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Focus: Bringing federal corporate governance up to speed

A long-awaited bill will bring federal corporate governance laws up to speed with standards already expected by the country’s securities exchanges and regulators, lawyers say.

Without a major overhaul since the turn of the century, the Canada Business Corporations Act hasn’t kept pace with advances over the last decade in the realm of director elections and board diversity.  

But proposed amendments to the law in Bill C-25, which passed third reading in the House of Commons earlier this year and is currently under discussion in the Senate, could change that.

“We have already seen a lot of these changes adopted in one form or other by the Toronto Stock Exchange and different provincial securities regulators, so, in some respects, the CBCA is just catching up,” says Heidi Gordon, a Toronto lawyer in the business law practice group at McCarthy Tétrault LLP.

Virginia Schweitzer, a corporate finance partner in the Ottawa office of Fasken Martineau DuMoulin LLP, says one of the most significant changes under C-25 is the promise to embrace majority voting.

Businesses incorporated under the CBCA still use the plurality standard, which gives shareholders just two options in uncontested elections for directors. They can either vote for the nominee presented by management or they can withhold their vote.

When it comes to tallying the scores, the withheld votes don’t count against the nominee and are treated instead like abstentions. Not only does it mean that directors can win elections without the support of a majority of shareholders, but taken to the extreme, they could secure a spot on the board with just one positive vote. And since directors are usually shareholders themselves, that single vote could even be their own.

Since 2014, the TSX has mandated majority voting, which requires nominees in an uncontested election to get the support of most of the votes cast during a shareholder meeting in order to be accepted on to the board.

In fact, Schweitzer says the CBCA version of majority voting included in C-25 goes even further because of its tougher rules on when boards can overrule the shareholder vote.
 
“Under the TSX requirements, voting policies are often written to allow boards discretion on whether to follow the vote or not,” she says.

In practice, that means corporations listed on the TSX have been able to treat the votes as advisory, and some have appointed nominees anyway in the face of an apparent rejection by shareholders.

If C-25 passes as written, it would virtually remove that option from the hands of boards by prescribing the very narrow circumstances in which a minority of positive votes can still result in a director’s appointment. The only way boards could carry out an appointment in the absence of a majority vote would be in circumstances where they were needed to meet the 25-per-cent Canadian content quota or to meet the legislated minimum of two non-employee or non-officer directors on a board.

“These rules are much more absolute,” Schweitzer says.

The bill would also ban slate voting for many corporations operating under the CBCA, a practice that sees the board presented to voters for approval as a single package, allowing potentially objectionable directors to slip through in the crowd.

Canada stood almost alone in the developed world for its widespread use of slate voting until the TSX barred its companies from running elections that way in 2012, and C-25 would cement the move away from the practice.

“Instead, you will have to have individual votes, for or against each director, as opposed to voting for the entire slate,” Schweitzer says.

She says the C-25 proposals on board diversity are also potentially more robust than ones that already exist under provincial securities regulations. Assuming it passes, the new CBCA would require publicly traded corporations to make an annual disclosure on diversity among its board members and senior management, mirroring the rules adopted by almost all provincial securities regulators.

However, draft regulations released by the federal government suggest the CBCA “comply-or-explain” model will go further than the provincial versions, which only apply to gender. The draft rules indicate the federal act will require disclosures on a second category of diversity “other than gender.”  

“It doesn’t go as far as imposing a quota, but the definition goes much broader than we have seen so far in Canada,” Schweitzer says. “There is definitely an increased focus on diversity in the corporate world since the CBCA was last amended.”

In a submission on the bill, several practice area sections of the Canadian Bar Association welcomed the amendments “as a first step to encourage greater diversity in Canada’s corporate leadership.”

However, the CBA also warned that the lack of a definition in the bill of the term “diversity” could cause problems.

“Vague requirements create uncertainty, making it difficult for corporations to comply, and hindering effective monitoring and oversight,” the submission reads.

Gordon says some companies incorporated under the CBCA are worried about more than the vagueness of the regulations on diversity.  

“Some have welcomed the idea, and others feel corporate legislation and regulations are not the place for this type of measure,” she says.

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