On March 7, 2017, Bill 101, Enhancing Shareholders Rights Act, 2017, was introduced in the Legislative Assembly of Ontario for amending the Business Corporations Act (Ontario) (“OBCA”). Bill 101 received second reading on March 9, 2017. Bill 101 propositions include: (1) reducing the minimum requirement of aggregate shareholdings from 5% to 3% for shareholder proposal of director nomination; (2) reducing the minimum requirement of aggregate shareholdings from 5% to 3% for the requisition of a shareholder meeting; (3) requiring proxy voting to specify that the shares shall be voted for or against the election of any directors; (4) including the names of director nominees in shareholder proposals; (4) providing that a majority cast of “for” votes are required for the election of any directors; (5) providing that a separate vote of shareholders shall be taken for each director nominee; (6) requiring the disclosure of diversity information at the director and senior management level to shareholders; and (7) enabling shareholders to propose the adoption of an executive compensation policy in relation to the remuneration of directors or officers.
The introduction of Bill 101 closely followed the enactment of Bill C-25 on June 21, 2017, which amends the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-Profit Corporations Act and the Competition Act. The aims of Bill C-25 include: (1) reforming some aspects of the election process of directors for some corporations; and (2) requiring some corporations to share diversity information to shareholders; and (3) changing the requirements for using the “notice-and-access” communication system with shareholders. Both Bill 101 and Bill C-25 aim to enhance the rights, engagement and control of shareholders, thereby reducing agency costs and increase the transparency of corporate governance.
While reducing the shareholding threshold from 5% to 3% for director nomination and the requisition of shareholder meetings might advance the interest of the shareholders, the majority of corporations incorporated under the OBCA are smaller corporations, such as corporations with only a few shareholders. A 2% change of threshold margin might not have any significant impacts for most OBCA corporations. In addition, the CBCA currently specifies the 5% threshold. It might be a good idea to keep the requirements of the OBCA more aligned with the CBCA requirements.
The OBCA specifies that a director can be elected with a single “for” vote regardless of the number of “withheld” votes in an uncontested election. In other words, a director can be elected with less than half of the support of shareholders, which is not representative of the position of the majority of shareholders. Bill 101 intends to make the election process more representative by requiring director nominees to obtain majority support from shareholders. Incumbent directors who fail to receive majority support would be required to submit their resignations.
The OBCA currently allows slate voting, which enables a group of directors to be elected at the same time in an “all or none” fashion. The slate system curtails the express approval or disapproval of individual director nominee. Bill 101 proposes that slate voting should be prohibited and that each director should be elected individually.
At the present time, the OBCA allows directors to be elected for a maximum term of three years. Bill 101 proposes that the maximum term should be reduced from three years to one year. Shortening the term period would allow more frequent evaluations of the performance of directors and increase their accountability to shareholders. On the other hand, the directors might not stay around long enough to make executive decisions in favour of the business’s long-term profit.
Bill 101 proposes the mandatory disclosure of diversity information to shareholders at every annual meeting. However, Bill 101, similar to Bill C-25 did not clearly define “diversity”. In a June 2016 report released by the Ontario government, women continued to be underrepresented on boards and at the senior management level and Canada lagged behind in terms of gender diversity on boards compared to other developed nations. The study stated that around 20% of board members are women in Canada. In contrast, 35% of board members are women in Norway. In a 2015 MSCI ESG study, companies with a strong female leadership generate a return of equity of 10.1% compared to 7.4% of those without. In addition, companies without a diverse board suffer more governance related controversies. Therefore, it is in the interest of both corporations and women to have more women on board. Bill 101’s proposal regarding diversity is a laudable goal if diversity includes the category of gender.
Bill 101 gave shareholders the right to submit a proposal in relation to executive compensation policies for the remuneration of directors or officers, or make a proposal to amend or appeal such policies. Currently, corporations would propose an advisory resolution with respect to the remuneration of directors or officers at a shareholder meeting. The shareholders would then either approve or disapprove the resolution. However, the shareholders’ approval, commonly known as the “say on pay” vote, is not binding on the board. The board ultimately has the final say on executive remuneration. Bill 101 proposes that the shareholders should make the executive remuneration proposals and the board should comply with the adopted proposals. Since the strength of a corporation’s management would determine the business’s profit level, improperly compensated executives would lead to the loss of management talent and ultimately the loss of profit. Therefore, shareholders, if given the final say on executive remuneration, should ensure that the level of remuneration attracts talent, aligns with the shareholders’ interest, and promotes the creation of long-term wealth for shareholders.
Bill 101 has laudable goals. However, its practical implications might be limited. For example, a reduction of 2% threshold margin might not lead to any significant impacts on OBCA corporations. Modification of the plurality voting scheme, elimination of slate voting and shortening of the term of office would enable shareholders to engage in a more democratic and representative system. On the other hand, directors who are only in office for a short term might not be interested in making executive decisions in favour of the business’s long-term profit. Although encouraging diversity on board is an important goal, Bill 101 did not specify the categories of diversity. Granting the final say on executive remuneration to the shareholders can be a risky exercise and shareholders must be educated on how to determine an appropriate package for the management team.
For more information, please call Janny Cho at (416) 601-0591 or Barbara Hendrickson (416) 601 -1004 at BAX Securities Law.
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