On March 7, 2017, Bill
101, Enhancing Shareholders Rights Act, 2017 (the "Bill"), a private
member's bill, was introduced in the Legislative Assembly of Ontario for the purpose of amending
the Business
Corporations Act (Ontario) ("OBCA"). Of particular interest to entities
incorporated under the OBCA are amendments relating to (1) shareholder meetings, (2) director elections,
(3) diversity disclosure, and (4) executive compensation. The apparent aim of the Bill is to provide
shareholders with greater opportunities for engagement within the corporate apparatus, while also
aligning the OBCA with recently proposed amendments to the Canada Business Corporations Act ("CBCA"),
with some notable divergences. For more information on the recently proposed CBCA amendments, see
the BLG bulletin Parliament
Looks to Enhance Shareholder Democracy and Gender Diversity Disclosure.
1. Reducing Thresholds for Shareholder Nominations and Shareholder Requisitions
Initiating a shareholder proposal to nominate directors under the OBCA currently requires representation
from holders of at least 5% of the shares of the corporation or 5% of the class or series of shares
entitled to vote at the meeting at which the proposal will be presented. Similarly, to requisition
a meeting of shareholders, representation from holders of at least 5% of the shares of the corporation
is required. The Bill proposes to reduce the 5% thresholds to 3% thereby making it easier for shareholders
to advance their interests in this regard. By contrast, the CBCA (and proposed CBCA amendments) maintain
the 5% threshold.
With respect to meetings at which a shareholder proposal nominating directors has been submitted,
the Bill also provides that such a proposal may nominate a single individual director nominee (whereas
the current wording of the OBCA arguably allows for the nomination of one or more individuals), and
that shareholders present at such meeting will pick an individual in attendance to preside as chair.
Neither of these provisions are currently set out in the CBCA, nor are they contemplated by the proposed
CBCA amendments.
2. Enhancing Shareholder Democracy in Director Elections
A. Majority Voting
The OBCA currently provides for a plurality voting regime in which shareholders can either vote "for" or "withhold" support
for a director nominee. Under such regime, directors in uncontested elections can be elected to the
board with a single vote "for" and irrespective of the number of votes "withheld" (i.e.
directors can be elected even if they obtain less than half of the support of shareholders).
The Bill proposes a majority voting requirement for OBCA corporations, which would require a nominee
in an uncontested election to obtain majority support from shareholders. Whereas the proposed CBCA
amendments only mandates majority voting for public corporations, the majority voting requirement under
the Bill would apply to all OBCA incorporated entities.
The Bill, like the proposed CBCA amendments, also appears to offer shareholders the opportunity to
vote "against" directors, but this power is not expressly stated in the current draft of
the Bill.
B. Individual Elections
The OBCA currently allows for slate voting of directors (i.e. electing directors as a group). The
Bill, like the proposed CBCA amendments, introduces a requirement that each director must be elected
individually, effectively prohibiting slate voting. Individual voting allows shareholders to express
disapproval with a particular director by withholding support for that director, whereas slate voting
can often shield directors from individual scrutiny.
C. Annual Elections
The OBCA currently permits directors to be elected for up to a maximum term of three years. The Bill,
like the proposed CBCA amendments, proposes that directors only be permitted to be elected for a maximum
term of one year. Reducing the maximum director term to one year better engages shareholders by requiring
them to evaluate the performance of directors on an annual basis, thereby enhancing the accountability
of directors to the corporation and its stakeholders.
* * *
The aforementioned amendments with respect to director elections will bring the OBCA substantially
in line with the Toronto Stock Exchange ("TSX") company rules. TSX-listed issuers are required to elect
directors on an individual basis and for up to a maximum term of one year. In addition, TSX-listed
issuers (except in the case of majority-controlled issuers) are required to adopt a majority voting
policy. The TSX's mandated majority voting policy, however, is tooled with an exception that is not
available in the current draft of the Bill: TSX company rules permit the board to reject the resignation
of an incumbent director within 90 days of failing to obtain majority support if "exceptional
circumstances" warrant that person's continuation on the board. The Bill, like the proposed CBCA
amendments, requires incumbent OBCA directors who fail to obtain majority support to resign without
exception.
3. Mandating Diversity Disclosure in respect of the Board and Senior Management
The Bill proposes to require prescribed corporations to disclose to their shareholders, at every annual
meeting, prescribed information respecting diversity among the corporation's board and senior management.
It is unclear whether the prescribed diversity disclosure will relate exclusively to gender or, like
proposed amendments to CBCA, be more expansive to include additional categories of diversity. The scope
of the prescribed diversity disclosure, and the prescribed corporations subject to this disclosure
requirement, will only be determinable once the accompanying regulations to the Bill are released.
The proposed diversity disclosure under the Bill would better align the OBCA with Canadian securities
regulations in place in most jurisdictions of Canada. National Instrument 58-101 Disclosure of
Corporate Governance Practices requires non-venture public issuers in Manitoba, New Brunswick,
Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Québec, Saskatchewan
and Yukon to disclose information pertaining to gender diversity in respect of the board and senior
management.
4. Giving Shareholders a Definitive Voice on Executive Compensation
The Bill provides shareholders with a definitive voice on executive compensation by permitting shareholders
to make a proposal to adopt an executive compensation policy with respect to the remuneration of directors
or officers, or make a proposal to amend or repeal such a policy. Notably, directors of an OBCA corporation
will be obligated to comply with any adopted proposal.
The Bill's proposed amendment on executive compensation is not available under the CBCA nor is it
contemplated by the proposed CBCA amendments. It also marks a divergence from current practices of
shareholder oversight of executive compensation, which has taken the form of a “say-on-pay” vote. Say-on-pay
involves the corporation voluntarily proposing an advisory resolution at a meeting of shareholders
to enable shareholders to express approval or dissatisfaction with the remuneration of executives.
Importantly, say-on- pay votes, while influential, are not formally binding on the board, as the board
still maintains its discretion to not abide with the say-on-pay vote. The Bill seeks to change this
and give shareholders of OBCA corporations the final say on matters of executive compensation.
Note: The Bill has passed Second Reading and has been referred to the Standing Committee on Finance
and Economic Affairs for further study. Passing of the Bill into law is not a certainty. And even
if passed into law, the final form of the law may differ in material respects from the current draft
of the Bill.
Authors: Graham King, a partner, and Joseph DiPonio, an associate, are members of
the corporate and capital markets group of Borden Ladner Gervais LLP and regularly advise corporations
on corporate governance matters.
