shareholders (i.e., those shareholders owning common shares registered in their name). We encourage registered shareholders to indicate their agreement to our continued use of householding by accessing the Internet site www.investorvote.com and following the instructions regarding householding, or by indicating your preference on the proxy card accompanying this proxy circular.

If you are a registered shareholder and have consented to our mailing of proxy materials and other shareholder information to only one account in your household, as identified by you, we will deliver or mail a single copy of our Form 10-K, our proxy circular and any other proxy materials, for all registered shareholders residing at the same address. Your consent will be perpetual unless you revoke it, which you may do at any time by calling our transfer agent, Computershare, (toll free) at 1-800-697-8078, or by informing Computershare in writing at 100 University Avenue, 9^th Floor, Toronto, Ontario, M5J 2Y1. If you revoke your consent, we will begin sending you individual copies of future mailings of these documents within 30 days after we receive your revocation notice. We will also deliver promptly to you, upon your oral or written request to Computershare at the contact information just provided, a separate copy of the Form 10-K and these and any other proxy materials, for which a single copy was previously provided to a shared address.

Registered shareholders who have not consented to householding will continue to receive printed copies of the Form 10-K (except those registered shareholders who asked not to receive it), our proxy circular, and any other proxy materials, for each registered shareholder residing at the same address. As a registered shareholder, you may elect to participate in householding and receive only a single copy of Annual Reports or proxy circulars for all registered shareholders residing at the same address by contacting Computershare, at the toll-free number set forth above, or by informing Computershare in writing at 100 University Avenue, 9^th Floor, Toronto, Ontario, M5J 2Y1.

 

 

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SCHEDULE “A”—SHAREHOLDER PROPOSAL

The following shareholder proposal (“Proposal”) was submitted for consideration at the meeting by The Humane Society of the United States (“HSUS”) of 2100 L Street, NW Washington, DC 20037. As of the date that the Proposal was submitted, HSUS informed us that it beneficially owned at least $2,000 in fair market value of our common shares. In accordance with applicable law, the Proposal and supporting statement are presented below exactly as submitted by HSUS and are quoted verbatim. We disclaim all responsibility for the content of the Proposal and the supporting statement.

Required Vote. For the approval of the Proposal to be approved by shareholders, the Proposal must receive the affirmative vote of a majority of the votes cast at the meeting in person or by proxy.

Proposal

“RESOLVED, that shareholders encourage the Board of Directors to report on the feasibility of ensuring that by 2015, all eggs and pork purchased by Tim Hortons’ from U.S. sources come from cage-free hens and pigs not bred using gestation crate confinement system.”

Supporting Statement

There has been a groundswell of support in the United States for providing farm animals with more humane conditions. The focus has largely been on how egg-laying hens are confined in tiny “battery cages” and breeding pigs are confined in “gestation crates,” both of which virtually immobilize the animals for their entire lives and prevent them engaging in many of their most important natural behaviors.

Food Industry Progress:

Starbucks, Wendy’s, Burger King, McDonald’s, Subway, Kraft Foods, Safeway, ConAgra Foods, Sara Lee, Sonic, Quiznos, Chipotle, Carl’s Jr., Cracker Barrel, Ruby Tuesday, Hardee’s, Golden Corral, Krispy Kreme, Wolfgang Puck, Whole Foods and many other companies have policies to shift partially or entirely to cage-free eggs and/or gestation crate-free pork. Tim Hortons has no such policy. Additionally, one hundred percent of Walmart’s and Costco’s private brand eggs are cage-free. And Unilever adopted a policy in 2010 to shift all eggs in all of its products worldwide to cage-free.

Public Sentiment:

Food industry consultancy, Technomic, found that animal welfare is the third most important social issue to American restaurant patrons (outranking the environment and buying local, organic, or fair trade). An American Farm Bureau-funded study concluded that 95 percent of Americans think farm animals should be well-cared for. Additionally, TIME magazine, Fox News, The Wall Street Journal and other major outlets have covered the issue, and Oprah Winfrey dedicated an entire episode to the extreme confinement of farm animals. A 2010 New York Times editorial noted that the publication hopes that the extreme confinement of farm animals will be a “relatively short-lived anomaly in modem farming.”

Legislation:

Eight U.S. states have passed laws banning one or both of these forms of extreme confinement, as has the entire E.U.

Sound Science:

Renowned farm experts-and advisor to the pork industry-Dr. Temple Grand in has repeatedly condemned gestation crates, saying “they have to go.” And a prestigious commission on farm animal welfare including a former U.S. secretary of agriculture concluded that gestation crates and battery cages should be phased out.

 

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We urge other shareholders to vote FOR this resolution. The extreme confinement of farm animals is a major social issue in the U.S., and legislation, science and public sentiment support moving toward more humane systems, as do the policies of many leading food companies. It would be in shareholders’ best interests to understand the feasibility of Tim Hortons switching to the above-described products for the pork and eggs it purchases from U.S. sources.

Board of Directors’ Statement in Opposition to the Proposal and Recommendation

The Board has carefully considered the Proposal and, for the reasons described below, believes strongly that the resolution submitted is NOT in the best interests of the corporation and, further, that it would detract from significant efforts undertaken by the corporation in the area of animal welfare. As a result, the Board recommends shareholders vote against the Proposal.

While some food products in our system are derived from farm animals, we are not directly involved in the raising, handling, transportation or processing of these animals. However, animal welfare is an important issue to Tim Hortons and our stakeholders, including our restaurant owners, suppliers, investors and guests. We consider animal welfare to apply to all aspects of animal care of the farm animals within our supply chain, and the corporation has made significant investments in time and effort in this area during the past several years.

The proponents have raised similar matters at many U.S. company shareholder meetings over the past few years. To our knowledge, not one of HSUS’ proposals has ever been passed, and each resolution HSUS has filed has typically received less than six percent of affirmative votes.

We have informed the HSUS that the industry has limited capacity to provide these products on a commercially and financially viable scale sufficient to our needs. It is estimated that over 97% of egg- laying hens in Canada¹ and 95% in the U.S.² are housed in non-enriched cages. Similarly, it is estimated that over 70% of breeding sows in the U.S. are housed in gestation crates,³while estimates are unknown for Canada as the pork industry has been downsizing over the last number of years. Furthermore, restaurant chains noted in the Proposal generally have made only limited commitments due to capacity and financial reasons and/or due to the fact that eggs and pork sold within these chains do not represent a material proportion of their sales.

The corporation believes the proponent’s intentions in relation to the Proposal are not in the best interests of the corporation due to the financial and commercial impacts and the nature of HSUS’ public actions (i.e., negative media campaigns) pertaining to other large restaurant companies, and more recently, targeted to Tim Hortons. The Proposal contemplates 100% commitments for our U.S. business; whereas the HSUS has historically called for only modest and gradual commitments in other organizations. Some recent examples include, but are not limited to: Bob Evans^® (2011)–“phase in the use of cage-free eggs for Bob Evans so that they represent at least 5% of the company’s total egg usage”; McDonalds^® (2010)–“switch to 5% of the eggs it purchases for its U.S. locations to cage-free eggs by January 2011”. Similar proposals for small percentage commitments have been made for gestation crate-free pork.

Further, pending U.S. federal legislation (announced jointly following an agreement by the HSUS and the United Egg Producers in 2011) calls for the gradual phase in of enriched-cage⁴ eggs over a 15-18 year period, instead of the cage-free-egg commitment called for by HSUS in the Proposal. This contradiction between the HSUS’ industry agreement and the Proposal illustrates the divergent direction of the industry, government and animal welfare researchers from that proposed by HSUS, and presents significant potential risks to our business if substantial cage-free sourcing commitments were required, while the rest of the industry pursues eggs sourced from enriched-cage hen housing systems.

 

 

1	Egg Farmers of Canada (2010).

2,3	Humane Society International/HSUS

4

“Enriched-cage” housing systems provide a larger caged environment that will allow egg-laying hens to express natural behaviors, such as perches, nesting boxes, and scratching areas, as opposed to the current non-enriched system. “Cage-free” environments do not utilize cages with egg-laying hens being free to move relatively uninhibited in a large open space.

 

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The corporation has worked with industry associations, major suppliers and other stakeholder groups to encourage the industry to reach agreement on common standards for egg-housing systems that enhance the welfare of egg laying hens. Additionally, to encourage the egg industry to further research and evolve hen welfare, we have made a commitment to source a minimum of 1% of the eggs used in our supply chain systemwide from enriched-cage hen housing systems. The corporation will continue to review this commitment over time to consider future developments in housing systems and/or hen welfare generally.

On gestation crate-free pork, we have been advised by certain of our suppliers that a portion of our products are already sourced from housing systems that do not utilize gestation crates; however, due to traceability issues, the exact portions cannot be quantified. Further, costs to make commitments for even small percentage increases within our supply chain for gestation crate-free pork would be excessive and unsustainable, to the corporation, our restaurant owners, our key suppliers, and family farm producers who make up a significant percentage of the overall supply. We believe the industry should make progress on reducing the use of gestation crates for pork, and we have committed to encourage and work with our suppliers, the industry and other stakeholders to assess new and/or alternative housing systems over time in a sustainable manner. We have previously communicated both our egg and pork commitments to HSUS.

The corporation has been engaged in dialogue with the HSUS since January 2010 and, over the past two years, we have had transparent and open discussions on the progress of our animal welfare program and initiatives. During this time, we have made significant strides in our animal welfare programs and have undertaken initiatives across a range of priority areas of our business towards our goals, including updating our Animal Welfare Policy, which has been in place since 2006.

More recently, working in collaboration with the broader industry, we conducted a thorough review of all relevant considerations including, the availability of, and our supply chain and distribution capabilities for, cage-free eggs and gestation crate-free pork. We have determined that it is not financially feasible to source 100% of such products, most specifically due to the negative financial impact that the use of these products would have on our restaurant owners, the vast majority of whom are independent, small business owners.

Recommendation: THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” THE PROPOSAL. Unless otherwise indicated, the persons named in the proxy will vote all proxies “AGAINST” the approval of the Proposal.

 

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TIM HORTONS INC.

ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

May 10, 2012

School of Hospitality and Tourism Management, Ted Rogers School of Management

Ryerson University, 7^th Floor Auditorium, 55 Dundas Street West, Toronto, Ontario

Phone: 416-979-5041. Meeting begins at 10:30 a.m., EDST,

doors open at 9:30 a.m., EDST

Shareholders are invited to attend the Annual and Special Meeting of Shareholders. Please note the following admission requirements:

 

•

Shareholders of record should be prepared to present a government-issued picture identification in order to be admitted into the meeting.

•

Shareholders owning shares through a bank, brokerage firm, or other similar organization should be prepared to present evidence of ownership as of March 13, 2012, such as an account statement, or proxy issued by the organization through which they hold their shares, in addition to government-issued picture identification.

•

A representative of a corporation, limited liability company, partnership or other legal entity that is a shareholder should also be prepared to present acceptable evidence of authority to represent such entity at the meeting. Only one representative of such an entity will be admitted.

•

SEATING AT THE MEETING IS LIMITED AND ADMISSION IS ON A FIRST-COME, FIRST-SERVED BASIS. CAMERAS, CELL PHONES, RECORDING EQUIPMENT AND OTHER ELECTRONIC DEVICES WILL NOT BE PERMITTED AT THE MEETING.

The meeting will be broadcast live over the Internet beginning at 10:30 a.m., EDST, at www.timhortons-invest.com and will be archived on the site. For further information, contact the Tim Hortons’ Investor Relations Department at 905-339-6186.

Directions to the Tim Hortons Inc. 2012 Annual and Special Meeting

Ryerson University (Toronto, Canada)

 

 

 

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		Security Class   Holder Account Number

 

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This Form of Proxy is solicited by and on behalf of Management.

Notes to proxy

 

1.

Every holder has the right to appoint some other person or company of their choice, who need not be a holder, to attend and act on their behalf at the meeting or any adjournment or postponement thereof. If you wish to appoint a person or company other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided (see reverse).

 

2.

If the securities are registered in the name of more than one owner (for example, joint ownership, trustees, executors, etc.), then all those registered should sign this proxy. If you are voting on behalf of a corporation or another individual, you must sign this proxy with signing capacity stated, and you may be required to provide documentation evidencing your power to sign this proxy.

 

3.

This proxy should be signed in the exact manner as the name(s) appear(s) on the proxy.

 

4.

If this proxy is not dated, it will be deemed to bear the date on which it is mailed to the holder.

 

5.

The securities represented by this proxy will be voted or withheld from voting as directed by the holder, however, if such a direction is not made in respect of any matter, this proxy will be voted as recommended by the Board of Directors.

 

6.

The securities represented by this proxy will be voted in favour of, withheld from voting or voted against each of the matters described herein, as applicable, in accordance with the instructions of the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, the securities will be voted accordingly.

 

7.

This proxy confers discretionary authority in respect of amendments or variations to matters identified in the Notice of Meeting or other matters that may properly come before the meeting or any adjournment or postponement thereof.

 

		8.   This proxy should be read in conjunction with the accompanying documentation provided by Management and the Board of Directors.		Fold

Proxies submitted must be received by 11:59 p.m., Eastern Daylight Savings Time, on the day before the meeting date.

VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!

 

•        Call the number listed BELOW from a touch tone telephone.   1-866-732-VOTE (8683) Toll Free		•        Go to the following web site: www.investorvote.com		•        You can enroll to receive future securityholder communications electronically by visiting www.computershare.com/eDelivery and clicking on “eDelivery Signup”.

If you vote by telephone or the Internet, DO NOT mail back this proxy.

Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual.

Voting by mail or by Internet are the only methods by which a holder may appoint a person as proxyholder other than the Management nominees named on the reverse of this proxy. Instead of mailing this proxy, you may choose one of the two voting methods outlined above to vote this proxy.

To vote by telephone or the Internet, you will need to provide your CONTROL NUMBER listed below.

CONTROL NUMBER    

 

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Appointment of Proxyholder
I/We, being holder(s) of Tim Hortons Inc. common shares hereby appoint: Paul D. House, or failing this person, Cynthia J. Devine, or failing this person, Jill E. Aebker		OR		Print the name of the person you are appointing if this person is someone other than the Management Nominees listed herein.

as my/our proxyholder with full power of substitution and to attend, act and to vote for and on behalf of the shareholder in accordance with the following directions (or if no directions have been given, as the proxyholder sees fit) on all proposals set forth below and all other matters that may properly come before the Annual and Special Meeting of shareholders of Tim Hortons Inc. to be held at the School of Hospitality and Tourism Management, Ted Rogers School of Management, Ryerson University, 7th Floor Auditorium, 55 Dundas Street West, Toronto, Ontario on May 10, 2012 at 10:30 a.m., Eastern Daylight Savings Time, and at any adjournment or postponement thereof.

VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES

The Board of Directors recommends a vote FOR all the nine nominees listed in Proposal 1, each for a term of one year, FOR Proposal 2, FOR Proposal 3, FOR Proposal 4 and AGAINST Proposal 5.

 

1.  Election of Directors

For

Withhold

For

Withhold

For

Withhold

01. M. Shan Atkins

¨

¨

02. Michael J. Endres

¨

¨

03. Moya M. Greene

¨

¨

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04. Paul D. House

¨

¨

05. Frank Iacobucci

¨

¨

06. John A. Lederer

¨

¨

07. David H. Lees

¨

¨

08. Ronald W. Osborne

¨

¨

09. Wayne C. Sales

¨

¨

For

Withhold

2.  Appointment of Auditors

To reappoint PricewaterhouseCoopers LLP as the independent auditor, for the fiscal year ending December 30, 2012.

¨

¨

For

Against

3.  Shareholder Rights Plan

To reconfirm the Shareholder Rights Plan, as described in the Proxy Circular.

¨

¨

For

Against

4.  2012 Stock Incentive Plan

To approve the 2012 Stock Incentive Plan, as described in the Proxy Circular.

¨

¨

For

Against

5.  Shareholder Proposal

Shareholder Proposal, as set out in Schedule A of the Proxy Circular.

¨

¨

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Authorized Signature(s) - This section must be completed for your instructions to be executed.				Signature(s)				Date
I/We authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by the Board of Directors.								/           /

 

 

 

Mark this box if you consent to householding		¨		Mark this box if you plan to attend the meeting		¨
Interim Financial Statements – Mark this box if you would like to receive interim financial statements and accompanying Management’s Discussion and Analysis (for electronic delivery see instructions on the front of this proxy card).		¨		Annual Financial Statements – Mark this box if you would NOT like to receive the Annual Financial Statements and accompanying Management’s Discussion and Analysis.		¨

If you are not mailing back your proxy, you may register online to receive the above financial report(s) at www.computershare.com/mailinglist.

 

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