After a long journey through the legislative process, Bill C-25, which amends the Canada Business Corporations Act (CBCA), together with the Canada Cooperatives Act and the Canada Not-for-profit Corporations Act, received Royal Assent on May 1, 2018. The amendments to the CBCA, once in force, will affect federally incorporated companies in three main areas: director elections, shareholder communication and diversity disclosure. This blog post provides an overview of the first two areas, but primarily focuses on diversity disclosure.
A significant amendment to the CBCA implements a mandatory majority voting regime for public companies incorporated under the CBCA. The new regime allows shareholders to vote against the election of a director nominee (as opposed to merely withholding a vote), meaning that a director who does not receive a majority of the shareholder votes in an uncontested election will not be elected.
Notably, these majority voting rules differ from those currently imposed by the Toronto Stock Exchange (TSX), which require a director who does not receive a majority of votes in his or her favour to resign immediately, but allow a board to reject a resignation in exceptional circumstances.
Bill C-25’s amendments also remove slate voting and require CBCA public companies to hold annual elections.
In Bill C-25’s reading before the Senate, the Senate proposed changes to Bill C-25 that were ultimately accepted in the final version. These changes provide that if a director does not receive a majority of votes for his or her election, there is a grace period of up to 90 days during which he or she can continue to serve until replaced. This is intended to mitigate business disruption while a company seeks a replacement.
Bill C-25 also amends the CBCA to allow federally incorporated companies to use the “notice and access” system established under National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer. “Notice and access,” which has been adopted by many public companies incorporated under provincial statutes but has not been available to CBCA companies without an exemption from the Director, allows public companies to provide certain materials to shareholders, including information circulars, financial statements and MD&A, electronically, saving the expense and burden of circulating physical copies.
Reforms under Bill C-25
Bill C-25 introduces amendments to the CBCA regarding disclosure of the diversity of boards and senior management of federally incorporated public companies. The CBCA itself does not set out the details of such disclosure requirements. Rather, they will be outlined in the regulations, which are still in draft form but provide insight into the aim and form of the proposed changes.
The proposed regulations adopt a “comply or explain” model, pursuant to which affected companies will be obligated to either take certain actions (such as the adoption of a policy or a target) or disclose why they have not done so. This model is consistent with existing securities laws applicable in most provinces under National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101). The key differences from NI 58-101 are that the CBCA provides no exemption for venture issuers, and the CBCA’s disclosure requirements relating to diversity apply not just to women, but also to other designated groups under Canada’s Employment Equity Act, including Indigenous Canadians, persons with disabilities and members of visible minorities.
Under the proposed CBCA regulations, federally incorporated public companies would be required to disclose:
- any policies relating to the selection of members of the designated groups as directors;
- whether and how the board or nominating committee considers the level of representation of the designated groups in identifying and nominating candidates for directors and executive officers;
- targets regarding the representation of the designated groups on the board and in executive officer positions (if a target has been set), and the progress of the company in achieving that target; and
- the number and percentage of members of the designated groups on the board and in executive officer positions.
Because these reforms fall under the “comply or explain” model, if an affected company does not have diversity policies or targets in place, or does not consider diversity with respect to designated groups, the company must disclose why it does not.
Board Diversity in British Columbia
One of the stated goals of Bill C-25 is to bring the CBCA into line with existing securities laws. One jurisdiction that has been slow to get on board with regards to diversity disclosure is British Columbia. British Columbia and Prince Edward Island are the only provinces that are not participating in the relevant portions of NI 58-101, and therefore do not have gender diversity disclosure rules. In practice, this has little effect, since any TSX listed companies based in British Columbia must comply with the rules anyway. However, the British Columbia Securities Commission recently published a notice and request for comment, which has now closed, seeking input on gender diversity disclosure requirements in NI 58-101. The British Columbia securities regulator may now be stepping into line with the rest of the country, as well as the federal government per the CBCA revision.
Do the Reforms Go Far Enough?
The voluntary nature of the “comply or explain” requirements under the amended CBCA and draft regulations has been a source of much debate over whether Bill C-25 goes far enough to promote diversity at the board and senior management level.
The Ontario Securities Commission (OSC) has been critical of companies that have shown bare “technical compliance” with the reporting rules under NI 58-101, and has expressed concern that the rules have had little effect since implementation in 2015. The OSC has reviewed diversity disclosure under NI 58-101 annually since its adoption, and has held roundtable discussions on the topic. Commentators have proposed various other ideas, including: revising corporate governance guidelines, advising and educating on best practices, implementing mandatory targets, and professionalizing the recruitment process to avoid unconscious bias in the selection of directors.
There were proposed amendments to Bill C-25 at the Senate level which would have required public CBCA companies to set targets for achieving levels of diversity and disclose their progress towards those targets annually. While still less prescriptive than implementing a quota regime, as seen in some European jurisdictions (with respect to gender diversity), these proposed amendments were ultimately not accepted by the Senate.
As noted in our December 10, 2017 blog post, these amendments to the CBCA have been introduced in a context of legislative, regulatory and investor scrutiny of diversity in corporate leadership positions. If the CBCA amendments alone do not go far enough to promote diversity on boards and in executive officer positions, securities laws and pressure from important investors may evolve to bridge the gap. Proxy advisory firms, such as Institutional Shareholder Services and Glass Lewis, have recently released gender diversity guidelines that recommend withholding votes for the chair of a nominating committee or a board chair if a company is not meeting their expectations for diversity, and major institutional investors have begun to demand more diversity on public company boards directly.
Ultimately, in introducing the CBCA, the federal government must perform a balancing act in drafting amendments that promote diversity in a way that aligns with, and does not detract from, the core purpose of the CBCA.
While the reforms set out in Bill C-25 will not be in force for at least a couple of years, the framework is in place. Nonetheless, the full effect of Bill C-25 on corporate diversity in Canada, in conjunction with the parallel initiatives of regulators and investors, may take years to be fully seen.
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