With the recent release of proposed regulations (Regulations), the Government of Canada has put some meat on the bones of the proposed changes to the Canada Business Corporations Act (CBCA) that were contained in Bill C-25 (Bill), which was released in the fall of 2016. In large measure, the Regulations continue the trend seen in the Bill of aligning the obligations of distributing corporations (generally, public companies) under the CBCA with the existing requirements of securities law and Toronto Stock Exchange (TSX) rules.
As we noted in our October 2016 Blakes Bulletin: Bill C-25 Looks to Include Majority Voting, Diversity Disclosure Requirements in Canada Business Corporations Act, the Bill would, among other things, make substantial amendments to the director-election provisions of the CBCA, require certain corporations to send disclosure with respect to diversity to shareholders and update the CBCA’s system for notice-and-access communications with shareholders, all with the stated intention of providing “the foundation for a 21st century marketplace”. The substance of many of these changes is outlined in the Regulations.
The Regulations specify what information relating to gender diversity among the members of their boards and senior management teams distributing corporations will be required to send to shareholders.
With respect to gender diversity, the Regulations would incorporate certain portions of the “comply-or-explain” model for diversity disclosure from Form 58-101F1 under National Instrument 58-101 – Disclosure of Corporate Governance Practices as the required information. However, the Regulations go further, requiring that CBCA distributing corporations also provide information regarding whether they have adopted a written policy relating to diversity other than gender among the board and senior management. If the corporation has adopted such a policy, it will be required to include a brief summary of its objectives and key provisions; if not, it will be required to explain why it has not done so.
Although companies listed on the TSX are already required under securities law to provide information relating to gender diversity, the adoption of the Regulations would also require CBCA corporations listed on the TSX Venture Exchange, which are not currently required to do so, to prepare and provide diversity disclosures.
The notice-and-access system, provided for under securities laws in National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101), permits a reporting issuer (that is not an investment fund) to distribute proxy-related materials relating to a meeting to beneficial owners by posting the information circular on a website in addition to SEDAR and sending — in most cases by mail — a voting instruction form and a notice package informing the shareholders how to access the posted materials.
Currently, the CBCA poses a particular corporate law challenge because while its regulations expressly contemplate the use of notice-and-access, it is a condition of that use that the addressee has consented in writing. While the Director under the CBCA is currently empowered to grant an exemption from the requirement to send proxy materials to registered shareholders, it has no power to grant exemptions from the requirement for intermediaries to send proxy materials to beneficial owners or from the requirement for corporations to send financial statements to shareholders.
To resolve some of these issues, the Regulations would permit intermediaries to send notice-and-access materials to beneficial owners of distributing corporations that comply with NI 54-101 and National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102), rather than sending the proxy materials on paper. The Regulations would also allow distributing corporations that are compliant with NI 54-101 and NI 51-102 to use notice-and-access to send information to beneficial owners on accessing the corporation’s financial statements, rather than sending the financial statements on paper
The Regulations and proposed CBCA changes would not eliminate the requirement to mail hard copies of proxy circulars to registered shareholders; however, the proposed amendments do provide the Director authority to grant an exemption from this requirement, as well as the requirement for intermediaries to send proxy materials to beneficial owners and the requirement for corporations to send financial statements to shareholders, provided that any such an exemption does not prejudice any of the corporation’s shareholders or the public interest.
The Regulations provide details of the application of changes proposed in the Bill to the director-election process for CBCA corporations. Such changes are intended “to promote greater shareholder democracy” by ensuring that “the voting process allows shareholders to have their voices heard in a meaningful way”. In particular, the Regulations outline the permitted exceptions from the majority voting standard outlined in the Bill and would require only distributing corporations to hold individual votes on each nominee for election.
The Bill would require that separate votes be held (i.e., would prohibit slate voting) for the election of each candidate to the board of CBCA distributing corporations, impose a majority-voting requirement where such elections are uncontested (i.e., where there is one nominee for each available board seat) and permit shareholders to vote shares for or against (rather than “withholding” shares from voting) each nominee in such uncontested elections.
Accordingly, each such candidate would only be elected if the number of votes cast in their favour represented a majority of the votes cast for and against them by the shareholders. This change would obviate the need for such a director to tender his or her resignation following an election in which they did not receive a majority of the votes cast.
The Bill would also prohibit a board from appointing 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, subject to certain exceptions. The Regulations clarify that a board would be permitted to appoint such a nominee in order to meet the following requirements of the CBCA:
- That at least two directors of a CBCA distributing corporation are not directors or officers of the corporation or its affiliates, and
- That at least 25 per cent of the directors (or, for corporations required by federal law to have a certain level of Canadian ownership or control, a majority of directors) of a CBCA corporation are Canadian residents.
The Bill aims to simplify the timing for submission of shareholder proposals. Currently, a CBCA corporation is permitted not to include a shareholder proposal in its management proxy circular if the proposal is not submitted to the corporation at least 90 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 Regulations are designed to “simply the deadline for shareholder to submit proposals to directors so that they [can] participate in meetings more often and effectively” and purport to accomplish this by establishing a timeframe for the submission of shareholder proposals that is presumably easier for shareholders to determine. If the Regulations are adopted, a CBCA corporation would be permitted not to include a shareholder proposal in its management proxy circular if the proposal was not submitted to the corporation between 90 and 150 days before the anniversary of the previous annual meeting.
The Bill has passed its second reading in the House of Commons, and has been referred to the House of Commons Standing Committee on Industry, Science and Technology. Following review (and perhaps revision) in committee, it will be returned to the House of Commons for third reading, after which it will be sent to the Senate for consideration.