CBCA update — Big changes to the Canada Business Corporations Act could soon be in the works

  • February 01, 2014
  • George Mucalov

In December, Ottawa started consulting the public on how best to update the Canada Business Corporations Act. Launched in 1975, its last major overhaul was 13 years ago.

“It’s important to ensure the CBCA is kept modern and up-to-date to reflect current realities,” notes Andrew Grossman of Norton Rose Fulbright Canada LLP, expressing a widely shared view.

The treatment of executive compensation, shareholder voting and participation rights, insider trading, and encouragement of socially responsible enterprises are all on the radar.

“The exploration of socially responsible enterprises is interesting,” says Ernest McNee of Blake Cassels & Graydon LLP. “We’ve traditionally viewed corporations as separate from other socially responsible organizations. Corporate profit has been their motive. I’m glad the federal government is looking into combining profit with a socially responsible element.”

The consultation shopping list also spans headline fodder, such as better gender representation on public company boards; ways to help fight tax evasion, money laundering, terrorist financing, international bribery and corruption; and technical bread-and-butter issues that have come to light since the 2001 revamp.

A rewrite of the CBCA, which governs some 235,000 businesses, will have to take into account provincial securities laws. “An update should pay careful attention to the spider web of existing securities legislation,” says Grossman.

And while the CBCA applies to almost half of Canada’s largest public companies, most CBCA corporations are small to medium-sized. That is something an update will also have to grapple with.

“There are many more small to mid-size companies than large public companies, and they’re driving the engine of the Canadian economy and creating most of the work,” says Montreal lawyer Patric Besner of Besner Business Lawyers. “We need an updated law that applies to all these other companies too.”

Some key topics up for discussion include:

1) Mandatory ‘say on pay’ provisions  

Should “say on pay” provisions be added to the CBCA? Essentially, they would compel companies to solicit “advisory” or non-binding shareholder votes on how top executives are paid. For example, do shareholders support a CEO’s massive incentive bonus scheme? Such provisions “could give a board of directors a tool to rein in executive compensation and bring a little more discipline” to compensation packages, says McNee.

“Say on pay” measures now apply to many public companies in the U.S. and the U.K. Several major Canadian public companies, like banks, have already voluntarily adopted “say on pay” voting. But some prominent public companies in Canada are still hold-outs.

If introduced, “say on pay” rules should only apply to public companies, says Grossman. “You can’t require private companies to follow the same corporate governance rules applicable to publicly traded companies – each has a completely different anatomy that needs to be recognized.”

There’s also the question of which is better – to bring in mandatory CBCA “say on pay” provisions or leave the matter to provincial securities regulation (with its focus on disclosure). “Lawyers will take different views on this, but I think the ‘say on pay’ provisions are better left to securities laws to avoid excessive regulation,” offers McNee. “The lack of coordination between securities regulation and the CBCA could be problematic.”

2) Shareholder voting and participation rights

Fostering better communication between shareholders and public company boards is also on the drawing board.

For one, the CBCA should be amended to keep up with changes in technology, says McNee. “Some technical updates are needed to reflect today’s world, for example, to allow electronic notice of delivery of documents and to allow electronic meetings,” he says.

Input is also being sought on improving shareholders’ positions in other ways, including:

  • requiring voting by ballot (rather than just a show of hands) and disclosure of voting results
  • requiring individual director elections (instead of just slate voting)
  • requiring annual election of directors (i.e. disallowing the current allowed terms of up to three years)
  • prohibiting “staggered” elections where terms overlap (so that only one third of directors are up for election in any year)
  • requiring each director to be elected by a majority vote

The goal behind these possible changes is to strengthen shareholder democracy. For example, shareholder votes could be better measured and interpreted. Also shareholders could evaluate the individual merits of each director and respond more quickly if unhappy with board-authorized actions.

3) Board accountability 

Some discussion items here include:

  • splitting the Board Chair and CEO roles in public companies (thereby axing the inherent conflict involved when a CEO also chairs the board, which is responsible for supervising management)
  • getting shareholder approval of significantly dilutive acquisitions (paid for by treasury shares)
  • devising streamlined means like arbitration to address perceived shareholder oppression
  • enhancing corporate social responsibility, for example, getting public company boards to reveal how they see their business operations affecting society and the environment

4) Diversity

The consultation paper also seeks input on how to promote diversity on public company boards of directors (for example, to get more women on boards). The paper notes other countries have used different approaches to encourage diversity, ranging from voluntary guidelines to targets to mandated quotas.

5) Transparency

Ottawa is also asking for feedback on ways to improve transparency of true share ownership and current reporting requirements to combat bribery in international transactions – suggesting improved disclosure could also reduce money laundering, terrorist financing and tax evasion.

There’s more…

A whole smorgasbord of other important aspects of the CBCA is also up for discussion, including:

  • getting rid of Canadian residency requirements for directors altogether
  • improving shareholder proposal mechanisms
  • reconsidering the statute’s current take-over bid provisions
  • assessing the present use of CBCA plans of arrangements to restructure insolvent companies
  • amending the current “squeeze-out” definition

Complete reform?

Whether the CBCA will be comprehensively overhauled to also address the concerns of smaller non-public companies is important for many lawyers.

“There needs to be complete reform,” says Besner, who’s on the CBA committee working on the Canadian Bar Association’s submission. “Lawyers should write to the Director General, Marketplace Framework Policy Branch, at Industry Canada, urging the government to undertake a complete reform. If it’s not done now, we could wait many years.”

The submissions deadline is March 11, 2014. The CBA will be commenting on the consultation paper. Click here for the consultation paper and related material.

Janice and George Mucalov are lawyers and writers living in British Columbia.