Written by Denise D. Bright, Beth Riley and Zach Johnson
On April 8, 2019, the Federal Government introduced Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures, which includes proposed changes to the Canada Business Corporations Act (CBCA). The changes will have varying impacts on federally incorporated businesses in Canada. The most significant and noteworthy provisions are as follows.
Directors and Officers—Best Interests Considerations
The CBCA requires directors and officers, in discharging their duties to the corporation, to "act honestly and in good faith with a view to the best interests of the corporation." Until the 2008 decision of the Supreme Court of Canada (SCC) in BCE Inc. v 1976 Debenture Holders, it was often believed that acting in the best interests of the corporation was tantamount to acting in the best interests of the shareholders of the corporation. However, the SCC confirmed that "directors owe their duty to the corporation, not to stakeholders and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation." The SCC provided further guidance on these duties by concluding that the interests of other stakeholders in the corporation may be relevant in an assessment of the duties of directors: "[t]he duty of the directors to act in the best interests of the corporation comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly" and that "directors may look at the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment" in discharging their duty to act in the best interests of the corporation.
Bill C-97 codifies the BCE decision by providing that directors and officers may consider, but are not limited to, the interests of shareholders, employers, retirees and pensioners, creditors, consumers and governments, as well as the environment and the long-term interests of the corporation, when acting with a view to the best interests of the corporation.
Diversity and Well-Being and Other Information
Bill C-97 also requires that the directors of prescribed corporations provide shareholders certain prescribed information, including information respecting: (i) diversity among the directors and "members of senior management", (which information disclosure is substantially similar to disclosure requirements in Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act, which received Royal Assent on May 1, 2018 but is not yet in force); and (ii) the well-being of employees, retirees and pensioners.
Bill C-97 does not provide details regarding which corporations will be designated “prescribed corporations” required to comply with these disclosure obligations, the identity of the "members of senior management" or the information required to be included; however, Bill C-25 contained almost identical language regarding the diversity disclosure to Bill C-97. The proposed regulations under Bill C-25: (i) define prescribed corporations as distributing corporations, (ii) define members of senior management as the “executive officers” within the meaning of the Canadian Securities Administrator’s National Instrument 51-102 – Continuous Obligations, which, generally apples to public companies in Canada; and (iii) specify that these disclosure requirements apply to women, Aboriginal peoples, persons with disabilities, and members of visible minorities. It is likely Bill C-97's regulations will likely follow suit.
Non-Binding Say-on-Pay Vote and Clawback Disclosure
The CBCA permits directors to fix the remuneration of the directors, officers and employees. Bill C-97 requires prescribed corporations to develop a "remuneration approach" for directors and employers who are "members of senior management" and disclose this approach to shareholders, who will vote on this approach by way of a non-binding “Say on Pay” resolution at each annual meeting. The corporation will be required to disclose the results of the vote to the shareholders. Non-binding “Say on Pay” resolutions are required for U.S. public companies, and directors of public companies in Canada are already increasingly adopting these resolutions, often in response to shareholder activism.
Bill C-97 also requires prescribed corporations to provide to shareholders prescribed information respecting the recovery of incentive benefits or other benefits, typically called "clawbacks”, which the corporation included in the remuneration paid to "members of senior management."
Investigative Powers—Individuals with Significant Control
Effective June 13, 2019, CBCA corporations will be required to include in a register in their minute books the identity and specified information of individuals with "significant control" over such corporations. Reporting issuers and those corporations listed on a designated exchange are exempt from the requirement to maintain a register.
Bill C-97 requires such corporations to provide a copy of such register or certain specified information contained in the register to investigative bodies, upon request of the investigative body where it has reasonable grounds to suspect that the register or the specific information requested would be relevant to investigate specified offense in respect of the corporation, individuals with "significant control" over the corporation and other entities. Investigative bodies include police forces, the Canada Revenue Agency and similar provincial agencies, and any prescribed body which has investigative powers in relation to certain prescribed offenses. The proposed prescribed offences include a broad range of Criminal Code offences, including related to fraud and counterfeit, theft, laundering proceeds of crime, bribery, corruption of foreign public officials, possession of property obtained by crime, trademark offences, terrorism, trafficking, and sexual assault.
It will be an offence under Bill C-97 if any director or officer knowingly authorizes, permits or acquiesces to a contravention of the obligation to provide such information to an investigative body, whether or not the corporation is prosecuted or convicted, with a penalty on conviction of a fine not to exceed $200,000 or imprisonment for a term not to exceed six months, or both.
Bill C-97 is in the early stages, having completed the first reading in the House of Commons on April 8, 2019. However, given that Bill C-97 is akin to an omnibus legislation implementing multiple unrelated matters, we expect Bill C-97 to received Royal Assent (with or without amendments). Readers are cautioned that the final legislation may not be reflective of the foregoing. In addition, as the Federal Government has not yet released regulations identifying the prescribed corporations subject to these new requirements and related information and, consequently, the extent of the obligations of corporations and directors remains unclear. We will continue to monitor the progress of Bill C-97.