Amendments to the Canada Business Corporations Act (CBCA) which went into effect on August 31, 2022 brought “majority voting” to the election of directors of a “distributing corporation”, in effect, a federal corporation that is a “reporting issuer” under provincial securities legislation. When the amendments were first introduced (in 2016!) as Bill C-25, the question arose, what if no directors are elected at a shareholders’ meeting under the system of “majority voting”? Unfortunately, the question persists.
In summary, under section 106(3.4) of the CBCA, if there is an uncontested election for directors of the corporation (i.e., only one candidate is nominated for each Board position), a candidate will be elected only if the number of votes cast in his or her favour represents a majority of the votes cast for and against the candidate by shareholders who are present in person at the shareholders’ meeting or represented by proxy. Under section 54.1(2)(b) of the Canada Business Corporations Regulations, a form of proxy must allow shareholders to specify, for each candidate nominated for director, whether their vote is to be cast for or against the candidate. This replaces the venerable “for” or “withhold from voting” on proxy forms.
So what happens if, for example: (i) the articles of the CBCA corporation require a minimum of three directors; (ii) the Board of Directors is comprised of five directors; (iii) all five incumbent directors are nominated for five Board positions; and (iv) because shareholders are aggrieved and unhappy, none of the five directors/candidates receives a majority of the votes cast at the annual meeting? Under section 106(6) of the CBCA, if no directors are elected at the annual meeting, the incumbent directors continue in office, or are “carried over”, until their successors are elected.
Except under section 106(6.1) of the CBCA, if an incumbent director was a candidate for election at the annual meeting and was not elected, the incumbent director may continue in office until the earlier of: 90 days after the date of the annual meeting; and the day on which a successor director is elected or appointed. So in our scenario, all five incumbent directors, none of whom was re-elected at the annual meeting, can remain in office for a maximum of 90 days from the date of the annual meeting.
Section 106 of the CBCA has two curing provisions. Neither will apply in our case.
First, under section 106(7) of the CBCA, if a shareholders’ meeting fails to elect the minimum number of directors required by the articles (in our case, three directors), the directors elected at the shareholders’ meeting may exercise all the powers of the directors, if the number of directors so elected constitutes a quorum. However, in our case, no directors were elected at the shareholders’ meeting.
Second, under section 106(8), the directors may appoint one or more additional directors, to hold office until the next annual meeting of shareholders, subject to the condition that the total number of directors so appointed not exceed one-third of the number of directors elected at the previous annual meeting of shareholders. If no directors were elected at the previous annual meeting, this curing provision is not available (one-third from nothing leaves nothing). As an aside, under section 106(8.1), a candidate who was not elected at the last meeting under the majority voting rule cannot be appointed to the Board under section 106(8) before the next meeting of shareholders at which an election of directors is required (i.e., the next annual meeting).
Section 111(2) of the CBCA tells our five 90-day “carried over” incumbent directors what to do. If there has been a failure to elect the minimum number of directors provided for in the articles (as in our scenario), the directors then in office must “without delay” call a special meeting of shareholders to fill the vacancy. As a result, our five incumbent directors must call a special meeting of shareholders to elect a Board, to be held within 90 days of the last meeting, as they will cease to be directors on day 90.
And what if, once again, no directors are elected at the second, special meeting because no candidate receives a majority of the votes cast by the aggrieved, unhappy shareholders? The result will be a corporation without a Board of Directors, as the five incumbents will cease to be directors 90 days after the date of the first meeting, unless one argues that a second 90-day period starts with the second shareholders’ meeting, a somewhat dubious proposition. If a corporation has no directors, section 111(2) of the CBCA provides that any shareholder may call a special meeting of shareholders, an exceptional situation. And if two shareholders each call a special meeting, to be held at different times and places? One of them will no doubt apply to the court for direction under section 144 of the CBCA, which states that the court, on the application of a shareholder, may order a shareholders’ meeting to be called, held and conducted in the manner that the court directs. We will see if the new CBCA rule on majority voting creates an impasse in a corporation and a special shareholders’ meeting called by a shareholder or by the court under section 144.