Rule change would put Ontario in line with several other provinces
The Ontario Government’s proposed amendments to the Business Corporations Act would likely increase the number of new corporations being created in Ontario, says Ian Michael, partner at Bennett Jones LLP, who practises corporate and securities law.
The suggested amendments are contained within Bill 213: Better for People, Smarter for Business Act, 2020, which is currently in second reading.
If passed, the legislation would remove the Canadian residency requirements for corporation directors. Currently, at least 25 per cent of an Ontario corporation’s directors must be resident Canadians. Quebec, B.C., Nova Scotia and New Brunswick have already nixed this requirement and Alberta is in the process of doing so.
The change will be welcomed by foreign investors with their eyes on the Ontario economy, says Michael.
“I think we will see an increase in the number of new Ontario corporations being created. Given the size of Ontario's economy within Canada, a lot of foreign investment comes to Ontario,” he says.
As the law currently stands, when an investor creates a new company as a base for its investment and lacks a Canadian resident to appoint as a director, the residency requirement leads them to incorporate elsewhere, even if the business is in Ontario and the investors have other companies in the province, Michael says.
The requirement is also artificial as it cannot prevent foreign actors from directing an Ontario corporation’s meaningful decision-making, he adds. Under the Ontario Business and Corporations Act, the shareholders can take decision-making power away from the company’s board and give it to themselves through a unanimous declaration.
“If you are a foreign company holding an Ontario Corporation and you have a local Canadian resident director, you can bypass the role that Canadian resident has by simply having the shareholders reserve the decision-making powers to the foreign shareholders and therefore neutralizing the effect of having a Canadian on the board,” Michael says.
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In taking that power, the shareholders would thereby take on liability for their decisions and so the action would not be taken lightly, he adds.
Bill 213 also proposes to permit public corporations to pass ordinary resolutions in writing with majority shareholder approval. The law currently asks for unanimous shareholder approval.
But a majority of shareholders can call a meeting, where that majority can then pass the resolution. Requiring unanimity to streamline that process with a written resolution – especially amid COVID-19 – is an “administrative hassle” and “legally meaningless,” says Michael.
“It's forcing a process without any impact on the ultimate result, most of the time,” he says.
Requiring written resolutions to be unanimous is difficult for those with many shareholders or shareholders who are uncooperative or inattentive, says Michael. The COVID-19 pandemic has also made it hard to justify otherwise unnecessary meetings.
There are certain situations, where contentious issues are being dealt with and holding a meeting to allow shareholders to express their opinion – despite their being in the minority – is a good thing for shareholder engagement, says Michael.
“Where there are controversial decisions to be made that might benefit from debate amongst the shareholders, that gets bypassed in this arrangement,” he says.
But for routine decisions, Bill 213’s proposed change is an “administrative efficiency,” he says.