The Government of Canada recently introduced Bill C-25 (Bill), titled “An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act”. Among the changes to the Canada Business Corporations Act (CBCA) proposed in the Bill are:
- Substantial amendments to the director-election provisions
- A requirement for certain corporations to send shareholders information relating to diversity
- Changes relating to the “notice-and-access” system for communications with shareholders
For issuers listed on the Toronto Stock Exchange (TSX), these primary changes would, to a substantial degree, harmonize the provisions of the CBCA with applicable securities laws and TSX rules, subject to some important differences discussed below.
In addition, the Bill would (among other things) amend the CBCA to prescribe a specified period for the submission of shareholder proposals, introduce a balancing test for financial disclosure exemptions, prohibit the issuance and use of bearer shares, clarify the capacity required for an individual to serve as an incorporator or director, revise French-language versions of certain provisions and revise certain provisions governing the naming of corporations.
The specific requirements of, and exemptions from, many of the changes proposed in the Bill are to be implemented by regulations, drafts of which have not yet been released.
The Bill’s proposed changes to the director-election process would require that:
- Directors of “distributing corporations” (generally being public companies) be elected annually (except in such cases as may be prescribed by regulation)
- Individual votes be taken in respect of each nominee for election to the board of directors of such corporations as are prescribed (i.e., would prohibit slate voting)
- A majority voting standard be used for uncontested elections of directors of distributing corporations (except such corporations as may be prescribed by regulation)
For TSX-listed CBCA corporations, these proposed changes would, to a considerable extent, bring the CBCA in line with the requirements of the TSX company manual (TSX Manual), which already mandates annual elections of directors and individual voting on nominees and requires a majority-voting policy. For more details on the director-election provisions of the TSX Manual, please see our February 2014 Blakes Bulletin: TSX Requires Majority Voting for Election of Directors.
However, the Bill proposes that shareholders of a CBCA corporation would be able to vote against nominees, rather than withholding their vote for a nominee, and pursuant to the Bill a nominee who failed to receive the requisite majority voting support in an uncontested election would not in fact be elected to the board, whereas the TSX Manual currently only requires such a nominee to tender his or her resignation to the board for acceptance or rejection.
The Bill would also prohibit a board from using its appointment power to appoint as a director a nominee who failed to receive a majority of votes cast at the previous meeting of shareholders at which directors were elected.
Issuers listed on the TSX Venture Exchange (TSXV) are not subject to the TSX Manual’s requirements. However, unless an exemption is provided by regulation, CBCA corporations listed on the TSXV would, as distributing corporations, be subject to these proposed provisions of the CBCA relating to director elections, and the changes would thus be significant for such corporations.
If the changes proposed in the Bill are adopted, directors of certain CBCA corporations would be required to send to the shareholders of the corporation (expected to be in the management proxy circular), and to place before such shareholders at every annual meeting, information to be prescribed by regulation with respect to diversity among directors and members of senior management.
Although the Bill does not specify what information is to be disclosed, in materials accompanying the release of the Bill, the government pointed to a “comply-or-explain” model that would require CBCA distributing corporations to “disclose their diversity representation and policies or explain why none are in place”.
While the items to comprise this “comply-or-explain” regime will be specified in regulations that have not yet been released, the requirements are expected to resemble the approach taken in Form 58-101F1 – Corporate Governance Disclosure, which requires non-venture issuers to include certain information with respect to gender diversity in their management proxy circular or annual information form. However, because “diversity” is not defined in the Bill, the CBCA regime may take a more expansive approach to diversity that goes beyond gender diversity, including by requiring disclosure relating to race, sexual orientation or other aspects of diversity.
For more information on the Canadian Securities Administrators’ recent report on its review of gender diversity disclosure, see our October 2016 Blakes Bulletin: CSA Identifies Only a Small Step for Women; No Giant Leap for Humankind.
The changes to the CBCA are expected to permit CBCA corporations to receive exemptions to use a “notice-and-access” system, rather than paper-based methods, in communications with all shareholders in respect of annual meetings. Currently, securities laws permit reporting issuers (other than investment funds) to use notice-and-access without applying for exemptive relief. Under the CBCA, by contrast, issuers must apply for an exemption in order to use notice-and-access, and the available exemptive relief does not cover all aspects of the process of communicating with shareholders, particularly communications with beneficial holders.
Proposed section 258.3 would permit the governing authority, in circumstances to be prescribed by regulation, to exempt any corporation or other person from certain requirements of the CBCA relating to the corporation’s obligation to send a notice of meeting, a form of proxy, a proxy circular and certain documents relating to financial disclosure and to intermediaries’ duties to send such documents to beneficial holders. It is unclear whether a blanket exemption might be provided such that CBCA corporations would be able to use notice-and-access procedures without applying for an exemption or whether CBCA corporations would have to apply for an exemption in order to do so.
Although the proposed provisions relating to diversity disclosure are not included among those from which the governing authority would be authorized to exempt corporations, proposed section 258.3 may be expanded to permit an exemption from the requirement to send information on diversity to shareholders.
The Bill aims to simplify the timing for submission of shareholder proposals. Currently, CBCA corporations are permitted to not include a shareholder proposal in their management information circulars if the proposal is not submitted to the corporation “at least the prescribed number of days before the anniversary date of the notice of meeting that was sent to shareholders in connection with the previous annual meeting of shareholders”.
The proposed changes would permit a CBCA corporation to not include a shareholder proposal in its circular if the proposal is not submitted “within the prescribed period” – that is, the changes are expected to replace the current “no later than” requirement with a requirement that the proposal be submitted during a period with determinable start and end dates.
Since shareholders are permitted (subject to certain requirements) to nominate directors by way of a shareholder proposal, the proposed amendments, if implemented, may require changes to advance notice policies adopted by CBCA corporations.
FINANCIAL STATEMENTS EXEMPTIONS
The Bill would also amend section 156 of the CBCA, which relates to exemptions from certain financial statement requirements. The revision would expand the scope of potential exemptions, but narrow the basis for relief by introducing a balancing test.
For example, the proposed provision would empower the governing authority to exempt CBCA corporations from the application of section 157, which requires corporations to permit shareholders to examine the financial statements of any subsidiary body corporate (no matter how immaterial the subsidiary and even though its results are included in the parent corporation’s consolidated financial statements), subject only to the corporation’s right to seek an order from a court barring such examination.
However, the proposed amendment would permit an exemption to be granted only if the governing authority reasonably believes that the detriment that may be caused to the CBCA corporation by the financial disclosure outweighs the benefit to the corporation’s shareholders or, in the case of a distributing corporation, to the public.
While many of the other changes proposed in the Bill were previewed in a consultation paper published in 2014 by the federal government (see our December 2013 Blakes Bulletin: CBCA Consultation: Another Cook in the Corporate Governance Kitchen), the changes relating to the financial statements exemptions were not, and thus are being proposed without the government having received input from stakeholders through a public consultation process.
Having passed its first reading in the House of Commons, the Bill is expected to proceed to second reading and be referred to a committee.
The government considers the proposed changes to the CBCA, many of which are the result of the consultation process launched in 2014, “limited” and is pitching them as changes to ensure that the CBCA “keeps pace with international standards, aligns with provincial securities laws and rules, and supports accountability and business certainty”. The Bill does not include changes to address a number of other “important and complex” corporate governance issues that were also identified in the 2014 consultation process but that require “further analysis and consultation”. Accordingly, it is anticipated that the government may address these other issues in subsequent legislative initiatives.