Canada: Proposed Amendments To Ontario’s Business Corporations Act – Implications For Public Companies

Last Updated: November 24 2006

Article by John Tuzyk and Lelia Costantini, © 2006, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Law, November 2006

On October 19, 2006, the Ontario Government introduced for first reading Bill 152 Ministry of Government Services Consumer Protection and Service Modernization Act, 2006 (Bill 152). It received second reading on October 26, 2006. Bill 152 amends several pieces of Ontario legislation, including the Ontario Business Corporations Act (OBCA). Several of the amendments to the OBCA are similar to changes made by the federal government to the Canada Business Corporations Act (CBCA) in 2001. As a result, if, as expected, the proposed amendments in Bill 152 become law, there will be greater harmony between the two Acts.

The following summarizes changes to the OBCA that will be of relevance to public companies incorporated under that Act.

Proxy Solicitation Rules

Currently, the OBCA requires anyone who solicits proxies of an offering corporation to prepare and send an information circular to, among others, each shareholder whose proxy is solicited. The proposed amendments in Bill 152 introduce two exemptions from this requirement. First, a dissident’s information circular would not be required if the total number of shareholders whose proxies are solicited is 15 or fewer. Second, a dissident’s information circular would not be required if the proxy solicitation occurs (i) in certain prescribed circumstances and (ii) is conveyed by public broadcast, speech or publication. The prescribed circumstances will be determined at a future date by regulation. These two exceptions mirror the amendments made to the CBCA. As a result, the prescribed circumstances under the CBCA may be indicative of the approach to be taken under the OBCA. Under the CBCA regulations, the prescribed circumstances are where the solicitation by public broadcast or speech contains similar information to that required in a dissident’s circular, such as the name of the corporation, the identity and background of each dissident and details of the dissident’s material interest.

Shareholder Proposals

Presently, only registered shareholders are permitted to submit a proposal for discussion at a shareholder meeting. Similar to the change made to the CBCA, Bill 152 extends this right to beneficial shareholders. As a result, beneficial owners of shares would also have the right, on the same basis as registered shareholders, to include a proposal and supporting statement in the management information circular. Currently, such a proposal and supporting statement cannot exceed 200 words. The new provision would establish a new maximum number of words to be determined at a later date by regulation.

Shareholder Communications

Under the OBCA, an offering corporation must send copies of certain prescribed documents to each shareholder at least twenty-one days before each annual shareholder meeting unless the corporation has been informed in writing by a shareholder that it does not wish to receive a copy. Bill 152 would change this provision so that an offering corporation would only be required to send these documents to a shareholder if the shareholder has informed the corporation in writing that it wished to receive a copy of such documents.

Director Residency Requirements

Currently, the OBCA requires that a majority of the directors of the corporation be resident Canadians. The proposed amendments would reduce this requirement to twenty-five (25) per cent. This amendment reflects the same change made to the CBCA. Bill 152 also proposes to eliminate the residency requirements for transacting business at directors’ meetings and for the appointment of a managing director.

Audit Committees

Another interesting proposed change to OBCA is the creation of an exemption from the audit committee requirement. Currently, the OBCA requires all offering corporations to have an audit committee. As part of the amendments in Bill 152, an offering corporation would be permitted to seek an exemption from this requirement upon application to the Ontario Securities Commission (OSC). Where the OSC is satisfied that shareholders would not be prejudiced, it may grant an exemption, subject to any reasonable conditions it may impose. At the present time it is unclear under which circumstances the OSC would provide this relief or the conditions it may impose.

Conflict Of Interest Rules

Under the OBCA, a director or officer of a corporation who is required to provide notice to the corporation of a conflict of interest is prohibited from voting on any resolution to approve the contract or transaction in respect of which he or she is conflicted. The proposed amendments would in addition prohibit such directors from attending the portion of the meeting where a matter in respect of which he or she is conflicted is being discussed. Conflicted directors also would no longer be permitted to vote on any arrangement where security is granted to a third party for obligations undertaken by the conflicted director.

The proposed amendments would also require directors to notify the corporation of any material changes in the nature of their conflict of interest.

Liability Of Directors And Defences

The proposed amendments clarify that directors and officers owe their fiduciary duties exclusively to the corporation.

Similar to the changes made to the CBCA, Bill 152 includes the addition of a "due diligence" defence for directors. This due diligence defence provides that a director will not be liable to the corporation for any liability resulting from his or her authorization of a resolution in contravention of the OBCA, such as a payment of a dividend in contravention of the solvency rules, or other breaches of the Act, if he or she exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This defence continues to include good faith reliance by a director on interim and other financial reports or the advice of an officer or employee of the corporation.

Indemnification And Insurance

Bill 152 proposes several changes to the scope of the indemnification provisions. The permissible indemnification would be expanded to cover individuals who act at the request of the corporation in a managerial position for a non-corporate entity. Furthermore, a corporation would also be able to indemnify a person acting on its behalf as a director or officer of another corporation regardless of whether the indemnifying corporation is (or was) a shareholder or creditor of that other corporation. The coverage of permitted indemnification would be expanded to include investigative and other proceedings.

A new provision would be added that would authorize corporations, with the approval of the court, to advance money to a director, officer or other individual for the costs, charges and expenses of a proceeding. Individuals, however, would have to repay the money if they were found to have acted dishonestly or in bad faith.

The proposed amendments would also expand the situations where a corporation would be required (as opposed to permitted) to provide indemnification. Currently, an officer or director is entitled to be indemnified by the corporation against any costs and expenses reasonably incurred in connection with his or her defence of an action or proceeding. However, such indemnification is available only if he or she was substantially successful on the merits of his or her defence. The new provision would be less stringent and entitle an officer or director to indemnification so long as he or she was not judged to have committed any fault or omission.

The new provisions would remove the current prohibition on corporations purchasing insurance for the benefit of their officers and directors in situations where the liability relates to their dishonest or bad faith conduct.

Minority Shareholder Rights And Remedies

Under the proposed amendments, beneficial owners of shares of a corporation would gain several of the rights presently held by registered shareholders, including the rights to: (i) make an application to court regarding the corporation’s refusal to include a proposal in the management information circular; (ii) access corporate records; and (iii) receive information regarding the registered holders of shares.

Bill 152 also clarifies that a shareholder’s right to dissent in respect of a resolution to amend the corporation’s articles applies even if there is only one class of shares. As well, the proposed amendments provide that a party seeking court approval to commence a derivative action is not required to give advance notice of such action to the corporation’s directors if they all are defendants in the action.

Voting Entitlements

Bill 152 would also restrict a shareholder’s right to vote their shares at a meeting to only those shareholders registered as of a fixed record date. A person who has received shares as a result of a share transfer after that fixed date would no longer be entitled under the OBCA as a matter of statutory right to vote those shares at the meeting.

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.

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