Bill C-25 received Royal Assent on May 1, 2018. The bill will amend the CBCA by: reforming certain aspects of director elections; creating requirements for public companies to disclose officer and director diversity representation; and introducing the new Notice-and-Access Regime.
While some of the CBCA amendments have come into force, many of the amendments – including those described below – will come into force on a future date. As well, certain amendments must await changes to relevant regulations. The Federal Government has published the proposed regulatory amendments and is currently accepting comments from the public. It is projected that it will take 18-24 months to develop the new regulations. In M&A deals where the target is incorporated under the CBCA, the acquirer should be aware of the implications that Bill C-25 will have on federally incorporated companies.
Changes to Director Election Process:
- For public companies, the new CBCA rules will allow newly elected directors to hold office only until the next annual meeting. Prior to the amendments, directors could hold office for three years.
- The voting procedure will change for certain corporations (public corporations based on the proposed regulations). There will be a separate vote for each candidate nominated for a director position, instead of a single slate vote being held for all nominated candidates.
- The proxy form in the regulations will be amended to allow shareholders to cast votes either “for” or “against” a nominee. The current form only allows a vote “for” or a “withholding” of a vote when during majority voting.
- When there is only one nominee per board position for a public company, the nominee will only be elected if they win the majority of votes being cast for or against them. These changes are meant to provide shareholders with greater influence in board elections. Under the current rules, a plurality system is used for uncontested elections for public companies, where shareholders can only vote “for” or “withhold” votes. The plurality voting method allows a nominee to win a board seat even if they only receive one vote for their election, with all other shareholders withholding their votes. While the TSX tried to solve this issue by requiring directors who receive a majority of withheld votes to tender their resignation, the board can reject the resignation and allow the elected director to continue to sit on the board. The new CBCA rules would apply to all public companies, not just those traded on the TSX, and they would prevent a director who fails to gain a majority of votes from serving on a board, subject to limited exceptions. Furthermore, only in particular circumstances will a single nominee be able to be appointed as a director after failing receive a majority of the votes in an election. Under the proposed regulations these circumstances include: the need to fulfill either the Canadian residency requirement or the requirement that two of the directors are not employees or officers of the company.
Diversity Disclosure Requirements:
The CBCA amendments will require public companies to provide information relating to diversity policies at every annual meeting. The information to be disclosed is the same information required under Items 10 to 15 of Form 58-101F1 (Disclosure of Corporate Governance Practices) under provincial securities rules. The difference is that the disclosure requirements will apply to the broader “members of designated groups”, which includes women, Aboriginal peoples, persons with disabilities and visible minorities. Companies that fail to adopt written policies regarding representation of members of designated groups on their boards will be required to explain to shareholders why they chose not to adopt such policies. Advocates of this change to the CBCA hope that this will increase diversity on boards of public companies. However, securities rules that required such disclosure for representation of women on boards failed to produce significant gains in gender diversity on boards in the last few years. It remains to be seen whether the CBCA changes will be more successful in creating diversity on boards of public companies.
The amendments to the CBCA and the proposed regulations will allow public companies to rely more heavily on electronic means for communicating proxy-related materials to its shareholders. Shareholders will be able to access proxy materials over the internet. The Federal Government has communicated that, “until the required regulations are developed, Corporations Canada is of the view that the notice-and-access regime provides shareholders with sufficient disclosure to support applications for exemptions” from having to circulate paper copies of proxy materials and annual financial statements to shareholders.
The author would like to thank Arron Chahal, summer student, for his assistance in preparing this legal update.