Canada: Proposed Amendments To The Canada Business Corporations Act And Other Federal Statutes

Last Updated: November 29 2016
Article by Edward Brown and Jack Schroder

Introduction

On September 28, 2016 the Government of Canada tabled Bill C-25 — An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (the "Bill"). If passed, the Bill will amend the Canada Business Corporations Act (the "CBCA"), with the stated objectives of:

  • increasing shareholder democracy and participation;
  • increasing women's representation, as well as diversity, on corporate boards and in senior management;
  • improving corporate transparency; and
  • reducing regulatory burden and increasing business certainty.

Corresponding and interpretive changes have been proposed to the other federal statutes affected by the Bill to ensure coherence within the federal corporate governance regime.

Background

In 2014, the previous federal government began seeking input on modifications to Canada's business legislation. Around the same time, the Toronto Stock Exchange ("TSX") introduced a listing requirement that companies listed on the TSX must elect directors individually and adopt majority voting policies. The majority voting policies as prescribed by the TSX require directors to resign if they do not receive a majority of votes cast in an annual election and, absent exceptional circumstances; a board of directors is required to accept the resignation. The proposed amendments in the Bill seek to address some of the input from the 2014 consultation, and additionally bring the CBCA into alignment with certain securities regulations and TSX rules such as the majority voting policy.

Proposed Changes

Shareholder Democracy

The current CBCA framework allows for directors of "distributing corporations" (the concept of "distributing corporations" under the CBCA is closely aligned with the concept of a "reporting issuer" under Canadian securities law) to be elected for terms up to three years in length, and for directors to be nominated and elected on a "slate" rather than an individual basis. Additionally, current legislation allows shareholders to vote "for" or "withhold" with respect to the election of directors. The result is that an uncontested director can successfully win election with a single vote, regardless of the number of votes withheld. The Bill proposes three major changes to director election procedures for distributing corporations:

  • annual elections;
  • election of directors individually; and
  • use of a majority voting standard for uncontested director elections.

The majority voting standard would provide shareholders with the option to vote "for" or "against" each individual candidate. This provides shareholders with a simple method of removing unpopular directors.

The majority voting policy implemented by the TSX is similar to that proposed in the Bill, and requires directors who do not receive a majority of votes to immediately resign. However, the TSX policy also allows a board to reject a director resignation if there are "exceptional" circumstances .

The changes proposed in the Bill would eliminate the discretion afforded to CBCA company boards under the TSX policy. The new rules would make an uncontested candidate's election contingent on receiving a majority of the votes cast "for" their election. In other words, a candidate who receives less than the requisite majority of shareholder votes will not legally hold a seat on the board. The proposed change also prohibits the board of directors from appointing a candidate to the board between annual meetings if that candidate failed to win majority shareholder support at the previous meeting (except in "prescribed circumstances"). The Bill does not propose changes for contested elections, meaning that in contested elections, the candidates with the most votes will win their seats on the board.

Board Diversity

In 2014, the securities commissions in certain provinces of Canada amended National Instrument 58-101 — Disclosure of Corporate Governance Practices ("NI 58-101") to require disclosure on gender diversity policies for senior management and board positions. The requirements under NI 58-101 are based on a "comply or explain" model, which require that TSX listed reporting issuers annually disclose their diversity representation and policies, or explain why none are in place.

The amendments proposed in the Bill mandate that directors must provide shareholders with the "prescribed information" respecting diversity among the board and senior management. However, at the present time it is not clear what information relating to diversity will be required to be disclosed as the "prescribed information" will be outlined in revised regulations, which have not yet been published. We expect that the prescribed information will be closely aligned to the disclosure relating to diversity required by NI 58-101.

Notice and Access

The proposed changes to the CBCA also contemplate simplified shareholder communications. The amendments would allow for "notice and access", which permits a corporation to use electronic communication (rather than physical mailing) to provide notice of meetings and access to relevant documents. Securities regulators have provided for a notice and access system since 2013, although the current text of the CBCA requires the express consent of a shareholder for delivery of electronic documents to be deemed valid. The current text of the Bill would eliminate the uncertainty regarding use of the notice and access rules for distributing CBCA issuers.

Conclusion

The proposed changes will have an impact on the framework of Canadian corporate governance for public corporations incorporated under the CBCA; however, it remains to be seen how the Bill will be further impacted by changes to the CBCA regulations, which at the time of writing have not been published. The regulations will provide clarity on what "prescribed information" and "prescribed circumstances" will apply in the context of the amendments. Considering the government's objectives, changes to the regulations will likely pursue similar alignment with existing law and policy, promotion of diversity and increased corporate accountability and transparency.

Public corporations incorporated under the various provincial or territorial corporate statutes in Canada, including the Alberta Business Corporations Act, will not be impacted by the proposed amendments to the CBCA. At the present time it is unknown whether provincial or territorial governments will follow suit and propose similar changes to the various provincial and territorial corporate statutes.

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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