CBCA to be amended to codify BCE decision and give shareholders a say-on-pay

The federal government introduced Bill C-97 on April 8 to implement measures announced in its 2019 budget. The key measures affecting CBCA companies include:

• codifying elements of the Supreme Court of Canada’s (SCC) decision in BCE Inc. v 1976 Debentureholders (BCE) regarding directors’ and officers’ duty to act in the best interests of the corporation;
• adding enforcement provisions to the new share register requirements;
• at annual meetings, requiring companies to conduct a non-binding shareholder vote on the company’s approach to executive compensation (say-on-pay); and
• requiring companies to disclose information about clawbacks of executive compensation and about the well-being of employees, retirees and pensioners.

Duty to act in the best interests of the corporation

The CBCA imposes on directors and officers a duty of loyalty, requiring them to “act honestly and in good faith with a view to the best interests of the corporation.” The best interests of the corporation, for this purpose, were traditionally viewed as the interests of shareholders as a whole. In the BCE case, the SCC addressed the duty of loyalty in the context of a leveraged buyout transaction in which the shareholders’ interest (obtaining the highest price possible for their shares) conflicted with the bondholders’ interest (maintaining the credit rating and value of their bonds). Although the court upheld the transaction, in doing so, it stated that the interests of the corporation should not be equated with the interests of shareholders alone, contrary to the traditional view, and that the interests of other stakeholders could be relevant. The decision in BCE had the effect of broadening the discretion of directors and officers by widening the array of interests they are permitted to consider and leaving to them the relative weight to assign to conflicting stakeholder interests in determining the best interests of the corporation.

Bill C-97 codifies the Court’s decision affirming the broader stakeholder model and rejecting the shareholder primacy model. The amended CBCA provision states that, when acting with a view to the best interests of the corporation, directors and officers may consider, but are not limited to considering, the following:

• the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments;
• the environment; and
• the long-term interests of the corporation.

The above amendment will come into force upon Royal Assent of Bill C-97, which is expected to occur in June, before Parliament breaks for the summer.

Enforcement of new share register requirements

Becoming effective on June 13 is a new requirement for private CBCA companies to maintain a register of individuals with significant control. Public CBCA companies are exempt. Bill C-97 adds several enforcement-related provisions to the share register requirement which are also expected to come into force in June.

• Companies must provide, upon request, a copy of the share register to police, tax authorities or other investigative authorities specified by regulation.
• Investigative bodies may request a company’s share register if there are reasonable grounds to suspect that the register would be relevant in investigating offences committed by, or involving, the company or an individual with significant control over the company. The list of covered offenses is extremely broad, including many offences under the Criminal code, Environmental Protection Act, Corruption of Foreign Public Officials Act and other legislation.
• It will be an offense for a company to contravene, or for a director or officer to knowingly authorize, permit or acquiesce in a contravention of, the share register provisions. The maximum potential penalty is a fine of $200,000 or six months’ imprisonment or both.

Say-on-pay, compensation clawbacks and well-being

The CBCA gives directors the power to fix the remuneration of directors, officers and employees. Bill C-97 imposes a new obligation on companies to develop an approach to remuneration of directors and senior management.¹ The approach to remuneration would be sent to shareholders (except those who decline in writing to receive it) and a non-binding say-on-pay vote would be held at every annual meeting. Also delivered to shareholders and placed before them at annual meetings would be information about clawbacks from directors or senior management of incentive or other forms of compensation and information about the well-being of employees, retirees and pensioners. The scope of each of these requirements must be specified in regulations to be adopted following public consultations, a process which is likely to take approximately 12 to 24 months.

Diversity on the board and among senior management

Outstanding draft regulations under Bill C-25, which received Royal Asset on May 1, 2018, would require CBCA companies to disclose information about the representation of women, visible minorities, Indigenous people and people with disabilities on the board of directors and among senior management. Bill C-97 maintains the substance of Bill C-25. The draft regulations are subject to public consultation and revision, a process which, as noted above, is likely to take approximately 12 to 24 months.

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¹ The term “senior management” will be defined in regulations. For public CBCA companies, it would be desirable for the scope of the new CBCA executive compensation requirements to align with the requirements under securities laws.