More Shareholder Democracy, More Board Diversity: Proposed Amendments to the CBCA

Authors: Justin Wood, Anna Beatch, Erin Smith

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

On September 28, 2016, the Minister of Innovation, Science and Economic Development introduced Bill C-25 (the “Bill“) which would amend the Canada Business Corporations Act (the “CBCA“).

The Bill is aimed at modernizing Canada’s legal and regulatory framework for federally incorporated corporations and, if enacted, would strengthen shareholder democracy by reforming aspects of the process for electing directors of publicly traded corporations (referred to in the CBCA as “distributing corporations”[1]) and promote diversity on boards of directors by requiring publicly traded corporations to disclose, on an annual basis, information about who makes up the board and senior management. There are three significant governance amendments to the CBCA proposed by the Bill:

1. Mandatory majority voting

Currently, shareholders can either vote for a nominee to the board or withhold their vote; they cannot vote against a nominee. Under this system, a nominee can be elected to the board if a single shareholder votes in his or her favour, even if all of the other shareholders withhold their votes.

The Bill, if enacted, would make majority voting for publicly traded corporations incorporated under the CBCA mandatory. Shareholders of these corporations would be entitled to vote “for” or “against” a nominee to the board, as opposed to only voting “for” a nominee or “withholding” their vote. Under the majority voting system, in an uncontested meeting,[2] each candidate can only be elected if the number of votes cast in their favour represents a majority of the votes cast for and against them by the shareholders. Thus, majority voting will prevent under-supported directors from being elected.

The Bill contemplates, but does not define, exemptions to the majority voting requirement. Exactly which corporations will be exempt will not be known until the regulations are available.

Majority voting is already required for uncontested meetings of corporations listed on the Toronto Stock Exchange. Specifically, the TSX Company Manual states that TSX-listed issuers must adopt a majority voting policy that provides that:

  1. a director must immediately tender his or her resignation to the board of directors if he or she is not elected by at least a majority of the votes cast with respect to his or her election; and
  2. the board of directors must accept the resignation, except in exceptional circumstances.

2. Mandatory annual elections for directors

Currently under the CBCA, directors may be elected for up to a 3-year term (or, more specifically, a term lasting until the close of the third annual meeting of shareholders following their election).

The Bill, if enacted, would only permit directors of publicly traded corporations incorporated under the CBCA to hold office for a 1-year term (or, more specifically, until the close of the next annual shareholders meeting following their election). Again, the Bill contemplates exemptions from this requirement, but the details of these exemptions will not be known until the regulations are available.

Note that the Bill would continue to permit 3-year terms for directors of private corporations.

3. Directors must annually disclose information about diversity

The Bill, if enacted, would also require directors of “prescribed corporations” to disclose to the shareholders, at every annual meeting of shareholders, the “prescribed information” respecting diversity among the directors and the members of senior management. The details of which corporations will have to report and what information will have to be reported will be set out in regulations, which are not yet available.

The Bill does not define the term “diversity”, however, the Government of Canada Backgrounder accompanying the Bill suggests that “diversity” includes gender diversity, and indicates that the federal government seeks to implement a “comply or explain” regime with respect to gender diversity.

Interestingly, certain provincial and territorial securities regulators, in National Instrument 58-101, Disclosure of Corporate Governance Practices, require TSX-listed companies to disclose certain matters relating to the representation of women on the board of directors and in executive officer positions.

The proposed amendments contained in the Bill would only apply to the 270,000 corporations incorporated federally under the CBCA. Corporations incorporated under provincial statutes would not be affected.

Publicly traded corporations incorporated under the CBCA should consider discussing the proposed amendments with their legal counsel to ensure that they are sufficiently prepared if and when the Bill becomes law.

[1] A “distributing corporation” is a corporation that is a “reporting issuer” under provincial securities laws, whose shares are listed on a stock exchange, or that has published a prospectus.

[2] Contested meetings are meetings at which the number of nominees to the board of directors is greater than the number of seats available on the board. By contrast, at uncontested meetings the number of nominees is equal to the number of seats available on the board.