Significant amendments to the Canada Business Corporations Act (CBCA) proposed in the federal government’s omnibus budget implementation bill (Bill) would codify into statute some of the principles relating to directors’ duties set out in the landmark Supreme Court of Canada (SCC) 2008 decision BCE Inc. v. 1976 Debentureholders (BCE).
The Bill would also require that certain CBCA corporations develop an approach to remuneration, hold an advisory “say-on-pay” vote on an annual basis, provide annual disclosures on diversity and on compensation clawback mechanisms and the well-being of employees, retirees and pensioners.
STATUTORY CHANGES TO DIRECTORS’ DUTIES
One significant proposal in the Bill is a codification and to a degree, expansion upon certain of the principles stated by the SCC in BCE, which remains the leading case on the fiduciary duties of directors of Canadian corporations (see our December 2008 Blakes Bulletin: Supreme Court of Canada Releases Reasons for Decision in BCE).
If implemented, these amendments would reinforce the divergence of Canadian law on directors’ duties from U.S. law on that point, where cases centre on maximizing shareholder value, especially when faced with a potential change of control (see our December 2015 Blakes Article: The Balancing Act: Directors’ Duties in Canada vs. the U.S.). The CBCA, like other Canadian corporate statutes, requires that directors and officers of corporation act “honestly and in good faith with a view to the best interests of the corporation,” a duty commonly referred to as the “fiduciary duty”.
The Bill proposes to amend the CBCA to specify that, when acting with a view to the best interests of the corporation, directors and officers of the corporation may consider (but are not limited to) the interests of shareholders, employees, retirees and pensioners, creditors, consumers, and governments; the environment; and the long-term interests of the corporation.
Notably, the Bill includes “retirees and pensioners” (a common theme across other statutes impacted by the Bill) as a class of people whose interests may be considered, although they were not specifically mentioned by the SCC in BCE.
The proposed changes would expressly embed these principles in statute, rather than for allowing for the flexibility afforded by the development of the common law. They also emphasize the fact that, in exercising their duties, directors are not necessarily bound to consider exclusively, or perhaps even primarily, the interests of shareholders and investors, but that shareholders and investors are but one set of “stakeholders” among many.
SAY-ON-PAY
The Bill’s changes to the CBCA would mandate that certain corporations develop and annually disclose their approach to the compensation of directors and members of senior management. The corporations affected will be prescribed by regulations, and are not now known, although they would likely be distributing (i.e., public) corporations.
In a significant change from existing law, the Bill would also require that shareholders of prescribed corporations be provided a non-binding “say-on-pay” vote on the corporation’s approach to compensation at each annual shareholder meeting and that the results of the vote be disclosed to shareholders.
An increasing number of large Canadian public companies have been holding say-on-pay votes in recent years, but such votes remain rare among smaller issuers. If the Bill becomes law and the regulations provide that all distributing corporations are subject to the requirement to hold say-on-pay votes, a very large number of Canadian public companies, including many junior issuers, and controlled public companies (many of which do not currently hold such votes as the results are preordained), will be required to hold say-on-pay votes annually.
DIVERSITY DISCLOSURE
The Bill also contains requirements relating to disclosure regarding diversity among directors and members of senior management of a prescribed corporation. Substantially identical requirements were approved in 2018, but have not yet been proclaimed in force.
If the regulations relating to diversity disclosure are not changed from those previously released, distributing corporations under the CBCA would, based on current disclosure requirements in Form 58-101F1 under National Instrument 58-101 – Disclosure of Corporate Governance Practices concerning gender diversity among the corporation’s board and senior management, be required to provide information relating to further categories of diversity (i.e., including, but not be limited to, Aboriginal Peoples, persons with disabilities, members of visible minorities – each as defined by the federal Employment Equity Act).
ADDITIONAL ANNUAL DISCLOSURE ON COMPENSATION AND EMPLOYMENT
In addition to the diversity disclosure, the Bill proposes additional disclosure requirements for certain corporations regarding the recovery of incentive benefits or other benefits paid to directors and members of senior management of the corporation (i.e., clawbacks) and “the well-being of employees, retirees and pensioners”. The regulations associated with the Bill have not been released, so the specifics of what such disclosure might entail are not yet clear, but if the same corporations are subject to these requirements as to the diversity disclosure requirements, these requirements would apply to distributing (i.e., public) corporations.
SIGNIFICANCE OF CHANGES
As noted, the statutory changes to the ambit of directors’ duties are significant, as they “hard-wire” and expand common law principles into the CBCA and open the door to potentially de-emphasize the interests of shareholders and investors. As well, the imposition of a “say-on-pay” vote will be a significant change for many corporations.
In addition, the imposition of disclosure requirements on CBCA corporations, beyond those prescribed on a uniform national basis by the provincial and territorial securities regulatory authorities, represents a significant foray by the federal government into an area that has been, for some time, the domain of securities regulators. It also provides for uneven disclosure between CBCA public corporations and public corporations incorporated provincially under the Ontario, Quebec, Alberta or other provincial corporate legislation, none of which jurisdictions have, to date, advanced on adopting similar requirements.
Interestingly, these changes are not currently proposed for chartered banks and life insurance companies, which are among the most significant public companies regulated federally, as they are incorporated under legislation other than the CBCA.
WHAT NEXT?
The Bill received its first reading in the House of Commons on April 8, 2019. It is expected that, following its second reading in the House of Commons, the Bill will be referred to the House of Commons Standing Committee on Finance. Following review in committee, it will be returned to the House of Commons for third reading, after which it will be sent to the Senate for consideration.
It is expected that, absent strong opposition, the proposed changes to the CBCA will remain part of the Bill and will be passed before the federal election scheduled for October 21, 2019. The changes to the CBCA would come into force on a date to be selected by the federal cabinet and it is expected that the associated regulations would be enacted before the changes to the CBCA come into force. However, it is unclear whether the regulations will be enacted before or after the federal election.
For further information, please contact:
Matthew Merkley 416-863-3328
Liam Churchill 416-863-3057
or any other member of our Capital Markets or Corporate Governance groups.
