Update

Corporate governance amendments to the Canada Business Corporations Act

Majority voting for reporting issuers takes effect in August; “say-on-pay” still waiting to take shape.

As of August 31, 2022, reporting issuers incorporated under the Canada Business Corporations Act (CBCA) must permit shareholders to vote “against” nominees for director roles in uncontested elections. This requirement is one of the more significant amendments to the CBCA arising from Bill C-25 and coming into force this year.

Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-Profit Corporations Act, and the Competition Act received Royal Assent in the spring of 2018. Much of the Act did not come into force, pending the publication of related regulations. It was announced in March that key changes to the CBCA’s shareholder voting requirements would take effect at the end of August.

The CBCA currently permits shareholders voting at a duly-called and legally valid shareholders’ meeting to “withhold” their vote, or to vote “for”, nominee directors in uncontested elections. A “withhold” vote is the practical equivalent of not voting; a vote “against” in effect reduces the number of votes “for” the nominee. If less than 50% of the votes cast are “for” the nominee, the nominee will not be elected as a director, subject to any variance of this provision in the company’s articles.

The failure of a nominee to get elected will not prevent their appointment by the other (elected) directors, if needed to fulfill other CBCA requirements, particularly the Canadian directors’ residency requirement or the independence requirement for distributing corporations, being the requirement that at least two directors of a distributing corporation are not simultaneously officers or employees of the issuer or its affiliates.

If the articles specify a minimum number of directors, the CBCA amendments will permit those directors who meet the electoral threshold to carry on the full responsibilities of the board, provided their number fulfills the quorum requirements, even if the minimum number of directors is not elected.

The majority voting system being introduced to the CBCA generally mirrors the existing Toronto Stock Exchange listing rules, but reporting issuers not trading on the TSX will be impacted by the change.

Still waiting for implementation are the provisions of Bill C-97 governing “say-on-pay.” 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 three years ago. A federal consultation process ended in March 2021, without further announcement as to when the say-on-pay provisions will come into force.

Bill C-97 introduces two requirements for “prescribed corporations” (a term to be defined by regulation; reporting issuers should assume that they will be prescribed for this purpose). First, they will be required to “develop an approach with respect to the remuneration of the directors and employees of the corporation who are members of the senior management.” The “senior management” is also a term to be eventually defined by regulation. In other words, a prescribed corporation must have a plan in place as to how it compensates its leadership.

The second requirement will be an obligation to put that compensation plan to a non-binding shareholder vote at every annual meeting, with the results of the vote to be disclosed to the shareholders. The vote is non-binding is recognition of the directors’ ultimate duties being owed to the corporation; but the shareholders will have knowledge of the board’s decision to disregard the shareholder vote.

The critical questions yet unanswered are (i) which corporations, and (ii) which levels of management will be subject to the remuneration vote obligation. Say-on-pay is not a new idea. The Ontario Securities Commission issued Staff Notice 54-701 in 2011 in which an advisory say-on-pay vote was identified as a policy idea requiring further consideration. Advisory votes on executive compensation are a feature of the Dodd-Frank regulatory regimen in the United States and dozens of Canadian reporting issuers have adopted an advisory vote policy on their own accord.

We will update this insight as further information becomes available. 

Posted July 13, 2022, with reports from Rhiannon Swan.

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