Significant amendments to the Ontario Business Corporations Act came into force on August 1, 2007, including (among other matters) a reduction of the director residency requirement and the expansion of director and officer indemnification.

Numerous amendments to the Ontario Business Corporations Act (OBCA) which were passed by the Ontario Legislature before Christmas came into force on August 1, 2007. Most of these amendments are “housekeeping” changes, designed to modernize the statute and bring it into line with other corporate statutes such as the Canada Business Corporations Act (CBCA).

Several of the more significant amendments which are likely to be of particular importance to OBCA corporations are briefly described below.

Director Residency Requirement Reduced

OBCA corporations may have greater representation on their Boards by directors who are non-residents of Canada. The director residency requirement is reduced from a majority of resident Canadian directors to 25 percent. The requirements that a majority of directors participating in a meeting be Canadian residents and that a managing director be a Canadian resident have also been removed. A majority of board committee members also no longer need to be Canadian resident directors.

Director and Officer Indemnification Expanded

OBCA corporations should consider revising their by-laws and indemnity agreements to take advantage of the increased flexibility for indemnification of directors and officers. As is the case under the CBCA, OBCA directors and officers may now be indemnified when: (a) involved in investigative and other proceedings because of their position; and (b) asked to act in a similar capacity for other “entities,” not just other bodies corporate in which the corporation is interested. The corporation may now advance defence costs to a director or officer who is subject to such proceedings, but the director or officer will have to repay such costs if he or she has not acted honestly and in good faith with a view to the best interests of the corporation or other entity. Similar expanded indemnification powers are provided in the case of derivative actions, subject to court approval.

A corporation is required to indemnify directors or officers in connection with any proceeding in which the individual was not judged to have committed any fault or omitted to do anything required to have been done, provided that the individual: (a) acted honestly and in good faith with a view to the best interests of the corporation; and (b) had reasonable grounds to believe that his or her conduct was lawful, in the case of criminal or administrative proceedings enforced by a monetary penalty. This is a lower threshold than under the existing provisions.

In addition, a corporation is no longer prohibited from purchasing insurance against a breach of a director’s fiduciary duty.

Director Defences Both Expanded and Curtailed

The good news for OBCA corporations is that the OBCA now contains a general due diligence defence for directors that is similar to the defence under the CBCA. The defence exonerates directors who show that they exercised the degree of diligence and skill that a reasonably prudent person would have exercised in similar circumstances. This new defence subsumes the existing “good faith reliance” defence which exonerated directors who relied in good faith on specific types of information or expertise. The scope of the “good faith reliance” defence has also been expanded.

The bad news for OBCA directors is that the availability of the “good faith reliance” defence has been curtailed. It continues to be available as a defence to specific statutory liabilities for improper declaration of dividends and similar matters. It is also available in cases of alleged breach of the duty to comply with the OBCA, the regulation, the articles, the by-laws and any unanimous shareholder agreement. However, as a result of a deliberate policy choice by the Ontario government, it is no longer available in cases of an alleged breach of fiduciary duty or duty of care. This change represents a clear divergence between the OBCA and the CBCA, which results in less protection for OBCA directors.

Changes to Proxy Rules

Changes have been made to the process of determining which shareholders are entitled to vote at shareholder meetings as well as to the definition of “solicitation.” Consistent with the CBCA, persons who acquire shares following the record date will no longer have the right to vote such shares at the meeting by making a demand within 10 days prior to the meeting. OBCA corporations may need to change their by-laws to reflect this change. In addition, as is the case with the CBCA, the OBCA will now permit a broader range of communications by shareholders without giving rise to an obligation to prepare and send a proxy circular.

Financial Statements

OBCA corporations are no longer required to send annual or interim financial statements to shareholders except those shareholders who request them.