The 2019 budget implementation bill (Bill C-97) contains significant amendments to the Canadian Business Corporations Act (CBCA), which should be noted by organizations wishing to acquire Canadian targets. On April 30, 2019, Bill C-97 passed its second reading and was referred to Committee in the House of Commons. The amendments to the CBCA create the following new considerations and/or obligations for the management of corporations governed under the CBCA.
“Best Interests of the Corporation” – more than solely shareholder interests
Bill C-97 aims to consolidate the law on the fiduciary duty of directors and officers by codifying the Supreme Court’s findings in BCE Inc. v. 1976 Debentureholders (BCE). Section 122 of the CBCA sets out that all directors and officer’s must “act honestly and in good faith with a view to the best interests of the corporation.” Historically, the “best interests of the corporation” was generally understood to be solely the interests of shareholders. However, in 2008, the Supreme Court in BCE found that the best interests of the corporation are not limited to any particular stakeholder and that “directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.” The Bill amends the CBCA to comply with this broader interpretation. The amendments state, “when acting with a view to the best interests of the corporation … the directors and officers of the corporation may consider, but are not limited to, the following factors:
- the interests of: shareholders, employees, retirees and pensioners, creditors, consumers, and governments;
- the environment; and
- the long-term interests of the corporation.”
A broader conception of the interests of the corporation expands the scope of factors directors can be expected to consider when making managing decisions. This may affect not only the day-to-day operations of corporations but when and why management can implement defensive tactics in order to delay or prevent a hostile takeover bid.
“Say on Pay” – shareholder review of executive compensation
The new amendments will increase shareholder scrutiny of compensation allocated to the senior management of CBCA corporations. Under the amendments, prescribed corporations must formally develop an approach on the compensation of senior management. A report outlining this approach must then be provided to shareholders at each annual meeting for a non-binding vote. The results of this vote must then be disclosed to all shareholders. In spite of the non-binding nature of the vote, these amendments will increase transparency and shareholder involvement in setting executive compensation.
New disclosure requirements
Bill C-97’s amendments create a number of disclosure requirements for the directors of a CBCA corporation. These amendments are meant to increase the transparency and accountability of directors as Parliament recognized the diverse interests of shareholders. At each annual meeting the directors of a prescribed corporation will have to provide shareholders with information regarding:
- the diversity among the directors and members of the senior management;
- the well-being of employees, retirees and pensioners; and
- the recovery of incentive benefits or other benefits paid to senior management. (Note that recovery of incentive benefits usually occurs when there has been an overpayment of compensation because prior financial statements were corrected or there was wrongdoing by senior management.)
The specifics of each of these disclosure requirements will be determined by the upcoming regulations associated with Bill C-97.
While Bill C-97’s definition of “the best interests of the corporation” will come into effect upon Royal Assent, the “Say on Pay” provisions and other disclosure requirements are likely to come into force after the enactment of the associated regulations.
It will be important for prospective acquirers of CBCA corporations to stay aware of the progress of Bill C-97 and the associated regulations and their impact on the obligations of senior management.
The author would like to thank Arron Chahal, summer student, for his contribution to the article.
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