Proposed federal legislation will impose a new reporting obligation on companies listed on Canadian stock exchanges who produce, sell or distribute goods in Canada or elsewhere or import into Canada goods produced outside of Canada. However, in order to comply with Canadian securities law requirements, reporting issuers should already be considering whether disclosure of modern slavery risks is warranted.
Takeaways
- Federal legislation with respect to forced labour and child labour (often referred to as “modern slavery”) is nearing implementation in Canada and, if passed, will require companies listed on a Canadian stock exchange, among others, to prepare a report on an annual basis setting out the steps they have taken to reduce the risk that forced labour or child labour is used in their supply chains.
- Reports must be published on company websites by May 31 each year, with the first report being due May 31, 2024 if the legislation is adopted in 2023. Reports must also be filed with the Minister of Public Safety and Emergency Preparedness and, in the case of CBCA-incorporated issuers, provided to shareholders.
- The legislation includes enforcement provisions, including appointing a designated person to verify compliance, and the creation of a new summary offence for failing to file the report or make it public, with a maximum fine of $250,000.
- Risks related to modern slavery should already be included in reporting issuers’ public disclosure to the extent such risks are material.
An annual report to fight against modern slavery
In an effort to “contribute to the fight against modern slavery”, and following the lead of jurisdictions like the UK, US and Australia, if adopted, Bill S-211 An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act (Bill S-211) will require certain entities to disclose in an annual report (a Report) their efforts in preventing and reducing “the risk that forced labour or child labour is used at any step in the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity”.
Bill S-211 is not an initiative of the Canadian Securities Administrators (the CSA). Rather, it is proposed federal legislation that will apply to a potentially wide variety of companies, including entities listed on a stock exchange in Canada who:
- Produce, sell or distribute goods in Canada or elsewhere;
- Import goods into Canada; or
- Directly or indirectly control an entity engaged in (i) or (ii) above.
Unlisted entities that partake in the above activities will also be subject to the legislation if they have a nexus to Canada and meet certain financial thresholds.
Notably, Bill S-211 does not specifically define “goods” or include any minimum threshold as to the quantum or value of the goods being produced, sold, distributed or imported and, as such, casts a wide net with respect to the types of public companies that may become subject to the new reporting obligation. For example, as currently drafted, a publicly traded software company that imports company branded mugs from a foreign jurisdiction would need to consider whether a reporting obligation has been triggered.
For issuers required to prepare a Report, the Report must set out the steps taken during the previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity, or of goods imported into Canada by the entity. More specifically, the Report must include:
- The issuer’s structure, activities and supply chain;
- The issuer’s policies and due diligence processes in relation to forced labour and child labour;
- The parts of the issuer’s activities and supply chains that carry a risk of forced labour or child labour being used and the steps the issuer has taken to assess and manage that risk;
- Any measures taken to remediate any forced labour or child labour;
- Any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labour or child labour in its activities and supply chains;
- The training provided to employees on forced labour and child labour; and
- How the issuer assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.
At this time, no form of Report has been prescribed under Bill S-211; however, the Minister of Public Safety and Emergency Preparedness (the Minister) is authorised to do so under the proposed legislation. Unlike certain disclosure obligations under Canadian securities laws as further discussed below, the obligation to file a Report is not based on any materiality determination.
Companies can submit their own Report, or in the case of a corporate group, one Report may be provided for all related companies. A copy of the Report must be provided to the Minister and published in a prominent place on the issuer’s website. Issuers incorporated under the Canada Business Corporations Act (CBCA) will also be required to provide the report to their shareholders, along with their annual financial statements. Reports will generally be available on the Department of Public Safety and Emergency Preparedness’ website.
Failure to comply with the reporting obligation may result in a fine on summary conviction of up to $250,000. Bill S-211 also provides for warrantless searches (except for searches of dwelling-houses, which will require a warrant) and failure to cooperate with a search conducted to verify compliance will also result in a fine of up to $250,000.
Further discussion of Bill S-211, including a discussion of the other types of entities to which the legislation would apply, can be found in “Bill S-211: A comparative overview of Canada’s newest legal tools against forced and child labour” (September 27, 2022).
Considerations in advance of Royal Assent
While the obligation to file a Report under Bill S-211 will be new, the consideration of the risks that forced labour and child labour presents to a public issuer is certainly not novel. Disclosure obligations under Canadian securities laws already require reporting issuers in Canada to provide shareholders with certain information related to modern slavery, provided that such information is considered to be material.
- Material Risks. The prescribed forms of Annual Information Form (AIF) and Management’s Discussion and Analysis (MD&A) may each require issuers to provide disclosure with respect to modern slavery. More specifically, the form of AIF requires issuers to disclose risk factors relating to the issuer and its business most likely to influence an investor’s decision to purchase securities of the issuer. Similarly, issuers are required to include risks that are reasonably believed to materially affect the issuers’ future performance in their analysis of their operations. In both cases, such risks may include those associated with modern slavery to the extent that such risks are material.
- Social Policies. The form of AIF also requires issuers to describe any social policies that have been adopted and are fundamental to the issuer’s operations. The steps taken to implement the policies must also be disclosed. Policies of this nature may include policies with respect to the communities in which the issuer operates or human rights policies, many of which may already address the issue of modern slavery.
- Codes of Conduct and Ethics. If an issuer has adopted a written code of business conduct and ethics (a Code), it is required to file it on SEDAR. While not a requirement to have adopted a Code, the CSA’s suggested best practice is to adopt one that is reasonably designed to promote integrity and deter wrongdoing. In particular, it is recommended that the Code address fair dealing with the issuer’s suppliers and employees, as well as general compliance with laws, rules and regulations, which has already led to many issuers addressing modern slavery and forced labour in their Codes and other policies.
Indeed, the Québec AMF confirmed the nexus between the existing disclosure obligations set out above and the topic of modern slavery in its Notice relating to modern slavery disclosure requirements (September 4, 2018), noting growing investor interest in the social responsibility of issuers, including modern slavery. Given the definition of “materiality” under Canadian securities laws, such heightened interest may result in materiality being attributed to risks that previously were not considered to be of much consequence. As such, and separate from any obligation to file a Report, issuers should continue to assess whether modern slavery poses a material risk to the issuer and its supply chain when preparing annual and quarterly disclosure.
Next steps
Bill S-211 received widespread political support as it progressed through the Senate and is now awaiting adoption of committee report and final reading in the House of Commons. If passed in 2023, the deadline for the first Report to be filed will be May 31, 2024. In the interim, reporting issuers may want to begin to review their governance policies and code of conduct to consider whether the issue of modern slavery and human rights in general is adequately addressed. In addition, issuers may want to consider their existing policies with respect to supply chain due diligence in order to prepare for the possibility that a Report will be required in a year’s time.
