Companies governed by the Canada Business Corporations Act (the “CBCA”) should be aware and mindful of recent amendments to the CBCA related to directors’ and officers’ fiduciary duties and diversity disclosure requirements with consequential filing obligations. Some of the amendments are already in place, others will come into force in January 2020 and the balance of these amendments is projected to be implemented in the near future (the “Amendments”). These Amendments are broad and signal the implementation of a socially conscious legislative initiative in line with modern rhetoric regarding diversity and the environment, and they place specific attention on addressing the interests of an aging population.

Officers and Directors Should Consider the Environment and the Interests of Pensioners and Retirees

One of the core concepts with respect to the fiduciary duties of a corporation’s directors and officers is to “act with a view to the best interests of the corporation.” However, the common law in this area has recently evolved such that directors and officers may also consider the interests of a broad range of stakeholders when exercising their fiduciary duties.[1]

Bill C-97, Budget Implementation Act, 019, No. 1 (Bill C-97) codified these common law developments by introducing new provisions into the CBCA which came into effect in June 2019. Under these new statutory provisions, officers and directors may consider a non-exhaustive list of factors, including named stakeholder interests when exercising their fiduciary duties.

Interestingly, the list of statutory factors expands the common law factors by not only considering employees, creditors, consumers, governments and the environment as part of the stakeholders with vested interests in a corporation, but adds retirees, pensioners, and the long-term interests of the corporation to the list. This new development not only creates an alignment between the common law and the statutory provisions but also gives further authority to the established common law. It also plays well on modern societal interests by emphasizing the protection of an aging population and reconfirming that the environment continues to remain an important factor in business decisions.

In a legal challenge, courts generally give appropriate deference to the business judgment of directors who consider these ancillary interests, so long as their decisions lie within a range of reasonable alternatives. The Supreme Court of Canada has stated that deference in accordance with the business judgment rule “reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions.”[2]

New Requirements for Diversity and Remuneration Filings

Effective January 1, 2020, distributing federal corporations, including venture issuers, will be required to place the following information before their shareholders at every annual meeting with a concurrent filing to the director appointed under the CBCA:

  • whether the corporation has adopted term limits or other mechanisms of board renewal and either a description of those mechanisms or, if no policy, the reasons for not adopting the policy;
  • whether the corporation has a written policy relating to the identification and nomination of directors from the designated groups (including women, Indigenous People, persons with disabilities and visible minorities) and either the reasons for not adopting such a policy, or if there is a policy, a summary of the policy with measures taken, a progress report and measurement of effectiveness;
  • whether the level of representation of the designated groups is considered when nominating individuals for directors and either a description of how that level is considered or, if not considered, the reasons why not;
  • whether the level of representation of the designated groups is considered when appointing members of senior management and either a description of how that level is considered or, if not considered, the reasons why not;
  • whether there are targets for representation on the board and among senior management for each group referred to in the definition of designated groups and, if so, progress in achieving the targets and either, for each group with a target, the annual and cumulative progress in achieving that target or, if there is no target, the reasons for not adopting a target; and
  • the number and proportion (in percentage terms) of directors from each group referred to in the definition of designated groups on the board and in senior management.

This list will grow longer once proposed additional amendments under Bill C-97 come into force on a future date. The additional amendments will require further disclosure on diversity in relation to directors and senior management, the well-being of employees, retirees and pensioners, and the corporation’s approach to remuneration and incentive benefits or other benefits, including salaries of directors and senior management.

The purpose of these Amendments as stated in the government Regulatory Impact Analysis Statement published with the regulations is to improve the transparency of information available to investors on corporate diversity, to foster conversation between management and shareholders on these important issues and to place the responsibility on federal corporations to advance the issues by using a “comply or explain” approach. The underlying rationale for these changes is that corporations may recognize the benefits of greater board and management diversity and take steps to increase such diversity.

Historically, when legislative bodies consider implementing regulatory changes, they choose one of three different options.[3] The first is the “hard law” approach and refers to the implementation of mandatory and binding statutory measures. The second is considered a “soft law” approach and refers to binding measures passed by administrative bodies. The third is making the changes voluntary and self-regulating. If having quotas for diverse candidates is the “hard law” approach, the CBCA amendments suggest a middle-of-the-spectrum approach aimed at not mandating change, but mandating disclosure aimed at encouraging self-propelled change. The effects and effectiveness of this regulatory approach remain to be seen as they are yet to be studied and judged through the lenses of time and statistical studies.

As a final note, federal corporations have to be mindful of the new rules and should become compliant with any new policy and filing requirements that come into force. This is especially the case in relation to matters of diversity and board member remuneration when applicable. Federal distributing corporations, including venture issuers, should also be aware of some additional provisions related to majority voting and notice-and-access provisions, which are expected to come into force in the near future. These rules will affect information circular drafting and voting procedures and will allow federal corporations to use linked financials instead of mail. More on these rules will follow in our next blog post.