Public Company Boards: Plan for Proposed Corporate Governance Changes
December 5, 2016
By Basia Dzierzanowska, Regional Lead Partner | Corporate at McInnes Cooper,
Julie Robinson, Partner at McInnes Cooper
Corporate governance of Canadian public companies might look a bit different in 2017. On September 28, 2016, the federal government introduced Bill C-25, aimed at amending the Canadian Business Corporations Act (CBCA) as a result of Industry Canada’s consultations on the CBCA corporate governance framework. The proposed amendments largely put the CBCA rules for election of directors, shareholder communications and diversity disclosure in congruence with those already applicable to many reporting issuers. In addition, proposed amendments to the Toronto Stock Exchange (TSX) Company Manual may enhance governance disclosure for TSX-listed companies in the coming years.
Neither when (or even if) the amendments will come into effect (they are still moving though the approval process), nor their scope (regulations delineating the details of the changes to the CBCA aren’t yet published and likely won’t be until the amendments become law) are clear. But boards would be wise to add planning for them to their New Year’s resolutions. If and when they do take effect, they will change the corporate governance landscape of many public companies, and boards will need to be prepared to comply. Here are four key aspects of the corporate governance for public companies that could change in 2017.
Reforms to Shareholder Democracy in CBCA “Distributing Corporations”. The proposed CBCA amendments mandate material changes to the election of directors of “distributing corporations” with the objective of strengthening shareholder democracy, promoting directors’ accountability to shareholders and introducing checks on the power of corporate boards. While “distributing corporations” generally means “reporting issuers”, the scope of corporations to which the proposed rules will apply is yet to be identified in regulations.
- Requirement for Annual Election of Directors. Bill C-25 proposes to limit the term of a director of prescribed CBCA corporations to one (1) year. This is consistent with the rules that apply to TSX-listed corporations. Currently, CBCA corporations can have staggered boards and allow directors to hold terms beyond one year, making it unnecessary to elect a full board of directors each year. Bill C-25 allows for an exemption from annual elections for “any prescribed class of distributing corporations” or “any prescribed circumstances respecting distributing corporations”, which would allow up to three-year terms and staggered boards. But the scope of these exemptions will only be detailed in the as-yet unpublished regulations.
- Separate Votes for Directors in Prescribed Corporation. The proposed amendments would also abolish election of directors using slates as far as “prescribed corporations” are concerned, with the exception of certain “prescribed corporations” (the details of which will be identified in the regulations). The rules propose that a separate vote of shareholders must be taken with respect to each candidate nominated for director. Again, these changes would make the CBCA consistent with director election rules applicable to TSX-listed issuers.
- Requirement for Majority Vote to be Elected. The proposed amendments require that for distributing corporations, where only one candidate is nominated for each board position, shareholders can only vote “for” or “against” the candidate. The candidate will only be elected if the number of “for” votes represents a majority of the total votes cast by shareholders. This majority voting rule is in line with requirements for TSX-listed companies. Currently, without majority voting, directors are elected based on a plurality of votes where shareholders either vote “for” a candidate or withhold their vote; a candidate is elected even if a single vote is cast in their favour. With majority voting, if the election results in a greater number of votes “against” the candidate, the board can’t appoint that candidate as a director before the next shareholders’ meeting except in “prescribed circumstances” that the regulations don’t yet define. This change would prevent situations where a candidate for the board doesn’t receive majority support, but is elected by a minority of “yes” shareholder votes or is appointed by the board.
Modernized Communications to CBCA Company Shareholders. The proposed CBCA amendments also allow for modernizing the method of communication with shareholders of CBCA corporations. The proposed amendments would exempt CBCA corporations, upon the CBCA Director’s approval, from existing notice requirements and allow them to provide shareholders with proxy materials and financial statements through alternative methods, such as notice-and-access delivery methods available to public companies. This will streamline the process for CBCA corporations to use notice-and-access and help them achieve cost-savings, while being more environmentally friendly, with fewer documents being printed and sent by mail.
Mandated Diversity Disclosure to CBCA Company Shareholders. Because it’s … 2017, the proposed CBCA amendments will require directors of “prescribed corporations” to place before shareholders, at every annual meeting, “prescribed information” about diversity among directors and senior management members as set out in the (still not published) amended CBCA regulations. The “prescribed corporation” will also be required to send information about diversity to each shareholder unless that shareholder has specifically informed the corporation they don’t want to receive it. Again, however, which corporations will be subject to and the extent of this disclosure won’t be clear until regulations disclose the meanings of “prescribed corporations” and “prescribed information”. These amendments are playing catch up to the 2014 amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101) requiring certain reporting issuers to disclose data on the participation of women on corporate boards and in senior management. NI 58-101 also requires certain reporting issuers to disclose policies relating to promotion of diversity on boards and adopt a “comply or explain” model whereby reporting issuers either inform shareholders about diversity policies, or disclose reasons they don’t have such policies. Whether the CBCA goes as far as adopting a “comply or explain” model remains to be seen when (and if) the amendments are made into law and the regulations are published.
Website and Governance Disclosure for TSX-Listed Issuers. The TSX published in Spring 2016 proposed amendments to its Company Manual to introduce website disclosure requirements and amend the disclosure requirements regarding security-based compensation arrangements for TSX-listed issuers. The amendments, if they come into effect as proposed, will require TSX-listed issuers to post and maintain on a publicly accessible website copies of certain corporate governance documents, including corporate policies, security holder rights plans and security-based compensation arrangements. The amendments will also update disclosure requirements regarding security-based compensation arrangements, reflecting current trends in those arrangements being used by TSX-listed issuers.
Please contact your McInnes Cooper lawyer or any member of the Corporate Governance Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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