Canada: Measures To Protect Head Offices Located In Quebec – Key Recommendations Of The Task Force On The Protection Of Quebec Businesses

On June 7, 2013, the Government of Quebec set up the Task Force on the Protection of Quebec Businesses (the Task Force), composed of experts and chaired by Claude Séguin, former deputy minister of finance for Quebec and current Senior Vice President of Corporate Development and Strategic Investments at CGI. The Task Force's mandate was, among other things, to recommend measures that would enable Quebec businesses to better protect themselves against hostile takeovers and measures that would foster the maintenance and development of head offices in Quebec.

On February 20, 2014, the government released the Task Force's report at the same time as the Quebec Minister of Finance and the Economy, Nicolas Marceau (the Minister), tabled the Budget1. A copy of the report is available here. The report proposes nine measures affecting corporate law, securities regulation and taxation. Some of these recommendations draw on American and European models and, if adopted, would be unique in Canada.  


Recommendations affecting the Quebec Business Corporations Act (the QBCA)

The Task Force recommends that the Minister introduce safeguards against hostile takeover bids. According to the Task Force, shareholders with a long-term interest in a corporation and the boards of entities incorporated under the QBCA should have the tools needed to make the decisions that are in the corporation's best long-term interests.

Measure 1 – Amend the QBCA to include provisions allowing for the automatic adjustment of voting rights based on the length of time shares are held (i.e. variable voting rights)

First, drawing inspiration from certain European jurisdictions, the Task Force proposes amending the QBCA to enable the adoption of variable voting rights, i.e. voting rights that increase the longer shares are held. Under the implementation formula proposed by the Task Force, an additional voting right may be included in the voting shares when the beneficial owner has held the shares for two years or more. This measure would benefit longer-term shareholders.

Measure 2 – Amend the QBCA to include provisions prohibiting certain transactions by offerors in hostile takeover bids

Second, in line with an approach taken in certain U.S. states, the Task Force proposes amending the QBCA to prohibit certain transactions by corporations that are the subject of a hostile takeover bid from being carried out without the approval of the target's board. The Task Force proposes the following implementation formula:

  • A merger or other amalgamation of the assets of the corporation with the assets of the offeror or a substantial sale of assets representing 15% or more of the corporation would be prohibited for five years.
  • The offeror would be required to give the corporation the profits made in the 24 months following the takeover bid on the resale of the securities of the corporation purchased during the 12 months prior to the launch of the takeover bid.
  • The current term of office of a director (maximum duration of three years) could not be revoked before the end of the term.
  • The offeror would not be able to exercise its voting rights for the shares it holds after the launch of the takeover bid. This measure would apply until the other shareholders, excluding the directors and executive shareholders, adopt a resolution, by a two-thirds majority vote, restoring the voting rights to the offeror and its associates.

Adoption of measures

Measures 1 and 2 could be included in the corporation's articles of incorporation or withdrawn at any time by special resolution of the shareholders.

In his Budget Speech, the Minister announced the government's intention to rapidly act on the recommendation enabling business corporations to adopt variable voting rights based on the length of time shares are held and the recommendation aimed at prohibiting certain transactions by corporations that are the subject of a hostile takeover bid.

Measures 1 and 2, as they currently stand, would only affect entities incorporated under the QBCA and whether they were adopted or not would ultimately be up to the shareholders of those entities.

Measure 3 – Make measures 1 and 2 applicable to all entities incorporated in Quebec that are likely to make a public offering and be the subject of a hostile takeover bid

According to the Task Force, measures similar to measures 1 and 2 should apply to all entities incorporated in Quebec that are likely to make a public offering and be the subject of a hostile takeover bid. They would therefore apply to issuing entities governed by the Civil Code of Quebec, such as certain trusts, but would not apply to corporations headquartered in Quebec that are incorporated under the Canada Business Corporations Act or other federal statutes.

Recommendations concerning securities regulators

The Task Force also recommends that the Minister facilitate legislative and regulatory implementation of the proposal of the Autorité des marchés financiers (AMF) concerning takeover bids, set out in its consultation paper on defensive tactics published on March 14, 2013,2 and that he turn the Bureau de décision et de révision (the BDR) into an administrative tribunal specializing in securities.

Measure 4 – Facilitate the regulatory and legislative implementation of AMF's proposal regarding hostile takeover bids

The AMF proposal is twofold and seeks to (i) redefine how the Canadian Securities Administrators (CSAs) intervene in takeover defences and (ii) change the takeover bid regime.3 The proposal, if implemented, would enable the boards of target corporations to fully exercise their fiduciary duties in order to restore the balance between the offeror and the target corporation.

According to the AMF's proposal, which is supported by the Task Force, Notice 62-202 relating to Take-Over Bids – Defensive Tactics (Notice 62-202) should be replaced by a new approach that gives appropriate deference to directors so they can exercise their fiduciary duties in adopting defensive tactics.  

Under that same proposal, the CSAs would issue cease trade orders only when the defensive tactic that is adopted results in a clear violation of the securityholders' rights or undermines the smooth operation of the markets. This would enable the boards of target corporations to exercise their powers without the systematic intervention of the CSA.  

In addition, the AMF proposes, as an irrevocable condition of any bid for all securities of a class, and for partial bids, that the minimum percentage of securities to be tendered be set at more than 50% of the outstanding securities belonging to persons other than the offeror. It also proposes extending the bid by 10 days following the public announcement that such minimum percentage has been tendered. This change would have the effect of mitigating the uncertainty surrounding a takeover bid that leads securityholders to tender their securities or sell them prematurely.   

Measure 5 – Transform the Bureau de décision et de révision (the BDR) into an administrative tribunal specializing in securities

According to the Task Force, the BDR should be turned into a specialized administrative tribunal made up of Court of Quebec justices. Like Delaware, which has courts specializing in corporate law, Quebec should create a new tribunal known for the quality and consistency of its decisions, which, according to the Task Force, would make it more attractive for companies to incorporate or continue under the QBCA.

Fiscal measures that could help to keep head offices in Quebec or attract new ones

According to the Task Force, to keep head offices in Quebec and attract new ones, the Quebec tax system needs to be competitive in the treatment reserved for businesses, shareholders and senior executives.

Measure 6 – Encourage employees to purchase shares in the companies they work for

First, according to the Task Force, employees should be encouraged to become shareholders of the corporations they work for. To achieve this, matching shares received from the corporation should be given a more favourable tax treatment by taxing employees on those shares when they are sold rather than when they are acquired. In addition to fostering a stronger sense of belonging among employees and providing them with an additional financial return, this measure would enable certain corporations to create blocks of employee-held shares, further complicating any hostile takeover bid.   

Measure 7 – Improve the tax treatment of gains obtained through stock options

Second, corporate executives should receive a more advantageous tax treatment of the gains realized on their stock options. This measure is intended to create optimal conditions for the development of head offices and make Quebec as attractive as possible for senior executives who might be drawn to this province and who then might make it their permanent home. According to the Task Force, since stock options often account for a significant portion of executive compensation, the taxation rate needs to be competitive with rates across Canada.

Measure 8 – Re-examining the tax rules for capital gains with a view to enabling the owners and key shareholders of a business to defer the taxation of capital gains at the time of death

Third, the taxation of capital gains at the time of death of an owner or a key founding shareholder should be
re-examined with a view to enabling the tax on capital gains normally payable at the time of death of an owner or key founding shareholder of a business to be deferred to the time of transfer of ownership of the business to another generation. This measure would deter a subsequent generation from prematurely selling all of its controlling shares. This, according to the Task Force, would result in more head offices remaining in Quebec.

The Task Force also wants to introduce a measure allowing family trusts to realize the gain attributable to their significant investment in a business at the time of sale instead of every 21 years, for as long as the business remains active.

Measure 9 – Promote the participation of Quebec investment funds

Lastly, the Task Force recommends that legislative and regulatory measures be put in place to promote the financial and operational participation of Quebec investment funds in order to facilitate the transfer of Quebec corporations to a new generation of Quebec owners.

Comments

The Task Force's report is premised on the notion that the presence of head offices – and the related economic benefits – is crucial for the Quebec economy and that the current rules make companies listed in Canada vulnerable to hostile takeover bids. In fact, federal and provincial laws in Canada place our businesses at a disadvantage in relation to businesses incorporated in the United States, where both securities legislation and corporate legislation in more than 30 states provide safeguards against hostile takeovers.    

Notice 62-202 states that the primary objective of the takeover provisions of securities legislation applicable in the provinces and territories of Canada is the protection of the bona fide interest of the shareholders of the target company; a secondary objective is to provide a regulatory framework within which takeover bids may proceed in an open and even-handed environment. At no point does the regulation deal with other priorities for the Canadian or Quebec economy, or the vulnerability of target corporations in the absence of adequate defensive measures.  

However, since the ruling of the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders,4 the attention has been focused on the role of the board of the company targeted by a hostile takeover bid and the fiduciary duties of the directors. In that ruling, the Court noted that, in determining what serves the best interests of the corporation, the directors may consider, among other things, the interests of various parties, but there is no principle that one set of interests should prevail over another.  

There is a growing debate concerning the tension that exists between the primacy of shareholders' interests espoused in current securities regulations, on one side, and the importance of public corporations for the communities they are located in and the power of boards of directors to determine their fate, on the other.  

The report and recommendations of the Task Force are clearly and unequivocally on the side of giving more powers to boards of directors. These recommendations will have to be taken into account in the approach adopted by the CSAs. In fact, in 2013, the comments received by the AMF during its comment period showed strong support from both Quebec issuers and issuers outside the province. The Task Force's recommendations and the Minister's initiatives could speed up a compromise among the CSAs regarding the AMF's position that would allow us to better protect not only our head offices, but all other Canadian public companies as well.

Incidentally, one would have expected the Task Force to propose legislative amendments that would apply immediately, as was the case in certain American states that impose provisions prohibiting certain transactions for offerors in hostile takeover bids but which, at the same time, allow the target companies to opt out of their application. Instead, the Task Force's recommendations provide for the possibility of opting in to the new measures.  

Lastly, the report recommendations (other than the proposed tax measures) apply only to hostile takeovers. In recent years, many companies that have been privatized and whose head offices have been relocated have not been the targets of hostile takeover bids; instead, they have been privatized through negotiated transactions. As such, for these types of transactions, regardless of what the future holds for the Task Force's recommendations, the shareholders will continue to have the last word.

Footnotes

1 For more information on the latest budget measures announced by the provincial government, please refer to our Legal update entitled "Highlights of the February 20, 2014 Quebec Budget," available here.

2 Autorité des marchés financiers, "Document de consultation : Un regard différent sur l'intervention des autorités en valeurs mobilières dans les mesures de défense," available here (French only).

3 For more information on the recommendation of the AMF and the CSA, please refer to our Legal Update entitled "The Canadian Securities Administrators propose new shareholder rights plan regime, AMF proposes alternative approach," available here.

4 2008 SCC 69, [2008] 3 SCR 560.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions