Co-authored by Justin Yee, Articled Clerk at McInnes Cooper
The Canada Business Corporations Act (CBCA) is catching up with the times. On May 1, 2018, amendments to the CBCA proposed in 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, received Royal Assent. Originally proposed in September 2016, the CBCA amendments introduce changes to the corporate governance regime of federally-regulated corporations by attempting to harmonize their legal corporate governance framework with that of their provincially-regulated counterparts and existing securities laws. The changes align with the changing face of the Canadian market and focus on three key areas: diversity disclosure, director elections and shareholder communication. Not all of the amendments are in effect yet and it could be several years before they are, so CBCA corporations likely won't need to comply with some of the new requirements immediately. But becoming fully compliant will take time, and boards will benefit from starting to plan for them now:
- Adopt policies that comply with the new requirements, or review and if necessary revise existing policies, relating to directors and senior management diversity and majority voting.
- Become familiar with the new diversity-related information required to be disclosed and establish mechanisms to collect this information in your organization.
- Review by-laws to ensure compliance with the new requirements, particularly with respect to the election of directors.
Here are three key areas in which the amendments, though not yet in effect, will modernize the CBCA – and federally-regulated public corporations.
1. Expanded Diversity Disclosure
The face of Canada's population is changing. That diversity is reflected in many facets of the corporate world – but not yet the facet of corporate governance. The CBCA amendments seek to remedy that by imposing obligations on directors of "prescribed corporations" to give to shareholders specific information about diversity among its directors and members of senior management. These diversity disclosure requirements go beyond the gender disclosure obligations that Canadian securities laws impose on non-venture reporting issuers by extending disclosure to "designated groups", defined to include "designated groups" per the Employment Equity Act which includes women, Aboriginal Peoples, persons with disabilities and members of visible minorities, and making diversity disclosure mandatory for venture reporting issuers. The CBCA will define "members of senior management" by reference to the definition of "executive officers" in National Instrument 51-102 – Continuous Disclosure Obligations, which includes the CEO, CFO, President, Chair, or any other individual who performs policy-making functions for the corporation. Adopting a "comply or explain" model, reporting issuers must provide the information prescribed by Items 10 to 15 of Form 58-101F1 under National Instrument 58-101 – Disclosure of Corporate Governance Practices, including:
- Whether the corporation has adopted a written policy relating to the identification and nomination of directors of designated groups, and if not, why.
- Whether, and if so how, the corporation's board considers the level of designated group representation on the board in the identification and nomination of directors.
- Whether, and if so how, the corporation considers the level of designated group representation in senior management when making senior management appointments.
- Whether the corporation has adopted a target or percentage of persons of designated groups to occupy board and senior management positions, and if not, why.
- The number and proportion of persons of designated groups in director and senior management positions of the corporation.
2. Director Elections
The amendments strengthen shareholder democracy, promote directors' accountability to shareholders and introduce checks on the power of corporate boards.
- Majority Voting. The amendments implement a majority voting requirement in uncontested director elections, bringing the voting threshold for CBCA corporations in line with that currently required for Toronto Stock Exchange (TSX)-listed issuers. Majority voting helps ensure shareholders, as a group, have a greater say in board composition, and prevents the election of directors lacking majority support of shareholders. Currently, the CBCA provides for a "plurality" voting regime: shareholders can cast a vote for or withhold their vote from director nominees. Since "withheld" votes don't count as a vote against, a nominee in an uncontested election can be elected by receiving a single vote "for" regardless of how many "withheld" votes are received. Instead, shareholders will be required to vote either "for" or "against" each nominee in director elections. Director nominees who receive less than the requisite majority of votes cast in an uncontested election won't be elected. However, incumbent directors will be permitted to continue in office even if not re-elected until the earlier of the 90th day after the date of their election, and the day on which their successor is appointed and elected.
- Prohibition of Slate Elections. Nominee directors must be elected individually, putting an end to the "slate voting" (electing directors as a group) the CBCA currently allows, and making the CBCA consistent with the rules applicable to TSX-listed issuers. Individual voting empowers shareholders to express their disapproval of a particular nominee by withholding support for that director; slate voting would often shield individual directors from such scrutiny.
- Unfettered Interim Appointments by Directors. Boards of directors will have the unfettered right to appoint additional directors between shareholder meetings without shareholder approval unless the corporation's articles provide otherwise. Currently, this is permitted only if the articles of the corporation allowed for it. The number of directors appointed by the board will continue to be limited to a maximum of one third of the number of directors elected at the previous annual shareholders meeting. However, the board can't appoint director nominees who don't receive the requisite majority of votes in an election unless the appointment is made to satisfy the Canadian residency requirement, or the requirement that at least two directors not also be officers or employees of the corporation.
3. Electronic Shareholder Communications.
Corporations will be allowed to use electronic communication as the primary means of providing proxy materials and financial statements to shareholders. This will reduce expenses by eliminating the circulation of copious amounts of documentation to shareholders and effectively align the CBCA regulations respecting distribution with those of the provincial securities regulators. Currently, securities regulators permit public companies to deliver meeting materials to shareholders electronically by way of notice-and-access (that is, filing the documents online on SEDAR). However, this option practically isn't available to CBCA companies due to a number of technical requirements the CBCA imposes, such as the requirement to obtain shareholders' express written consent before sending electronic materials. Where deemed appropriate by the directors, the new amendments also allow for corporations to seek full exemption from the delivery of documents if they have already filed with any of the securities regulators documents containing similar information.
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.