Écrit par Will Osler, Denise Bright, Steven Bodi and Jonathan McKay
In 2021, the Government of Canada proposed regulations that would change the director election process for certain corporations established under the Canada Business Corporations Act (CBCA). For more information with respect to the history of the regulations, please refer to our previous insight, Canadian Government Proposes New CBCA Standard for Electing Directors.
The regulations are scheduled to come into force on August 31, 2022 and will be in place for the 2023 annual meeting season for many corporations. Once in force, the regulations will require: (i) annual board member elections; (ii) individual voting; (iii) voting "for" or "against" each nominee; (iv) majority voting; and (v) other administrative updates.
Background
The regulations implement changes contemplated under the Act to Amend the CBCA, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (Bill C-25). We previously wrote about the proposed changes to the CBCA when Bill C-25 was introduced in 2016 in Amendments to the Canada Business Corporations Act, and again in 2018 in New Rules for CBCA Companies, when it received Royal Assent. The key changes in the regulations relate to the election of directors for distributing corporations—generally speaking, public companies—and work to align the process for electing directors under the CBCA with rules for issuers listed on the Toronto Stock Exchange (TSX). The regulations also introduce new rules regarding retention of documents and certain other technical amendments to the CBCA.
Annual Director Elections
Once the new regulations take effect, each member of the board of directors of a CBCA distributing corporation will be required to be elected at each annual meeting of shareholders rather than the current provisions which allow for up to a three year term. This new annual election requirement aligns with the rules already applicable to TSX-listed issuers under the TSX Company Manual.
Individual Voting
Under the new 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 did not previously require either slate or individual voting unless the corporation's constating documents adopted such a system of voting. This change will not impact issuers listed on the TSX, as TSX rules already require shareholders to vote on the election of each director nominee.
Voting "Against"
The CBCA currently allows shareholders to vote "for" or "withhold" their votes in respect of director nominees. Shareholders are not currently provided the opportunity to vote "against" director nominees, and "withheld" votes are not counted in the tally of votes. Under the CBCA changes, shareholders will now be permitted to vote "for" or "against" a director nominee. This new requirement differs from Canadian securities laws, which require that a form of proxy allow shareholders to vote "for" or "withhold" their votes for the election of directors.
Majority Voting in Uncontested Elections
Under the current CBCA regulations, a director nominee could be elected if only one vote is cast "for" such nominee, even if the majority of shareholders vote to withhold their votes. Under the new regulations, director nominees for the board of a distributing corporation must be elected by receiving the majority of the votes cast (or such other greater amount as set forth in the corporation's articles) in an uncontested election. In an uncontested election, if a director nominee fails to receive more votes "for" than "against," then that director nominee cannot be appointed to the board, subject to limited exceptions to meet statutory requirements with respect to Canadian residency and independent director requirements. If an incumbent director fails to obtain a majority votes at the shareholder meeting, that director may be able to continue as a director for a transition period of up to 90 days following the meeting.
This change aligns with the current requirements for TSX-listed issuers (excluding majority-controlled issuers) to have a majority voting policy that requires a director nominee to immediately resign if they do not receive more votes "for" than votes "withheld" from that nominee's election. The new regulations also apply to majority-controlled corporations under the CBCA which negates the need for a majority voting policy for CBCA distributing corporations. The TSX also currently provides boards with discretion to not accept a director's resignation in exceptional circumstances; however the new CBCA regulations remove this discretionary power.
Other Administrative Changes
The regulations will also change the time period for sending shareholder proposals to public companies under the CBCA in an effort to make this cut-off date more clear. Shareholder proposals will need to be submitted in the 60 day period between 90 and 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 corporation's proxy circular must include a statement setting out the latest day by which a proposal must be received in respect of the next annual meeting.
The regulations also introduce certain technical changes to the regulations under the CBCA. 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.
Key Takeaways
Once the new regulations come into force, all CBCA distributing corporations will be required to follow governance practices for electing directors which are generally consistent with the current rules of the TSX. Public companies will be required to elect all directors annually and to permit shareholders to vote separately "for" or "against" each director nominee, and directors will be required to be elected based on a majority voting standard. 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.
CBCA distributing corporations should pay close attention to the shareholder proposal timeframe change as these dates will need to be communicated to shareholders in advance.
There have been no updates with respect to other amendments to the CBCA such as notice-and-access procedures for providing documents to shareholders, say on pay, claw back provisions and board and senior management diversity disclosure requirements. We will provide further updates surrounding these changes as they become available.
Bennett Jones has extensive experience in corporate and governance matters. If you have questions regarding the corporate governance impacts of the proposed regulations, please contact the authors or any of our corporate partners.
Bennett Jones