As of August 1, 2007, significant amendments to the OBCA have come into effect. The changes, which affect both public and private companies, can be roughly grouped into four types, respectively concerning (i) directors and officers, (ii) shareholders’ rights, (iii) corporate procedures and organization, and (iv) corporate finance. While many of the amendments are intended to bring the OBCA into line with the CBCA, others represent departures from the CBCA that may be relevant to the choice of incorporation jurisdiction.
Directors and officers
The amendments expand the general defence applicable to directors from the previous standard of “good faith reliance” on financial reports or professional advice into the broader “reasonable diligence” standard familiar from the CBCA. In so doing, however, the amendments introduce uncertainty with respect to this provision’s interaction with the OBCA’s fiduciary duty and duty of care provisions. The amendments also follow the CBCA in reducing the resident director requirement to 25% and reducing the potential of directors’ personal exposure to actions on the part of stakeholders while allowing directors to rely with greater confidence on the advice of corporate officers and employees and to use D&O insurance and seek indemnification in a slightly wider range of circumstances. Directors will also face new requirements with respect to conflicts of interest including a prohibition on attending parts of meetings during which a conflicting contract or transaction is discussed.
Beneficial owners of shares will be given the same rights as shareholders in a range of situations. Importantly for shareholders of OBCA offering corporations the definition of “solicitation” will be broadened to include certain types of public announcement, the requirement for a dissident’s circular will be eliminated in certain cases and shareholders will have to “opt in” – not current CBCA practice but in line with proposed securities law changes – if they wish to receive materials relating to annual meetings. Shareholders will be able to vote at a meeting only to the extent that they were shareholders on the record date. Shareholder proposals, together with letters of support, will be subject to a new, though as yet undefined, word limit and there will no longer be a notice requirement for derivative actions in certain situations. Shareholders to whom the powers of directors are delegated under USAs gain certain defences previously reserved for directors.
Corporate procedures and organization
The OBCA’s financial assistance rule will be abolished. There are also some new rules relating to voluntary dissolutions and revivals of OBCA corporations and further provision for electronic notices.
Under the amendments, a subsidiary will be allowed to own shares of its parent under prescribed conditions. There are further exemptions from the rule requiring inclusion of the full value of consideration in stated capital accounts in the case of stock dividends and purchases of property from arm’s-length persons. The permissibility of creating multiple share classes or series with identical rights is clarified, and there are also some clarifications relating to the solvency test applying to share repurchases. Finally, it will now be possible to apply to the OSC for an exemption from the requirement to have an audit committee, just as may be done via application to the Director under the CBCA.
DIRECTORS AND OFFICERS
Directors’ Canadian residency requirements relaxed
- A board of directors now need only include 25% resident Canadians (s. 118(3)). Matches the CBCA’s s. 105(3).
- No residency requirement applies to committees of the board (s. 127(2) repealed). The corresponding s. 115 of the CBCA also has no residency requirement.
- Requirement that managing director be a resident Canadian abolished (s. 127(1)). The CBCA’s s. 115(1) requires a managing director to be a resident Canadian.
Directors’ statutory fiduciary duty and duty of care owed only to the corporatio
- S. 134(1) of the OBCA, which creates the directors’ and officers’ fundamental fiduciary duty and duty of care, has been amended to make it clear that the duty is owed to the corporation (the addition is underlined)
- The addition of “to the corporation” distinguishes the OBCA from the CBCA. In interpreting the corresponding s. 122(1) of the CBCA, the Supreme Court of Canada in Peoples Department Stores v. Wise held that the “statutory fiduciary duty” in (a) was a duty to the corporation, but stated, with respect to (b), that “the beneficiary of the duty of care is much more open-ended, and it appears obvious that it must include creditors”. The OBCA amendment reinforces the Supreme Court’s message with respect to the fiduciary duty, while also making it difficult to argue that directors or officers owe their statutory duty of care to persons other than the corporation.
“Reasonable diligence” becomes the core of the directors’ general defence, mirroring the CBCA
- Some of the most significant changes in Bill 152 alter the OBCA’s rules on directors’ liability. The most significant change is to s. 135(4) – additions are underlined and deletions shown as struck through
The New Rule
The amendments are intended to bring the OBCA into closer harmony with the CBCA and other Canadian statutes by expanding the s. 135(4) defence from a good faith reliance defence to a reasonable diligence defence, of which the previous good faith reliance test – in expanded form – is only one element. The corresponding CBCA provisions are found in s. 122(4) and s. 122(5).
Application of the defence
- Like its predecessor, the new s. 135(4) applies to the director’s joint and several liability in s. 130 where a director votes for or consents to resolutions authorizing the issuance of shares for inadequate non-money consideration or resolutions authorizing various prohibited expenditures (e.g. payments of dividends contrary to s. 38 and share purchases contrary to s. 32, among many others). Unlike its CBCA counterpart, however, it has not been broadened to apply to the directors’ joint and several liability for unpaid wages (OBCA, s. 131).
- Unlike its predecessor, it applies only to s. 134(2) (duty to comply with the Act, regulations, articles, by-laws and any unanimous shareholder agreement), not to the basic fiduciary and standard of care provisions in s. 134(1)(a) and (b). In this it differs from the CBCA, which applies the good faith reliance test to the CBCA equivalent of s. 134(1). On its face, this difference appears to put directors of OBCA corporations in a worse position than their counterparts in CBCA corporations. Having said that, there are a number of arguments to support the position that the narrowed scope of s. 135(4) is actually a technical change with little or no practical effect on the potential liabilities of OBCA directors. Nevertheless, by departing from the path established by the CBCA and other jurisdictions, the Ontario legislature has introduced a degree of uncertainty, which is never welcome in the area of director liability and is sufficient in itself to make the OBCA less favourable than the CBCA in this respect.
Expanded Scope of good faith reliance
The insertion into s. 135(4) of the new paragraphs (b) and (c) represents a significant expansion of scope of the good faith reliance defence. Where previously the defence applied only to reliance on financial statements and professional advice, it will now include reliance (i) on any “interim or other financial report” represented by an officer to be accurate and in accordance with GAAP and (ii) on any report or advice of an officer or employee, where it is reasonable to rely on that advice. The position under s. 123(5) of the CBCA is similar to the old s. 135(4) of the OBCA, although there is no reference to GAAP.
Corporations can now obtain D&O insurance for all types of potential liability
- OBCA corporations can now insure directors and officers and those acting at their request in similar capacities outside the company for any liability incurred in these capacities, not only (as was previously the case) for acts performed in good faith and with a view to the best interests of the corporation (s. 136(4.3)). Matches the CBCA’s s. 124(6).
Indemnification now available in a wider range of situations
As a result of the amendments, OBCA corporations can indemnify those who serve at the corporation’s request in any role similar to that of a director or officer in any entity, where formerly they were limited to indemnifying their own directors and officers and those who served as directors or officers in corporate entities in which they held an interest (s. 136(1)). Matches the CBCA’s s. 124(1).
Indemnification is now possible with respect to a broader range of proceedings and investigations, including securities commission investigations, for example (s. 136(1)). Matches the CBCA’s s. 124(1).
- OBCA corporations now have explicit authority to advance money to directors, officers and other individuals with respect to the costs, charges and expenses of proceedings referred to in s. 136(1), although any such advance would have to be repaid if it is found that the individual did not act honestly and in good faith with a view to the best interests of the corporation or other entity (s. 136(2)). Matches the CBCA’s s. 124(2).
- The standard for entitlement to indemnification has been changed from meeting the “good faith and with a view to the best interests of the corporation” requirement and having been “substantially successful on the merits” to meeting the same good faith requirement and having not been “judged by a court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done”. In the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, there continues to be an additional requirement that the individual have had reasonable grounds for believing his or her conduct to be lawful (s. 136(4.2)). Matches the CBCA’s s. 124(5).
Directors and officers’ conflicts of interest rules tightened with respect to disclosure and exclusion from meetings
- Directors and officers relying on the general notice of interest provision must now notify the corporation not only of their interest but of any material changes in that interest (s. 132(6)). This matches the CBCA’s s. 120(6).
- Conflicted directors are now prohibited from attending any part of a meeting (as well as voting) during which the conflicting contract or transaction is discussed (s. 132(5)). The CBCA maintains the old OBCA rule, prohibiting voting rather than attendance, in its s. 120(5).
- The exception allowing a conflicted director to vote on arrangements where the corporation grants security to a third party for obligations undertaken by the conflicted director has been abolished (s. 132(5)). This matches the CBCA’s s. 120(5).
- Where the exclusion of a conflicted director under the new s. 132(5) would normally result in a loss of quorum, the remaining directors are deemed to constitute a quorum, unless all directors are conflicted in which case the contract or transaction must be put to a shareholder resolution (s. 132(5.1); s. 132(5.2)). No CBCA equivalent.
Shareholder rights extended
- Shareholders will now expressly have the right to dissent even where there is only one class of shares (s. 185(2.1)). This matches the CBCA’s s. 190(2.1).
- Derivative action section amended to eliminate advance notice requirement where all directors are to be defendants in the action (s. 246(2.1)). The CBCA’s s. 239 does not do this.
- Beneficial owners of shares are given the same rights as shareholders in several areas, including rights to access corporate records, receive information and make applications to court (numerous sections with appropriate minor amendments). The OBCA contains a definition of “beneficial ownership” that was amended by the Securities Transfer Act, 2006. The CBCA has also inserted references to “beneficial owners” in a similar manner. The CBCA definition has not been amended.
Easier proxy solicitation for dissidents
- Non-management proxy solicitations no longer require a dissident’s circular where fewer than 16 are solicited or where solicitation is by public broadcast, speech or publication in prescribed circumstances (s. 112(1.1) and (1.2)). This matches the CBCA’s s. 150(1.1) and (1.2).
- The definition of “solicitation” is amended to include prescribed public announcements and (in the case of non-management solicitations) other prescribed communications (s. 109, clauses (i) and (j) under the definition of “solicit” and “solicitation”). The CBCA accomplishes this in a slightly different way under parts (b)(v) and (b)(vii) of the definition of the same terms in s. 147.
Beneficial owners of shares now entitled to make and discuss proposals, which will be subject to a word limi
Beneficial owners of shares can now make and discuss proposals at shareholders’ meetings (s. 99(1)). This matches the CBCA’s s. 137(1).
- A word limit will be prescribed for the proposal and supporting statement (s. 99(3.1)). The previous 200-word limit in s. 99(3), applying to the supporting statement only, has been repealed. The new provision for an overall word limit to be prescribed by regulation matches the CBCA’s s. 137(3).
- The company’s right to refuse to set out a shareholder proposal in its proxy circular where the proposal is irrelevant, related to a personal grievance, or originates with a shareholder who failed to show up (or send a proxy) to a previous meeting to present a previous proposal, has been re-worded without any apparent change of substance to match the wording in the CBCA’s s. 137(5)(b), (b.1) and (c). The corresponding sections in the OBCA are now numbered s. 99(5)(b), (b.1) and (c).
- Changes to mailing requirements and further provisions for electronic documents
- The amendments establish an opt-in requirement for shareholders of offering corporations wishing to receive materials relating to annual meetings or interim financial statements. There is no change with respect to nonoffering corporations (s. 154(3)). This is the opposite of the CBCA’s s. 159(1), which has an opt-out rule.
- The amendments provide for electronic notices to shareholders and directors as well as electronic waivers of notice and time requirements by the recipients of notices required under the OBCA (s. 262; s. 264). No such provisions appear in the corresponding CBCA s. 253 or s. 255.
Shareholders who acquire shares after the record date can no longer vote
- The right to vote at a meeting is now determined exclusively on the basis of the list of shareholders and shareholdings on the record date as determined under the Act (s. 100). This removes the anomalous situation under the OBCA, matching the CBCA’s s. 138(3.1).
- Shareholders under Unanimous Shareholder Agreements get directors’ defences
- Such shareholders are explicitly granted the same defences as available to directors to the extent that directors’ discretion or powers are restricted under the USA (s. 108(5)). This matches the CBCA’s s. 146(5). ? Shareholders under Unanimous Shareholder Agreements may fetter discretion
- Such shareholders are now explicitly permitted to fetter their discretion (s. 108(5.1)). This matches the CBCA’s s. 146(6). ?
CORPORATE PROCEDURES AND ORGANIZATION
Financial assistance disclosure requirements abolishe
- Following the lead of the CBCA, the OBCA has repealed the financial assistance disclosure requirements in s. 20.
- Voluntary dissolution of never-active companies at any time, but revival of dissolved companies now time limited
- An OBCA corporation that has not commenced business or issued shares may be dissolved at any time (rather than, as currently, within two years) upon the authorization of all of its incorporators (s. 237, clause (c)). This matches the CBCA’s s. 210(1), although that section refers only to the non-issuance of shares. ?
- Revival of a dissolved OBCA corporation now subject to a 20 year time limit (s. 241(5.1)). Here the OBCA is now different from the CBCA, which provides for no time limit.
CORPORATE FINANCE AND SECURITIES
Subsidiary to be allowed to own shares of parent
- A subsidiary will now be able to acquire and hold shares of its parent in more than the traditionally limited range of situations, under conditions to be set out in the unreleased regulations and only as long as those conditions continue to be met (s. 29(9)-(11)). This matches the CBCA’s s. 31(4)-(6). Identical classes/series can be created
- The amendments clarify that two or more classes, or series within a class, can be identical in terms of rights, privileges and conditions (s. 22(7)). There is no corresponding subsection in the equivalent CBCA s. 24.
Further exemptions to rule requiring inclusion of full value of consideration in stated capital accounts
- OBCA corporations will now have the option of adding all or part of the value of the shares issued as stock dividends to their stated capital accounts, rather than being required to add the full value of the declared amount of the dividend as was previously the case (s. 38(2)). The CBCA’s s. 43(2) follows the previous OBCA rule.
- It will also now be at the company’s option whether to add to its stated capital the whole or any part of the value of consideration received where its shares are exchanged for property of an arm’s length person, provided that consent is obtained from that person, the corporation, and all holders of shares in the class or series (s. 24(3)(a)(iii)). This matches the CBCA’s s. 26(3)(a)(iii).
- Exemption from prohibition on sale of restricted shares extended to compliance with prescribed foreign laws
- The power of an OBCA corporation to sell shares in contravention of its own share restrictions in order to meet securities registration, stock exchange, and similar requirements is now extended to sales intended to “assist the corporation to comply with a prescribed law”, which will presumably include the laws of foreign jurisdictions to be named in the unreleased regulations (s. 45(1)(c)). This matches the CBCA’s s. 46(1)(b).
Audit committee exemptions
- OBCA corporations now have the right to apply to the OSC for authorization to dispense with the audit committee requirement on such conditions as the Commission sees fit (s. 158(1.1)). The CBCA has the same right, on application to the Director, under s. 171(2).
Clarifications relating to the solvency test applying to share repurchases
- The amendments clarify that for the purposes of the solvency test applicable to purchases of a company’s own shares, its liabilities include the cost of the redemption of any redeemable shares whose owners have a right to be paid prior to the holders of the shares to be purchased and that this is one of the solvency tests that a corporation can raise against another person’s demand that it perform a contract to purchase its own shares (s. 31(3)(b)(ii); s. 36(1)-(2)). These new provisions match the CBCA’s s. 35(3)(b)(ii) and s. 40(1). ?
- The amendments also clarify that a shareholder who has entered into a contract under which the corporation agrees to purchase its own shares will rank behind both creditors and behind any shareholders whose shares have higher rights to the corporation’s assets than the shares dealt with in the contract (s. 36(3)). This matches the CBCA’s s. 40(2).