The law from BCE v. 1976 Debentureholders (the “BCE decision”) is expected to soon be codified within the Canada Business Corporations Act. The Federal Government is proposing to set out factors that directors and officers of a corporation may consider when acting with a view to the best interests of that corporation. As well, the Federal Government is proposing to require certain corporations to: hold a say-on-pay vote on the remuneration of its directors; disclose information respecting the diversity of its senior management; and disclose information respecting the well-being of its employees and retirees.
These proposed changes are included in the “Enhancing Retirement Security” chapter of Bill C-97, the omnibus budget bill introduced by Finance Minister Bill Morneau. The bill had its first reading in the House of Commons on April 8, 2019. The bill also included provisions relating to requirements to disclose to investigative bodies information relating to the requirement of certain corporations (soon to be in force) to maintain a register of individuals who have significant control over the corporation. (Please read McCarthy’s blog about these new requirements here.)
If passed, this bill would codify and expand certain principles flowing from the BCE decision and reflect some of the “good governance” guidance published by independent proxy advisory firms such as ISS and Glass Lewis. Potential buyers and targets in the M&A context need to be aware of these changes. For example, directors of both buyers and targets may need to consider how their decisions with respect to a contemplated M&A transaction comply with the more detailed director fiduciary duty requirements in the Bill.
Directors’ Fiduciary Duty
Bill C-97 would add a provision with the headnote “best interests of the corporation” that would permit directors and officers to consider, without limitation, the interests of various enumerated stakeholders (which would include not only shareholders, but also employees, retirees and pensioners, creditors, consumers, and governments), the environment, and the long-term interests of the corporation when discharging their fiduciary duty to act with a view to the best interests of the corporation.
In 2008, the Supreme Court of Canada ruled in the BCE decision that when discharging their fiduciary duty, the directors must look to the long-term best interests of the corporation and consider a broad set of stakeholder interests commensurate with the corporation’s duties as a good and responsible corporate citizen—including the interests of shareholders, employees, creditors, consumers, government and the environment—with no one interest prevailing over the others, and that the interests of a corporation are not confined to short-term profit or share value. (Please read McCarthy’s blog about the case here.) It is interesting to note that “retirees and pensioners” were not among the stakeholders expressly listed by the Court in the BCE decision, but appear to be a group the Bill aimed at supporting.
Say on Pay:
Certain prescribed corporations would be required to develop an approach to the remuneration of “members of senior management” as that term will be defined by regulation and to place such approach before its shareholders at every annual meeting. The shareholders will then be asked to vote on this approach (commonly known as a “say on pay” vote). The results of the vote would not be binding on the corporation but would nevertheless need to be disclosed to the shareholders. The time and manner in which the results of the vote are to be disclosed may be prescribed by regulation.
Which corporations will be “prescribed” by regulation is not yet known, but it is likely that the regulations will only require disclosure by publicly listed corporations (or a “distributing corporation” within the meaning of the current regulations) which are already subject to continuous disclosure obligations regarding executive compensation pursuant to provincial securities laws, and many of which already voluntarily provide for annual “say on pay” advisory votes of shareholders as a component of their corporate governance practices.
Recovery of Benefits of Senior Management:
In addition to their “approach” to remuneration, prescribed corporations would also be required to disclose information respecting the recovery of incentive benefits or other benefits paid to directors and employees of the corporation who are members of senior management. The bill would enact a provision requiring this information to be placed before shareholders at every annual meeting. Currently, public companies would typically disclose these sorts of “claw-back” policies annually in the compensation discussion and analysis portion of the executive compensation disclosure in their proxy circular.
Well-Being of Employees and Retirees
Prescribed corporations would also be required to place before their shareholders information respecting the “well-being of employees, retirees and pensioners” at every annual meeting. Such information will also be prescribed by the regulation. While it is not clear what type of information this would include, requiring directors to turn their minds to their employees and retirees can be expected to effectively “enhance” their stakeholder position in the corporation. And this, as previously noted, was a major goal of the federal budget ahead of the October 21, 2019 election.
Diversity of Senior Management
Prescribed corporations would need to disclose information on diversity among its directors and “members of senior management” in connection with every annual meeting. They will also need to send this information to the CBCA Director. This disclosure echoes the guidance put forth by independent proxy firms like ISS and Glass Lewis for public issuers. These proxy firms require disclosure of senior management gender diversity and will recommend “withhold” votes when certain diversity requirements are not met. Please see our recent blog post on noteworthy developments in this area. Bill C-97 codifies similar disclosure requirements.
These same amendments were passed last May under Bill C-25, which amended other sections of the CBCA. However, these amendments have not come into force. To learn more about Bill C-25 and the regulations that accompanied it, please read our two blogs posts about the bill, as it was passed, and the regulations, as they were proposed.
Bill C-97 creates a mechanism whereby the federal government may proclaim the provisions respecting disclosure on the diversity of senior management before proclaiming the provisions respecting the say-on-pay vote, the disclosure on the recovery of benefits of senior management, and the disclosure on the well-being of employees and retirees.