A reduction in the Canadian residency requirement for corporate boards of directors is one of a slew of changes in Bill 152 aimed at modernizing Ontario’s business laws.
But the reduced residency requirement, mandating boards be comprised of 25 per cent Canadians rather than a majority (51 per cent), is but one amendment to the Ontario Business Corporation Act (OBCA) that falls short of changes the Ontario Bar Association was seeking to achieve par with other provinces.
“We wanted it down to zero so corporations would have the same flexibility in Ontario that they do in other jurisdictions across Canada,” Wayne Gray, chairman of the OBA’s corporate law subcommittee that presented recommendations to the province, says of the residency amendment.
While the 25-per-cent requirement brings Ontario into line with Alberta and federal incorporation statutes, most Canadian provinces and territories have eliminated the constraint.
“So Ontario still has not moved into the top echelon of Canadian jurisdictions in terms of board composition,” says Gray, a corporate-commercial partner at McMillan Binch Mendelsohn LLP.
On the other hand, the bill dumps a requirement for a minimum number of Canadians to be in attendance at a board meeting, or for mandatory Canadian representation on board committees, allowing lawyers, who often sit on boards to fulfill the requirement, to relieve themselves of that responsibility, says Gray.
“Now with the relaxed requirement, those boards can be reconstituted and the lawyers resign, which is a good thing,” says Gray. “Once you cease to be a director, you don’t have to worry as much about whether employees are being paid, taxes are remitted, whether there are environmental problems and such.”
The multi-faceted Bill 152, the Ministry of Government Services Consumer Protection and Service Modernization Act, contains new consumer protection legislation along with the changes to the OBCA included to reflect its federal counterpart and essentially simplify the system. It received royal assent Dec. 20 and comes into effect Aug. 1.
John Cameron, a researcher and transaction lawyer at Torys LLP, is chairman of the OBA’s personal property security legislation committee. He says the legislation simplifies administrative and technical requirements.
“It reflects a highly symbolic move to make business laws more modern. This is a really positive development,” says Cameron. “What’s really interesting and what’s really important is that the government is willing to do something about these technical issues.”
He says the changes will greatly assist lawyers and their clients.
“Lawyers like to be able to say to their clients, ‘Here’s what the law is and here’s what it takes to get this done,’ ” says Cameron. “Lawyers don’t like to say to their clients that the law is unclear so we’ll have to do it three different ways because we don’t know which way is right so it’s going to cost you three times as much.”
The changes mean lawyers will be able to revisit their standard corporate bylaws to integrate increased flexibility that the amendments introduce.
Those include changes to the scope of indemnities in favour of directors and officers, which has been expanded to cover persons and situations similar to federal changes six years ago, Gray says.
The bill enables indemnification for individuals managing a non-corporate entity on behalf of the corporation - such as partnerships, trusts, joint ventures, limited liability companies, or unincorporated organizations, or those acting for the corporation as a director or officer of another corporation.
Indemnification is extended beyond civil, criminal, and administrative proceedings to include an investigation by a securities commission, for instance.
In a paper outlining the changes, Gray writes, “perhaps most importantly” the OBCA expressly includes a provision allowing the corporation to advance money to directors, officers, or other individuals for defence costs, noting, “Directors and officers are usually less concerned about an ultimate finding of liability than with the often astronomical cost of defending the claim.”
The bill also provides that directors or officers of an OBCA corporation will be entitled to indemnification if a court or other competent authority has not judged that he or she committed any fault or omitted to do anything that he or she ought to have done.
“This will replace the current OBCA language that forces directors and officers to go to trial for vindication and, if successful, indemnification,” writes Gray.
He expects the new language will encourage early settlements so people claiming mandatory indemnification can avoid the risk of an adverse finding of fault. It also clarifies that indemnification will be disallowed where the director or officer has failed to comply with his or her fiduciary duties to the corporate body or other entity on whose board the individual sits.
Bill 152 adopts several of the 2001 Canada Business Corporations Act innovations designed to give shareholders a stronger voice in the affairs of offering (or public) corporations.
The adoptions grant a beneficial owner, who leaves the stock in a broker’s name, the same right as a registered shareholder to initiate a proposal for discussion at shareholder meetings, and to submit the proposal in writing to be included in the management information circular.
It also gives beneficial owners the right to make an application to a court if the corporation refuses to include a proposal in its circular, provides the beneficial shareholder access to corporate records, and the right to receive information of registered holders of shares, which have all been rights afforded registered shareholders.
A former mandate that offering corporations must have an audit committee has been removed, permitting a corporation to apply to the Ontario Securities Commission for an exemption, which will be granted if it is determined shareholders would not be prejudiced.
The legislation also includes clarity and provisions that make stock dividends “more attractive, or at least more clear,” as an alternative to a straight stock split, which gives financial professionals more options, says Gray.
But besides the zero-residency requirement for corporate boards, the OBA had requested that lawyers and accountants be allowed to income split, an accommodation recently afforded to physicians and dentists in their negotiations with the province.
“We didn’t get that. Doctors and dentists can have family members become shareholders in corporations but lawyers and accountants cannot,” he says, adding he figures legislators “didn’t see the logic that if they do it for one profession, it’s discriminating against another profession.”
Ontario also declined to approve unlimited liability companies, available in other provinces and used largely by U.S. investors seeking to acquire Canadian companies.
“These are cross-border transactions and investments into Canada and tend to be very high dollar and so have a significant amount of legal services tied to them,” says Gray.
“So it would have been good for the Ontario bar.”
