CANADA BUSINESS CORPORATIONS ACT:
DIRECTORS' RESIDENCY REQUIREMENTS
AND OTHER RESIDENCY ISSUES
Law and Government Division
7 December 1999
TABLE OF CONTENTS
OF CORPORATE RECORDS
OF SHAREHOLDER MEETINGS
CANADA BUSINESS CORPORATIONS
DIRECTORS RESIDENCY REQUIREMENTS
AND OTHER RESIDENCY ISSUES
The Canada Business
Corporations Act (CBCA) contains seven residency requirements. One relates to the
location of a corporations registered office, another to the location of shareholder
meetings, two apply to the location of corporate records, and three deal with the
residency of corporate directors. This note discusses these residency requirements.
The most contentious residency
requirements are those applying to corporate directors, which provide that:
- a majority of the directors must be resident
Canadians(1) (section 105(3));
- the directors shall not transact business at a
board meeting unless a majority of the directors present are resident Canadians (section
- a majority of the members of each committee of the
board must be resident Canadians (section 115(2)).
For holding corporations that
earn less than 5% of gross revenues in Canada, the CBCA provides an exception to the
requirement for the majority of directors to be resident Canadians. For these
corporations, one-third of the directors must be resident Canadians (section 105(4)).
Enacted in 1975, the
directors residency provisions were designed to address concerns about the amount of
direct foreign investment in Canada. These concerns had been brought forward in a number
of studies of foreign investment in Canada, which, among other things, had discussed the
need to ensure a Canadian presence on corporate boards.(2)
The 1971 Dickerson Report, which served as the foundation for the enactment of the CBCA
some four years later, had, however, observed that it would be futile to impose a general
requirement for directors of federally incorporated companies to be citizens or residents
Despite the Dickerson Report, the
CBCA introduced requirements specifying that a majority of the directors of a CBCA
corporation must be resident Canadians, as must be a majority of the members present at a
board meeting and a majority of each committee of the board.
In addition to promoting Canadian
interests and ensuring a Canadian presence on the board of directors of corporations
incorporated under the CBCA, the directors residency requirements aimed to ensure
that there would be directors resident in Canada who would be accountable for the actions
of the corporation. It has been suggested that the residency requirements help to promote
compliance with the law, particularly statutes that impose liability on directors for the
actions of a corporation. Furthermore, if directors must be resident in Canada, there are
likely to be local assets from which judgments can be satisfied.
It is relatively easy to avoid
the application of the CBCA requirements. One obvious way is by incorporating in a
Canadian province that has no such requirement. Another, the use of a unanimous
shareholder agreement, can be found within the CBCA itself.
A unanimous shareholder agreement
allows shareholders to restrict the powers of the directors to manage and supervise the
business and affairs of the corporation and to transfer the directors powers to
themselves. This is particularly important for wholly-owned subsidiaries because the
parent can effectively control all board decisions from outside the country, even though
the subsidiary will still be required to have a majority of resident Canadian directors.
The intent of the residency
requirements can also be avoided through the appointment of nominee directors or directors
who do not reflect a Canadian perspective.
It is also worth pointing out
that, although the residency requirements apply to the board of directors and committees
of the board, there is no requirement that the quorum needed at meetings of committees of
the board must be composed of resident Canadian members. As a result, it is possible to
have committees with a majority of Canadian resident members, but which conduct meetings
and business without such a majority or even without having any Canadians present.
In August 1995, Industry Canada
released a Discussion Paper, Directors and Other Corporate Residency Issues,(4) which outlined various arguments for and against the
directors residency requirements and set out options for consideration.
The Discussion Paper refers to
the debate about the need to impose residency requirements on corporate directors. Some
argue that the requirements interfere with the ability of global-oriented companies to
move into foreign markets.(5) Others contend that they
inhibit the inflow of investment capital into Canada.(6)
Yet others maintain that the requirements have outlived their usefulness now that ensuring
Canadian businesses become more active in foreign markets has become a more important
concern than resisting the influence of foreign investment in Canadian markets. Moreover,
the Discussion Paper also notes that residency requirements for corporate directors are
not widespread; few European countries or U.S. states have such requirements.(7)
In support of the residency
requirements, it is argued that they promote Canadian participation in corporate
decision-making, foster compliance with and enforcement of legal obligations, promote
Canadian participation in the decision-making of multinational enterprises, and help
foreign firms to understand the economic, political and social environment of Canada.(8)
After reviewing the residency
provisions and outlining arguments for and against their retention, the Discussion Paper
presented possible options for revising the CBCA provisions, including:
- maintaining the status quo;
- requiring the majority of directors to be resident
Canadians and eliminating the quorum requirement for the board and the committee residency
- reducing the directors residency requirement
to one resident Canadian and eliminating the quorum requirement for the board and the
residency requirement for members of committees; and
- eliminating the residency requirements altogether.(9)
In 1996, the Standing Senate
Committee on Banking, Trade and Commerce considered the directors residency
requirements during its study of corporate governance issues. Witnesses who commented on
the issue before the Committee either favoured the requirements or strongly opposed them.
The Committee was of the view
that the residency requirement should remain for the board of directors as a whole, but
did not see a need to retain it for committees of the board.(10)
LOCATION OF CORPORATE RECORDS
The CBCA requires that certain
corporate records must be kept in Canada. Section 20(1) of the CBCA provides that a
corporation must maintain at its registered office records such as its articles and
by-laws, minutes of meetings and resolutions of shareholders, copies of certain notices,
and a securities register. If directors records (including accounting records) are
maintained outside Canada, "accounting records adequate to enable the directors to
ascertain the financial position of the corporation with reasonable accuracy on a
quarterly basis" must be available in Canada (section 20(5)). Corporations are
permitted under the Act to maintain registers and records on computer.
Ontario corporations law allows
provincially incorporated companies to keep their corporate and directors records at
a place of the corporations choice, as long as the records can be inspected at the
companys registered office by means of computer or other form of electronic
It has been suggested that the
CBCA should be amended to allow corporations to keep corporate records off-site, provided
they were available for inspection on-line at the registered office.
The Discussion Paper outlines
arguments for and against the CBCA requirement for corporations to maintain a registered
office in Canada. In favour of the requirement, it is said that it ensures that there is a
local place for delivery and service of notices and legal documents and that the
incorporating statutes commonly require corporations to have an office in the jurisdiction
where they incorporate.
LOCATION OF SHAREHOLDER MEETINGS
Under the CBCA, shareholder
meetings must be held within Canada unless all the shareholders entitled to vote at that
meeting agree otherwise (section 132).
A number of provincial laws
specify that meetings are to be held in the jurisdiction of incorporation unless all the
shareholders agree or unless the articles specify another location.
Because Canadian companies whose
shares are listed on stock exchanges within and outside Canada have significant numbers of
shareholders outside this country, it has been suggested that the CBCA should be amended
to allow shareholder meetings to be held outside Canada.
Section 2(1) of the CBCA defines a resident Canadian as an individual who is
- a Canadian citizen ordinarily resident in Canada;
- a Canadian citizen not ordinarily resident in
Canada who is a member of a prescribed class of person; or
- a permanent resident within the meaning of the Immigration
Act and ordinarily resident in Canada, except a permanent resident who has been
ordinarily resident in Canada for more than one year after the time at which he first
became eligible to apply for Canadian citizenship.
Report of the Royal Commission on Canadas Economic Prospects (1957); Report of the
Task Force on the Structure of Canadian Industry (1968); Foreign Direct Investment in
Robert W.V. Dickerson, John L. Howard, Leon Getz, Proposals for a New Business
Corporations Law for Canada, 1971.
Industry Canada, Canada Business Corporations Act, Discussion Paper, Directors
and Other Corporate Residency Issues, August 1995.
Ibid., p. 1.
Ibid., p. 22-23.
Ibid., p. 25.
Ibid., p. 26-27.
Senate of Canada, Standing Senate Committee on Banking, Trade and Commerce, Corporate
Governance, August 1996, p. 44.