Bill C-25 – Proposed Changes to the Canada Business Corporations ActMonday, October 31, 2016
On September 28, 2016, 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 (“Bill C-25”)passed its first reading in Parliament. If passed into law, Bill C-25 will introduce significant amendments (the “Proposed Amendments”) to the Canada Business Corporations Act, R.S.C. 1985, c. C-44(“CBCA”).
Mandatory Annual Elections of Directors
The Proposed Amendments would alter the director election process for CBCA corporations. Currently, the CBCA provides that an election of directors must be held at least once every three years. The Proposed Amendments would require “distributing corporations” (essentially, reporting issuers or public companies) that were incorporated under the CBCA to hold elections of the entire board of directors annually. Corporations that are not “distributing corporations” under the CBCA (essentially, private companies) could continue to hold elections of directors as late as every three years.
Although it is the practice for most CBCA corporations to hold annual director elections, the Proposed Amendments would codify this requirement for public companies and align the CBCA with the listing requirements of the Toronto Stock Exchange (“TSX”) and the TSX Venture Exchange (“TSXVE”), which require their listed issuers to hold annual director elections.
Mandatory Individual Director Election
Until recently, it has been common practice for public companies to nominate a slate of directors, meaning that all nominees are grouped together and voted for collectively on one ballot (rather than permitting the shareholders to vote in respect of each director individually). This form of voting has been criticized for restricting shareholder democracy, particularly where “dissidents” nominate additional individuals for election to the board on proxy forms that list out such nominees separately, making tabulation difficult. The TSX and TSXVE require their listed issuers to elect directors on an individual basis.
The Proposed Amendments would also require that shareholders are given the opportunity to vote for each nominee on an individual basis, whether the corporation is private or public. In addition to alleviating the tabulation issues noted above, this approach gives rise to greater shareholder choice, since management’s nominees would no longer be put forward on an “all or nothing” basis and each nominee can be evaluated by the shareholders.
Currently, the CBCA requires that shareholders be given the option to vote “for” or to “withhold” their vote. The purpose of this voting structure (the appointment of the corporation’s auditor is similarly structured) was likely originally meant to accommodate elections where there were more nominees than board positions – a situation that does not arise very often for either public or private companies. As a result, an anomalous situation may occur in circumstances where the number of nominees equals the number of board positions available where a single vote “for” a particular director is sufficient to elect such director, regardless of whether the majority of shareholders do not wish that nominee to serve as director, since a “withhold” vote is substantially identical to an abstention. As such, there is no majority vote requirement for any nominee to be elected, even if there is competition for the available positions.
In 2014, the TSX introduced a requirement for majority-voting for its listed companies. The TSX requires its listed issuers to require that any director that receives a majority of “withhold” votes must submit his or her resignation from the board. The board must accept the resignation and publicly announce the resignation, except if the board chooses to refuse the resignation in “exceptional circumstances.” The inconsistent application of this discretion has caused controversy, and very often in such cases the board has refused to accept the resignation.
The Proposed Amendments would require shareholders to have the option to vote either “for” or “against” a director’s election. If a nominee fails to receive more “for” votes than “against” votes (of the votes cast at the shareholder meeting, either in person or by proxy), he or she will not be elected and will be ineligible to be appointed to any vacancies on the board before the next meeting of shareholders. While this proposed change to the CBCA strikes a blow for shareholder democracy, it is unclear how the regulations will deal with situations where one or more positions are not filled as a result of a nominee not receiving a clear majority of votes cast at the meeting. If the result is that the board will not have quorum to convene director meetings, the corporation may find itself without an effective board until another shareholder meeting can be held (which could be months later). Holding multiple shareholder meetings is expensive for public companies and potentially damaging to a public company’s credibility in the capital markets, not to mention to its business and affairs if suppliers and customers lose confidence in its ability to continue as a going concern. At this time, the Proposed Amendments do not contemplate the ability of the board to reject a directors’ resignation in “exceptional circumstances” where he or she does not receive more “for” votes than “against” votes as is currently permitted by the TSX rules as noted above.
The Proposed Amendments would also require the directors of prescribed corporations to provide to shareholders at every annual meeting certain prescribed information pertaining to diversity among the members of the board of directors and senior management. The Proposed Amendments specifically would require each such corporation to identify the gender composition of their boards and senior management and to disclose its diversity policies (or explain the lack thereof). Under applicable securities laws, reporting issuers (including CBCA corporations) that are not “venture issuers” are required to make comparable disclosure.
In the past, where other provincial legislation has also regulated certain aspects of the business and affairs of a CBCA corporation (such as the disclosure required in an information circular, for example), the CBCA has been amended to refer to such other legislation rather than set out requirements that are substantially similar and therefore duplicative. However, it would appear that with the diversity proposals, the CBCA will not be adopting this approach.
Notice and Access
Currently, CBCA corporations are required to send out paper-based communications to shareholders, including notice of meetings and other relevant documents such as the corporation’s financial statements. As a result, CBCA corporations have not been able to avail themselves of the “notice and access” provisions of provincial securities legislation, which permits an issuer to merely send a short notice and form of proxy to its shareholders and therefore avoid mailing an information circular and other proxy-related documents (such as letters of transmittal and financial statements, for example) which it just needs to make available to shareholders on-line. The Proposed Amendments would permit CBCA corporations to use the “notice and access” system, which is a welcome advancement in today’s interconnected world where paper mailings are largely ignored. It remains to be seen how “user friendly” the CBCA will be in this regard, but any advancement in this regard is good news.
The Proposed Amendments also contemplate a variety of technical amendments to the CBCA, including:
- eliminating warrants, options, conversion privileges, fractional shares and scrip certificates in bearer form;
- permitting the board of directors to appoint additional directors to hold office for a term ending no later than the close of the next annual meeting of shareholders. (Currently, a CBCA corporation would have to opt in to such a provision in its articles);
- expanding the available exemptions from certain requirements under Part XIV of the CBCA that may be granted by the Director pertaining to the financial statements of a corporation;
- expanding the test for granting Part XIV exemptions to one in which the detriment that may be caused to the corporation must outweigh the benefit to shareholders or, in the case of distributing corporations, the public; and
- simplifying the deadline for shareholders to submit proposals.
Bill C-25 still needs to pass second and third reading in parliament before being passed into law. Assuming the regulations are published and enacted, CBCA companies will have to ensure compliance with the Proposed Amendments.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
Download a PDF copy of this update here.