Écrit par Denise Bright, Will Osler, Kristopher Hanc and Steven Bodi
This blog was originally published on May 4, 2021, and has been updated to reflect an announcement on May 6, 2021, that the new regulations will not come into force on July 1, 2021.
The federal government has introduced proposed regulations that would, among other things, change the director election process for certain corporations established under the Canada Business Corporations Act (CBCA). Following the end of the comment period on April 27, 2021, the government announced that the proposed regulations will not come into effect on July 1, 2021, as originally published. The government indicated that the delay was so that the changes to the director election procedure minimally disrupt the election of directors during this year's proxy season. A new date has not been confirmed; however, given the number of corporations with a calendar year end it is likely, but not guaranteed, that the Proposed Regulations will be in place for next year's annual meetings for many corporations. Once effective, the proposed regulations will require: (i) annual board elections; (ii) individual voting (i.e., slates will no longer be permitted); (iii) majority voting; and (iv) that shareholders be permitted to vote for or against each nominee (as opposed to a "withhold" vote).
The proposed regulations implement changes contemplated under the Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (Bill C-25). We have previously written about the proposed changes to the CBCA when Bill C-25 was introduced in 2016 and when it received Royal Assent in 2018. The key changes in the proposed regulations relate to the election of directors for distributing corporations—generally speaking, a public company—and will generally align the CBCA with the rules for issuers listed on the Toronto Stock Exchange (TSX). The proposed regulations also introduce new rules regarding retention of documents and certain other technical amendments to the CBCA.
The CBCA currently requires that an election of directors be held once every three years and that a director's term expire within three years from the annual meeting at which the director was elected. Once the proposed regulations take effect, the board of directors of all distributing corporations will be required to be elected at each annual meeting of shareholders. This annual election requirement aligns with the rules applicable to TSX-listed issuers under the TSX Company Manual.
Under the proposed regulations, the directors of distributing corporations will be required to be elected by individual voting. Slate voting will no longer be permitted for distributing corporations. The CBCA currently does not require slate or individual voting unless the corporation's constating documents have adopted such a system of voting. This change will not impact issuers listed on the TSX, as the applicable TSX rules require that shareholders vote on the election of each nominee individually.
The CBCA currently allows shareholders to vote "for" or "withhold" their votes in respect of nominee directors. Shareholders are not provided the opportunity to vote "against" nominee directors, and the "withheld" votes are not counted in the tally of votes. As a result, a nominee director can be elected if only one vote is cast "for" such nominee, even if the majority of shareholders are opposed to the election of such nominee director. Under the new governance structure, nominees for the board of a distributing corporation must be elected by majority voting in an uncontested election (i.e., where only one nominee is proposed for each position). In an uncontested election, if a nominee fails to receive more votes "for" than "against", then that nominee cannot be appointed to the board, subject to limited exceptions to meet statutory requirements with respect to Canadian residents or non-employee directors.
This requirement aligns with the requirement for TSX-listed issuers (unless the issuer is majority-controlled) to have a majority voting policy that requires a director nominee to resign if they do not receive more votes "for" than votes "withheld" from that nominee's election. As drafted, the proposed regulations would also apply to majority-controlled corporations under the CBCA. If passed, the proposed regulations would effectively negate the need for majority voting policies for CBCA distributing corporations.
Under the CBCA, shareholders will now be able to vote "for" or "against" a nominee instead of the current scheme of voting "for" or to "withhold" the voting of shares. This new requirement under the CBCA differs from applicable Canadian securities laws, which require that a form of proxy allow shareholders to vote "for" or "withhold" their votes for the election of directors. Applicable securities laws contain an exemption from this requirement if: (i) the form of proxy complies with the laws pertaining to proxy solicitation in the statute under which the issuer is formed or continued and (ii) the statutory requirements are substantially similar to the securities laws requirements. The Canadian Securities Administrators have not released guidance confirming whether the new voting scheme under the CBCA is "substantially similar" to proxy requirements under securities laws.
The proposed regulations also introduce certain technical changes to the regulations under the CBCA and other legislation affected by Bill C-25 (i.e., the Cooperatives Act or Canada Not-for-Profit Corporations Act). These "housekeeping" changes relate to minor changes to the name granting rules for corporations, fixing certain time periods, and document retention by the "Director" or other government body responsible for administering the legislation.
The proposed regulations will change the time period for sending shareholder proposals to public companies under the CBCA. If enacted as written, shareholder proposals will need to be submitted within the 60-day timeframe between 90-150 days before the anniversary of the previous annual meeting of shareholders. This is a change from the current deadline under the CBCA of at least 90 days before the anniversary date of the notice of meeting provided in respect of the previous annual meeting.
The current default time period the Director must retain most documents filed with the government is six years. The proposed regulations will modify the blanket six-year retention period based on the type of disclosure document: charter documents (e.g., articles, bylaws, and lists of directors) will need to be kept indefinitely; annual returns will be required to be kept for two years; financial statements for three years; and proxy circulars (including diversity disclosure) for six years. Upon dissolution of a corporation, the person specified must retain the corporate records for six years.
All distributing corporations established under the CBCA will now be required to follow governance practices for electing directors which are generally consistent with the current rules of the TSX. Public companies will now be required to elect all directors annually and to permit shareholders to vote separately "for" or "against" each nominee, and directors will be required to be elected based on a majority voting standard. These new standards apply broadly to distributing corporations governed by the CBCA, including those listed on the TSX Venture Exchange, Canadian Securities Exchange, and NEO Exchange. Non-distributing companies—generally, private companies—will be permitted to adopt the new corporate governance standards or continue under the previous rules governing corporations established under the CBCA.
Certain amendments to the CBCA proposed by Bill C-25 with respect to the availability of notice-and-access procedures of providing documents to shareholders have yet to be implemented. It is also worth noting that the corporate governance standards proposed for CBCA distributing corporations will not apply to public companies incorporated under provincial statutes and which are listed on an exchange other than the TSX. We will monitor whether this change by the federal government results in similar modifications to provincial corporate legislation.
Bennett Jones has extensive experience in corporate and governance matters. We will be monitoring developments for the proposed regulations, including the updated date that these are expected to come into force. If you have questions regarding the corporate governance impacts of the proposed regulations, please contact a member of our Capital Markets or Corporate Governance groups.