On June 21, 2019, the federal government’s Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019, and other measures, received Royal Assent. The Bill implemented certain provisions included in the 2019 budget and contained some notable changes to the Canada Business Corporations Act (CBCA). The amendments contained a strong focus on updated corporate governance measures with the objective of ensuring enhanced oversight.
An Update to Directors’ and Officers’ Obligations to the Corporation
The CBCA outlines the fiduciary duty that every director and officer owes to a corporation, requiring that in order to properly discharge their duties they must “act honestly and in good faith with a view to the best interests of the corporation.” The long-standing convention was that this could be met by acting in the best interests of the shareholders of a corporation. However, the 2008 decision of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders revised this, with the Court holding that the “best interests of the corporation” are not synonymous with the interests of shareholders. Instead, directors may consider the interests of numerous stakeholder groups.
Bill C-97 updated the CBCA to account for the 2008 decision by acknowledging the additional interests for directors and officers to consider. Section 122 of the legislation was expanded with a new subsection stating that directors and officers may consider the following factors:
- the interests of shareholders, employees, retirees and pensioners, creditors, consumers, and governments;
- the environment; and
- the long-term interests of the corporation.
Enshrining this broader view of the interests of the corporation in the statute should not significantly alter the director’s decision-making, though it does make the CBCA consistent with judicial precedent.
New Disclosure Requirements Raise Corporate Governance Standards
The amendments within Bill C-97 also include several new disclosure requirements for CBCA corporations. Collectively, these serve to increase accountability and transparency surrounding management decision-making.
Diversity and Well-being
At each annual meeting directors of prescribed corporations will need to provide shareholders with information outlining diversity among directors and senior management as well as information concerning the well-being of employees, pensioners, and retirees.
Review of Executive Compensation
Prescribed CBCA corporations will be required to develop an approach to Director and senior management remuneration. This approach must be disclosed to shareholders before each annual meeting, allowing shareholders to vote via a non-binding “say-on-pay” resolution, with the results to be disclosed. In Canada, these votes previously existed for public companies on a voluntary basis. The amendment follows an increased focus on executive compensation and can be expected to act as a gauge of shareholders’ views on compensation, increasing shareholder activism.
Bill C-97 also requires prescribed corporations to provide shareholders at each annual meeting with information concerning the recovery of incentive benefits or other benefits (“clawbacks”) previously paid to senior management or directors.
Consultation on the Regulations to Bill C-97
Some of the amendments reviewed have already been added to the CBCA, although additional details still need to be set out in regulations. According to Corporations Canada, the amendments arose in response to concerns around the security of workplace pensions, with the objective of enhancing retirement security, while ensuring a strong platform for growth and innovation. Accordingly, Innovation Science and Economic Development Canada (ISED) sought feedback from stakeholders on the proposed regulations.
The ISED consultation specifically sought feedback on the following:
A) Prescribing the corporations subject to the new obligations
The current intention is for the new amendments to apply to distributing corporations, defined as publicly-traded CBCA corporations.
B) Defining “members of senior management”, “retirees”, and “pensioners”
The amendments will use new terms that need to be defined. Currently, only “members of senior management” is already defined, appearing in subsection 172.1(1) of the CBCA. ISED proposes having the same definition apply to the new obligations respecting remuneration disclosure.
The proposed new definitions for “retirees” and “pensioners” aim to distinguish between those who receive a pension and those who receive other benefits from a corporation. A person may be both or only one.
“Retiree” could mean “a person who has concluded their working or professional career with a corporation, and receives or will receive post-employment benefits other than a pension from that corporation.”
“Pensioner” could be defined as “a person who receives regular payments from a corporation from a fund accumulated during that person’s employment with that corporation, or a spouse or dependents of such a person receiving the payments after the person is deceased.”
C) Determining the time and manner for disclosing the results of say-on-pay votes
ISED suggests that prompt communication of results will facilitate shareholder engagement in relation to corporate remuneration. It proposes that results be reported 1) at the annual meeting, 2) posted on the corporate website no later than 30 days after the meeting, 3) set out in the next annual general meeting’s management proxy circular.
D) Determining what information to disclose to shareholders regarding clawbacks
ISED notes that clawbacks can mitigate risk by allowing corporations to recover undeserving incentive payments. It suggests corporations should be required to indicate if they have adopted a policy, and if not, provide the reasons why. For corporations that have a policy, they must provide a summary including key provisions.
E) Prescribing the information to disclose regarding the well-being of employees, retirees and pensioners
According to ISED, this disclosure will ensure better oversight of corporate behaviour while promoting the interests of human resources. The proposal is that corporations should indicate whether they have a policy relating to the well-being of employees, retirees and pensioners and if not, must indicate why. If a policy exists, it should provide a summary of the objectives and key provisions, and the elements of the policy covering well-being, as well as a description of the progress in achieving the policy goals.
The CBCA amendments seek to update corporate governance best practices while engaging an expanded group of stakeholders which may encourage shareholder activism.
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