Directors of Quebec insurers, trust and savings companies and deposit institutions will have increased duties regarding the development and enforcement of “sound commercial practices” and “sound and prudent management practices” in order to comply with new regulations enacted by Bill 141. The bill, titled An Act mainly to improve the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions, was introduced by Quebec’s Minister of Finance Carlos Leitão in October 2017 and applies to companies licensed, but not incorporated in Quebec (see our October 2017 Blakes Bulletin: Quebec Introduces Much Anticipated Bill 141 to Revise Framework for Quebec Financial Sector).

This bulletin discusses the new governance rules that will apply to corporations governed by: the new Insurers Act (Insurers Act), which replaces the Act respecting insurance; the new Act respecting trust corporations and savings corporations (Trust Companies Act), which replaces the statute with the same name; and the new Deposit Institutions and Deposit Protection Act (Deposit Act), which substantially amends the Deposit Insurance Act.

COMPOSITION OF BOARD OF DIRECTORS

The board of directors of corporations governed by the Insurers Act, Trust Companies Act and Deposit Act (collectively the Statues) must be composed of at least seven members, more than half of whom are persons other than employees of the corporation or of a “group of which it is the holder of control”. A corporation that breaches this requirement is liable to an administrative monetary penalty (AMP).

In addition, the majority of the directors of corporations governed by the Insurers Act and Trust Companies Act must reside in Canada or face AMPs. Further, a person found guilty of an indictable or other offence involving fraud or dishonesty is disqualified from becoming a director unless he or she has obtained a pardon. This disqualification is in addition to that prescribed by the Civil Code.

A director who, without authorization, holds a “significant interest in the decisions of the corporation” — meaning a person who can exercise 10 per cent or more of the voting rights attached to the shares issued by the corporation — will be relieved of his or her duties if the Autorité des marchés financiers (AMF) orders that the director’s voting rights be exercised by an AMF-appointed administrator of the property of others.

The AMF is also given the power to dismiss a director who is disqualified.

The Statutes also require that the corporation implement a policy to foster the “independence, competence and diversity” of its board of directors and committees’ members, but provide no details about such a policy.

QUORUM

Both the Insurers Act and Trust Companies Act state that, notwithstanding section 138 of the Business Corporations Act, the quorum at a meeting of a corporation may not be less than the majority of the directors in office.

RESIGNATION

A director who resigns is required to declare his or her reasons for resigning to the corporation and the AMF, but the Statues exempt the director from any civil liability for resigning.

SOUND COMMERCIAL AND MANAGEMENT PRACTICES

The board of directors is required to ensure that the corporation adheres to “sound commercial practices” and “sound and prudent management practices” and, to this end, may entrust certain directors or a committee of such directors with the responsibility of making certain that such practices are followed.

“Sound commercial practices” include fairly treating clients by, among other things, providing appropriate information, adopting a policy for processing complaints, keeping a complaints register and resolving client disputes.

“Sound and prudent management practices” must ensure sound governance and compliance with the laws governing the corporation’s activities. Regarding financial management, they must also provide that boards maintain adequate capital to ensure sustainability and adequate assets to meet liabilities as, and when, they become due.

The directors or committee responsible for such practices must report to the board on their activities within three months of the closing date of the fiscal year.

The designated directors and committee are required to report to the board of directors in writing any situation of which they become aware that adversely affects the corporation’s financial position or is contrary to sound and prudent management practices or sound commercial practices. They must also inform the AMF if they find that the board did not correct the situation and send the AMF a copy of the notice they gave the board as well as a description of any relevant events that have occurred since the notice was drafted and any other relevant information.

Directors who fulfil the above-mentioned reporting obligations in good faith, as well as any persons who, in good faith, provide information or documents to those directors, are exempt from civil liability.

These provisions do not detract from the Act respecting access to documents held by public bodies and the protection of personal information, the Act respecting the protection of personal information in the private sector or other communication restrictions prescribed by other Quebec statutes, or any term of a contract or duty of loyalty or confidentiality that may bind the reporting director or his or her own informers. They also do not provide for keeping the identity of such individuals confidential or protecting them against retaliation.

AUDIT AND ETHICS COMMITTEES

The board of directors are required to set up audit and ethics committees composed of at least three directors, a majority of whom are not officers or employees of the corporation, members of those committees, directors, officers, mandataries or employees of a group of which the corporation is the holder of control or holders of a “significant interest” in the corporation or a business corporation affiliated with it.

The audit committee must examine all financial statements intended for the board of directors before they are submitted to the board; ensure all errors or misstatements in financial are corrected; and if the financial statements were sent to the shareholders, inform the general meeting of shareholders accordingly.

The ethics committee must adopt rules of ethics for the conduct of the corporation’s directors and officers, the conduct of the corporation with natural persons or groups that are “restricted parties” with respect to it, as well as the formalities and conditions governing contracts with such persons or groups. These rules must be sent to the AMF and followed by the corporation. They are binding on its board of directors.

The ethics committee must see that the rules of ethics are complied with and notify the board of directors, in writing and without delay, of any violation of those rules. It must send the AMF a report on its activities each year, within two months after the closing date of the corporation’s fiscal year.

The AMF may authorize the establishment of a committee whose composition does not comply with the above requirements, or grant a committee the functions usually assigned to the other committee, if the corporation shows that the exercise of the committee’s functions will not be adversely affected.

DOING BUSINESS WITH “RESTRICTED PARTIES”

The Statutes establish rules governing transactions between the corporation and natural persons and groups that are “restricted parties” with respect to the corporation. The definition of “restricted parties” excludes an authorized financial institution that is the “holder of exclusive control” of the corporation, or that is the holder of control of the corporation and both the authorized financial institution and the corporation have the same holder of exclusive control. The AMF has the power to designate a natural person or a group as a restricted party if, in its opinion, that person or group is likely to receive preferential treatment to the detriment of the corporation.

When doing business with “restricted parties”, the corporation must “act in the same manner as it would when dealing at arm’s length”. Consequently, a contract entered into between the corporation and a “restricted party” may not be less advantageous for the corporation than if it had been entered into at arm’s length. The exception to this rule is the remuneration of directors and “any other matter connected with a contract of employment”.

The Statutes add that contracts, other than those that are minimal, for services or the transfer of assets between the corporation and a “restricted party”, as well as for the acquisition of securities issued by it, must be submitted to the board for approval, and the board must consult with the ethics committee before approving them.

Except to the extent authorized by its rules of ethics, a corporation is prohibited from extending credit to certain restricted parties, namely its directors and officers, natural persons and groups having “economic ties” with or to them, and the directors or officers of a legal person affiliated with it.

INVESTMENTS

A corporation is required to adopt and follow an investment policy approved by its board of directors. The policy must match the maturities of the corporation’s investments with its liabilities, provide for the appropriate diversification of those investments, and include a description of the types of investments and other financial transactions it authorizes and the limits applicable to them.

The Statutes set out a limit to a corporation’s investments. The corporation may not acquire or hold “contributed capital” securities issued by a legal person or a partnership or participations in a trust in excess of 30 per cent of the value of those securities or participations, or the number of those securities or participations allowing it to exercise more than 30 per cent of the voting rights unless, following the acquisition, the corporation will not be the holder of control of the person, partnership or trust. A corporation may also not be the co-owner of property if its share of the right of ownership is greater than 30 per cent without exceeding 50 per cent, alone or together with the shares of groups affiliated with it. The “no-go zone” for investments is therefore between 30 and 50 per cent.

A corporation must dispose of property it holds in breach of this limit “as soon as market conditions permit”.

According to the Statutes, directors who agree to a contravention are solidarily liable for any resulting losses unless they prove that they acted with “a reasonable degree of prudence and diligence in the circumstances”, or the court considers that they acted reasonably, honestly and loyally, and ought “fairly” to be excused.

DELEGATION

The Trust Companies Act includes specific provisions regarding the delegation of powers by the board of directors. Any delegation must be authorized by special resolution and it may only be to a committee of the board of directors, provided the majority of its members are Canadian residents, and only to officers who are Canadian residents. The delegation of powers relating to the administration of the property of others to one or more officers, with or without the power of subdelegation to other officers, requires that a special resolution be passed for that purpose.

The Insurers Act does not contain such a provision but states that the board of directors may not delegate the power to appoint and dismiss the actuary charged with the functions provided for in Chapter VII of Title II, or the power to determine the actuary’s remuneration. The actuary has the same duty to report situations that are contrary to sound and prudent management practices or sound commercial practices as the directors and committees in charge of seeing that such practices are followed.

CIVIL LIABILITY

The AMF may apply to the court to cancel or suspend the performance of a contract entered into in contravention of the Statutes if it shows that the cancellation or suspension is in the interest of the holders of insurance contracts (Insurers Act), co-contracting parties (Trust Companies Act) or depositors (Deposit Act) and that, under the circumstances, “that interest must prevail over the legal security of parties to the contract and of other persons whose rights and obligations would be affected by the cancellation or suspension”. This recourse is subject to a long prescription — 10 years after the contract came into effect.

Furthermore, the Statutes provide that the court may, among other things, order that the directors who authorized such a contract or facilitated its entering into, are solidarily liable to pay the corporation the amount of damages awarded as compensation for the injury suffered or the sum paid by it because of the contract.

The Insurers Act and Trust Companies Act impose new personal civil liability on directors who approve a resolution authorizing a purchase or redemption of shares or a dividend that contravenes the capital adequacy rule enacted by those statutes. The capital adequacy rule prohibits the acquisition of shares and the payment of dividends if there are reasonable grounds for believing that the corporation is, or would after the payment be, unable to “maintain adequate assets to meet its liabilities, as and when they become due, and adequate capital to ensure its sustainability”.

The directors’ liability is set forth in section 156 of the Business Corporations Act, i.e. the solidary obligation to restore to the corporation “any amounts involved and not otherwise recovered by the corporation”.

PENAL LIABILITY

The Statutes set up a new penal liability regime for directors, which includes the following penalties:

  • If the corporation fails to pay an AMP (which could be up to C$10,000), its directors are personally and solidarily liable to pay the amount, “unless they establish that they exercised due care and diligence to prevent the failure”.
  • If directors and officers breach the law, the fines that would apply in the case of a natural person are doubled.
  • If the corporation commits an offence, each of its directors is deemed to have committed the offence unless they establish they “exercised due diligence, taking all necessary precautions to prevent the offence”. The burden of proof is therefore reversed.
  • In addition to a fine (even if it’s for the maximum amount), a director who realizes a financial benefit as a result of the offence may be required to pay a “further fine” not exceeding the financial benefit realized.

CONCLUSION

The new governance rules enacted by the Statutes raise the bar for directors of Quebec insurers, trust and savings companies and deposit institutions.

Directors will have increased duties regarding the development and enforcement of “sound commercial practices” and “sound and prudent management practices”, particularly with respect to reporting. They will be required to set up audit and ethics committees with considerable power and comply with the rules of ethics adopted by the ethics committee. They will also have to follow strict rules involving transactions with “restricted parties” and investments.

In most cases, a breach of these duties could make the directors personally liable.

The new rules also provide that the directors will be subject to increased penal liability in the case of an offence under the Statutes, with a reversal of the burden of proof.

Public consultations and hearings on Bill 141 will be held in December 2017 and January 2018.