Proposed OBCA changes to open province for cross-border businesses and foreign investors

On October 6, the Government of Ontario tabled proposed amendments to the Business Corporations Act (Ontario) (OBCA). Bill 213 proposes omnibus reform in order to stimulate and strengthen economic recovery in response to COVID-19 related downturns.

What you need to know

In particular, it proposes two amendments to the OBCA:

1. Director residency: The former requirement under subsection 118(3) of the OBCA that 25% of directors of a corporation be Canadian residents will be repealed.
2. Written shareholder resolutions: The current legislation requires shareholder unanimity to pass written shareholder resolutions without a shareholder meeting. For private OBCA corporations, under the proposed amendments, this threshold would be lowered for ordinary written shareholder resolutions so that they would need to be signed only by the holders of a majority of the shares entitled to vote. Bill 213 would require notice of any written resolutions passed in this manner will need to be provided to the shareholders who did not participate in the resolution within 10 business days of being passed. This notice must include the text of the resolution and a statement setting out a description of and the reasons for the resolution.
   
   The proposed amendments would not apply to actions requiring a special resolution of shareholders (as defined in the OBCA), such as amending a corporation’s articles, selling all or substantially all of a corporation’s assets, or to amalgamating with another corporation. These items would continue to require approval either at a properly called shareholder meeting or through a unanimous written resolution.

The details

If passed, Bill 213 will make Ontario a more appealing jurisdiction to set up business in Canada. It will allow foreign owners or parent companies to implement a qualified board of directors of their choosing, without the requirement to also appoint a Canadian resident. Similarly, the Canadian resident director requirement is also being removed in Alberta once the Red Tape Reduction Implementation Act, 2020 (Alberta) comes into force, which was passed with the similar purpose of stimulating the economy by encouraging foreign investment. Currently, the provinces of Nova Scotia, Québec, British Columbia, Prince Edward Island and New Brunswick, do not have Canadian residency requirement for directors. The changes in Bill 213 will have the practical effect of removing costly requirements to either: i) incorporate and appoint agents in a province that doesn’t have a director residency requirement, or ii) find and appoint a trusted person willing to serve as a resident Canadian director if incorporated in Ontario even where there would be no business rationale to do so.

Bill 213’s changes pertaining to shareholder resolutions will also help early-stage private companies, whose initial growth may be fueled by a flurry of different investors, to more efficiently comply with basic corporate maintenance requirements under the OBCA. The changes will remove the need for private companies to obtain unanimous written consent or hold formal shareholders meetings for ordinary shareholder resolutions which would generally include routine business at annual general meetings. This will significantly simplify the process for completing regular annual shareholder proceedings. The process of properly calling and holding shareholder meetings can be time-consuming and expensive for small private companies (particularly in the era of COVID-19), as can the process of tracking down non-responsive small shareholders for signatures on written consents. While innovative solutions such as powers of attorney and voting trusts have previously been used to allow small companies to navigate these requirements more efficiently, these need to be implemented in advance and often require significant negotiations with investors who may not always be agreeable to them.

The simplified shareholder approval process set out in the proposed changes may result in significant cost-savings for smaller private companies and will move Ontario corporate legislation closer in line with approaches taken in other jurisdictions. For U.S. investors, the changes more closely resemble the approach taken under Delaware law by removing the archaic and burdensome practice of soliciting written consent of de minimus shareholders for routine matters. However, a key distinction remains: the OBCA will continue to provide that absent unanimous shareholder written consent, special resolutions (which are often necessary to approve fundamental changes and transactions) will still require a formal shareholder meeting to be properly called and held with an appropriate notice period and disclosure provided to shareholders.

Importantly, the changes in Bill 213 regarding director residency and shareholder approval requirements will not modify any separate requirements set out in a corporation’s articles, by-laws and shareholder agreements, so OBCA corporations should continue to review these documents to ensure compliance. If these documents contain provisions that are inconsistent with the proposed changes, OBCA corporations may wish to consider implementing amendments as necessary to take advantage of the additional flexibility that will be provided under the legislation.

As of the time of writing, Bill 213 is in its second reading, and if passed will come into force when proclaimed.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.