The federal government has introduced a bill in Parliament in an attempt to modernize the Canada Business Corporations Act, but some corporate lawyers have lingering concerns that the proposed amendments could cause confusion for some companies.
While the regulations have not been released, some lawyers say they worry that any differences between the proposed legislation and the requirements of the Toronto Stock Exchange could cause confusion for companies that are both listed under the index and come under the purview of the CBCA, says Jennifer Longhurst, a partner with Davies Ward Phillips & Vineberg LLP.
“To the extent that the CBCA is going to make amendments that in many ways already address things that the [Toronto Stock Exchange] rules address, but with differences, it could cause confusion and some conflicting compliance,” Longhurst says.
“It begs the question if it’s appropriate for different regulators to be prescribing rules or regulations that deal with the exact same matters,” she adds.
If passed, Bill C-25 would require board of directors be elected by a majority voting system when they’re facing uncontested elections. The amendments would allow shareholders to vote against a director, whereas currently, shareholders vote for a director or withhold their vote.
Law firms cannot incorporate under the CBCA, but lawyers say it’s important for corporate lawyers to be aware of such developments to be able to advise clients on how to update their majority voting policies.
“For some corporate lawyers what it might mean is investigating the corporate statutes that their clients are currently existing under,” Longhurst says.
Under TSX rules that were implemented in 2014, listed companies are required to have a majority voting policy in which directors must receive more “for” votes than “withhold” votes in uncontested elections. If a director fails to get a majority of “for” votes, they must resign, but the board has the last say as to whether that director’s resignation is accepted. The board can choose to reject a resignation if there are “exceptional circumstances.”
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A 2015 report by Davies Ward Phillips & Vineberg LLP found that only one in 10 directors who did not receive majority support in 2015 had their resignations accepted by their board.
The proposed amendments would remove that role for boards and would require the unsupported director to step down.
“The main difference there with regard to this majority voting requirement would be that, as it would be a legal requirement, directors and boards wouldn’t have the ability to sort of reject a resignation,” says Laura Levine, a lawyer with Stikeman Elliott LLP.
Currently, a director who does not receive a majority of “for” votes is still considered elected, unless the board accepts their resignation.
The proposed amendment would mean that any director who does not receive a majority is not elected as a matter of law and, therefore, there is no need for them to submit a resignation and the board to rule on it.
Andrew MacDougall, a partner with Osler Hoskin & Harcourt LLP, says the proposed requirements could cause “failed elections” in which shareholders fail to elect enough directors to act.
“You could have a situation where you don’t have enough directors that have been elected to satisfy quorum requirements or the residency requirements or the minimum number of independent director requirements under corporate and securities laws and, therefore, the board is unable to act,” he says.
Under the current system, MacDougall says, the board acts as a “safety valve” against that risk.
The proposed amendments say that the majority voting standards will not apply in “prescribed circumstances,” and Longhurst says the lingering question for the regulations will be how clearly the regulations define the “prescribed circumstances.”
“The prescribed circumstances that are going to be in the regulations will determine the all-important outcome of whether or not this practically has a difference,” she says. She adds that, with today’s system, it is up to the board to determine what are “exceptional circumstances” under the TSX rules.
Longhurst says the proposed legislation could create different standards and potential inequalities for those TSX-listed companies that were incorporated under different jurisdictions.
The provincial government has initiated a panel to look at modernizing Ontario’s Business Corporations Act, but, in the meantime, Longhurst says there could be a “potential disconnect now between federally incorporated corporations versus those incorporated under any other provincial statute.”
Another requirement the amendments would impose would be diversity disclosures. Under the proposed amendments, board of directors would have to submit annual diversity disclosure about the background of the directors as well as senior management to shareholders. Boards will be required to provide their diversity representation and policies or explain why none exist.
MacDougall says it is consistent with the current requirements of securities laws of most Canadian jurisdictions.
MacDougall says it remains to be seen whether the regulations will require the same level of disclosure as the existing requirements.
In Longhurst’s view, the proposed amendments will likely modernize the CBCA in a way that is a standard in many other jurisdictions.
The amendments will bring the act up to speed “with the legal reality that I think is viewed as not just a best practice but, increasingly, what should be a baseline practice,” she says.
