Bill C-25: Major changes proposed to director elections and other governance matters for CBCA reporting issuers
On September 28, 2016, the federal Minister of Innovation, Science and Economic Development introduced 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, if enacted, would result in sweeping changes to the corporate governance regime for reporting issuers incorporated under the Canada Business Corporations Act (CBCA).
The CBCA is the incorporating statute for nearly 270,000 corporations. Although most of these are small- or medium-sized and privately held, a large number of Canada’s largest reporting issuers are also governed by the CBCA. The amendments proposed in Bill C-25 stem from a House of Commons committee-led statutory review in 2010, which, in turn, led to a further consultation undertaken in 2014 by Industry Canada.
Proposed amendments to the CBCA relevant to reporting issuers
The amendments proposed cover several key corporate governance matters:
- Majority voting: Currently, director elections for reporting issuers in Canada operate under a “plurality system”: shareholders are permitted to vote “for” or “withhold” their vote, but a director requires only a single “for” vote to be elected, regardless of the number of “withhold” votes cast. In 2014, the Toronto Stock Exchange (TSX) announced amendments to the TSX Company Manual that required all TSX-listed issuers (except majority-controlled issuers) to adopt a “majority voting” policy. Under such a policy, a director that receives a majority of “withhold” votes must, despite being elected as a matter of corporate law, submit their resignation to the board, which the board may then accept or reject at its discretion. Despite adoption of such policies among TSX issuers, in practice boards commonly exercise their option to reject such resignations. Under Bill C-25, shareholders would vote “for” or “against” nominees, and a nominee in an uncontested election (i.e., for which there are equal numbers of nominees and positions available) would be elected only if that director receives more “for” votes than “against” votes.
- Individual voting: For many years, reporting issuers in Canada practiced “slate voting”, whereby the options on the form of proxy for director elections were limited to either voting “for” or to “withhold” from voting for an issuer’s slate of nominees. Gradually, many reporting issuers began to adopt “individual voting”, a practice where shareholders are explicitly permitted to vote for or withhold their vote in respect of each individual nominee, until this practice became mandatory for TSX-listed issuers in 2012. Bill C-25 would entrench this practice in the CBCA for prescribed corporations, and a backgrounder to the bill indicates this prescription will include reporting issuers.
- Annual elections: Currently, the CBCA permits directors to be elected for a term ending not later than the close of the third annual meeting of shareholders following their election. Bill C-25 would, for reporting issuers, limit a director’s term to the close of the next annual meeting. In practice, annual elections have been a listing requirement for TSX-listed issuers since 2012.
- Notice and access: For several years, Canadian securities regulators have permitted reporting issuers to post certain shareholder communications to SEDAR in lieu of requiring them to be mailed to shareholders. However, CBCA corporations have faced statutory restrictions that limited their ability to make use of these “notice and access” rules. Bill C-25 will lift these restrictions.
- Diversity-related disclosure: Under Bill C-25, certain CBCA corporations would be required to make annual disclosure relating to diversity among their directors and members of senior management. Details of which corporations this will apply to and what precise information must be disclosed will be set out in regulations that are not yet available. However, a set of “frequently asked questions” accompanying the bill indicates that the government intends to require of reporting issuers at least disclosure of gender composition, and intends to adopt a comply-or-explain approach to diversity policies.
- Shareholder proposal filing deadline: The government has stated in the backgrounder to the bill that the deadline for filing a shareholder proposal will be “simplified”. It is not yet clear what the new deadline will be, since the proposed amendment defines the deadline solely by reference to regulations that have not yet been disclosed. We note that the CBCA is currently the only business corporation statute in Canada that sets the deadline for shareholder proposals with reference to the date of the notice of meeting of the previous annual meeting, rather than simply the previous annual meeting date. (Quebec also sets its deadline with reference to the previous notice of meeting date, but does so through regulation.)
Several related and technical amendments are also being proposed to the CBCA, as well as the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act.
The dog that didn’t bark: what the bill will not change
Despite the sweeping nature of these proposed changes, there are many matters considered during the 2014 Industry Canada consultation that Bill C-25 does not address in its current form: no amendments are being proposed to expand proxy access, to mandate automatic disclosure of voting results, or to ease residency requirements for directors.
In particular, we note that the bill will not require CBCA reporting issuers to hold advisory votes on executive compensation (also known as “say-on-pay” votes). Such votes are mandatory for many types of issuers in the United States and the United Kingdom, and are conducted by an increasing number of TSX-listed issuers on a voluntary basis.
Additionally, the application of many of the proposed amendments will be limited according to rules to be set out in regulations to the CBCA. The text of such regulations will likely not be made available until after Bill C-25 is enacted.
Furthermore, corporations governed by provincial or territorial corporate statutes will not be impacted by Bill C-25, nor will banks incorporated under the federal Bank Act.
What comes next?
Since Bill C-25 is a government bill and a majority of seats in the House of Commons are controlled by the governing party, it is highly likely the bill will be enacted, although changes may occur as the bill passes through Second and Third Readings in the House and a further three readings in the Senate. Further, the federal cabinet will be required to draft and file regulations before certain of the bill’s provisions will begin to apply to CBCA corporations.