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BILL S-11: AN ACT TO
AMEND THE CANADA BUSINESS
Prepared by:
LEGISLATIVE HISTORY OF BILL S-11
TABLE
OF CONTENTS B. Directors’ Residency Requirement 1. Requirement to File Reports E. Unanimous Shareholder Agreements G. Take-over Bids and Going Private Transactions H. Modified Proportionate Liability 2. Part 1 - Interpretation and Application 4. Part 4 - Registered Office and Records 6. Part 10 - Directors and Officers 9. Part 14 - Financial Disclosure 10. Part 15 - Fundamental Changes 11. Part 18 - Liquidation and Dissolution 12. Part 20 - Remedies, Offences and Punishment 1. Prohibition against Speculative Trading D. Modified Proportionate Liability AMENDMENTS TO OTHER ACTS (Ownership Restrictions) BILL S-11: AN ACT
TO AMEND THE CANADA BUSINESS Bill S-11, An Act to amend the Canada Business Corporations Act (CBCA) and the Canada Cooperatives Act (CCA) and to amend other Acts, was introduced and read the first time in the Senate on 6 February 2001 by the Honourable Fernand Robichaud, Deputy Leader of the Government in the Senate. The two Acts named regulate federally incorporated companies and cooperatives and the proposed amendments are designed to enhance corporate governance, improve the ability of Canadian corporations to compete in the marketplace and reduce costs for businesses. Bill S-11 is the result of a process that began as early as 1994 when consultations were held across the country in order to determine what changes should be made to the CBCA. A set of discussion papers was then released in order to obtain comments from stakeholders.(1) Afterwards, more consultations were held to develop a consensus on reform proposals. The Standing Senate Committee on Banking, Trade and Commerce also played a key role with the presentation of its report on corporate governance(2) and its interim and final reports on modified proportionate liability.(3) A bill amending the CBCA and the CCA, Bill S-19, was introduced in the Senate in March 2000, but died on the Order Paper when Parliament was dissolved for the November 2000 federal election. At the time of dissolution, the Standing Senate Committee on Banking, Trade and Commerce was examining the bill. Bill S-11 is largely the same as Bill S-19, although a number of technical and substantive amendments have been made in response to concerns raised during the committee hearings or otherwise identified. In addition, some amendments were made in committee and at 3rd reading stage in the Senate. The CBCA, which has not been substantially amended since 1975, sets out the legal and regulatory framework for corporations in Canada, including the basic rules for corporate governance. The approximately 155,000 companies incorporated under this Act include large as well as small and medium-sized businesses. In Canada, corporations have the option of incorporating at the federal or the provincial level and the CBCA operates in parallel with the corporate laws of the provinces and territories. The main goals of the amendments now proposed are:
The CCA sets out the legal and regulatory framework for the establishment of non-financial cooperatives. The main objective of the proposed amendments to that Act is to harmonize its provisions for corporate governance with the proposed amendments to the CBCA. This would complete the reform process that led to the new CCA, which received Royal Assent in 1998 and came into force on 31 December 1999. Because of its recent passage, the CCA already contains a number of amendments now proposed for the CBCA.(4) Certain issues, however, were set aside pending the results of consultations on the CBCA; these are addressed in the proposed amendments to both the CCA and the CBCA. The Acts will be supplemented by a set of regulations dealing with a wide range of issues such as minimum ownership and length of ownership requirements with respect to eligibility to make shareholder proposals, the investment threshold defining a small investor for the purpose of the modified proportionate liability regime, and detailed rules for electronic communications between the corporations and shareholders. Due to the length of this amending legislation and because many of the proposed amendments would make technical changes, this legislative summary will not follow the normal clause-by-clause approach. Certain of the amendments are grouped according to theme, while more general amendments are grouped together. Section 44 of the CBCA restricts the provision of loans, guarantees and other kinds of financial assistance by a CBCA corporation to directors, officers, employees and shareholders. More specifically, this type of financial assistance is restricted “where the directors have reasonable grounds for believing that, as a result, the corporation either is or would become insolvent or the corporation’s assets either are or would be less than all of its liabilities and stated capital.”(6) Directors who approve financial assistance contrary to section 44 are personally liable to the corporation for the amount. They can, however, rely on a “good faith reliance” defence. Clause 26 would repeal the financial assistance provision. The rationale for this change is that the current wording causes legal and accounting practitioners considerable difficulty in providing clients with unqualified opinions. Despite this repeal, directors dealing with such transactions are subject to statutory fiduciary duties to act in the best interest of the corporation and can be sued for failing to do so. It is argued that this provides adequate safeguards. B. Directors’ Residency Requirement (7) The CBCA currently sets out the following residency requirements for corporate directors:
An exception to the residency requirements is provided for holding corporations that earn less than 5% of gross revenues in Canada. Only one-third of the directors of such corporations must be resident Canadians (section 105(4)). One of the purposes of the residency requirements was “to specifically promote a Canadian viewpoint at meetings of directors of corporations controlled by non-resident Canadians.”(9) The following amendments are proposed:
These changes are designed to allow for stronger international representation on boards of directors and to provide corporations with the flexibility to appoint directors to committees based on their qualifications. The stated goal is to provide Canadian corporations with more flexibility as they become global players and perhaps to encourage global corporations to incorporate and locate their headquarters in Canada. It is worth noting that the corporations laws of provinces such as Quebec, Nova Scotia, New Brunswick and Prince Edward Island do not have residency requirements for directors. Section 123(4) of the CBCA currently provides a “good faith reliance” defence to certain of the liabilities for which directors are subject under the Act.(14) The director is not liable if he or she relies in good faith on:
The scope of this defence is limited: “It allows directors to point to a reliable source of information as justification for their actions, but it does not permit them, in absence of that specific justification, to show that they acted reasonably in the circumstances.”(15) Clause 50 would replace the “good faith reliance” defence with a “due diligence” defence with respect to the liabilities and duties set out in sections 118, 119 and 122(2). It is specified that due diligence would include reliance in good faith on the above-mentioned documents. It is thus clear that such action would continue to be part of what constitutes acting with due diligence. A due diligence defence allows a court to determine that the directors are not liable if they “exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” This test is set out in several other pieces of legislation, including the CCA. The “good faith reliance” defence would still be applicable with respect to the duties set out in section 122(1). The proposed inclusion of a due diligence defence reflects the recommendations of the 1996 report Corporate Governance issued by the Standing Senate Committee on Banking, Trade and Commerce. Clause 110 would amend section 222 to provide a due diligence defence for liquidators rather than the current “good faith reliance” defence. Thus, they would be able to rely on the same defence as is proposed for directors. Currently, the CBCA is not clear on whether defence costs can be advanced and whether directors or officers should be indemnified for all legal proceedings, including investigations. Clause 51 would amend section 124 to broaden the statutory indemnification rules. For example, a corporation would be expressly allowed to advance defence costs, charges and expenses and the indemnification provision would be applicable to investigations. The indemnification rules would continue not to apply to directors who engage in fraudulent or otherwise illegal activity. Both the CBCA and provincial securities laws require that insiders periodically file trading reports with the respective authorities. “Insider trading has been described as the purchase and sale of securities of a corporation by a person with access to confidential information about the corporation that can materially affect the value of its securities and that is not known by other shareholders or the general public.”(17) The following sets out the general rules regarding insider trading: “Trading by insiders per se is not illegal; most laws governing the issue allow insiders to trade in the securities of corporations with which they have a connection, provided they do not possess material confidential information about the corporation. Insider trading is proscribed, however, when the insider possesses material confidential information or uses such information for his or her benefit when trading in the securities of the corporation.”(18) There are three main components to the insider trading provisions: requirement to file reports, speculative trading prohibitions, and civil liability. 1. Requirement to File Reports The CBCA currently sets out the rules governing when a person must send a report to the Director: within 10 days after the end of the month in which he or she becomes an insider of a distributing corporation, and within 10 days following the end of the month in which there is any change in the person’s interest in the securities of a distributing corporation (section 127). Clause 53 would repeal the insider reporting requirements. Insiders would, however, still be required to report under provincial securities legislation, which contains prohibitions and penal remedies to deal with non-compliance. The current rules regarding speculative trading are as follows: “The CBCA prohibits insiders from selling shares that they do not own or have a right to own (short selling) and from buying or selling a call option or put option in respect of a share of a distributing corporation of which they are insiders (section 130). Insiders can sell shares they do not own, however, provided they own other shares that are convertible into the shares sold, or they own an option or right to acquire the shares sold.”(19) Clause 54 would replace the word “share” with the word “security” in section 130 to cover more fully types of transactions that could give rise to a conflict of interest (for example, trading in debt obligations issued by the corporations). In addition, insiders would no longer be prohibited from selling a put option or purchasing a call option since they would profit only if the value of the corporation’s stock increased, meaning that there would be no direct conflict with the interest of the corporation and its shareholders.(20) The purchase of put options and the sale of call options would still be prohibited, however. Clause 52 would amend the definitions of “insider,” “officer,” and “business combination” for the purposes of speculative trading provisions. Clause 54 would increase the fine for a contravention of the speculative trading prohibitions from $5,000 to $1,000,000; or three times the profit made, whichever was greater. Following are the current rules regarding civil liability for insider trading: “Under subsection 131(4) of the CBCA, insiders (as defined in section 131(1)) who make use of specific confidential information for their own benefit in connection with a transaction in the securities of a corporation (whether distributing or non-distributing) are liable to compensate anyone who suffers a direct loss as a result. They are also accountable to the corporation for any direct benefit or advantage they receive.”(21) Clause 54 would clarify and expand the scope of civil liability provisions. This would be accomplished in part by expanding the definition of “insider” and “security” for the purpose of the civil liability provisions. Among other things, clause 54 would define an insider as a person who beneficially owns shares carrying more than the “prescribed percentage of voting rights” (set at 10% in the draft regulations). The CBCA at present defines an insider as a person who beneficially owns more than 10% of the shares of a corporation. This amendment would allow the CBCA standard to be changed by regulation when required. In addition, the civil liability provision would be re-worded to expand its scope. For example, the word “specific” would be removed in order to capture confidential information that was general in nature; as well, there would no longer be a requirement that the confidential information be used for the insider’s benefit or advantage. The new provision would impose liability where an insider purchases or sells a security with knowledge of confidential information that, if generally known, might reasonably be expected to affect the value of any of the corporation’s securities in a material way. The requirement to compensate for loss suffered would be changed to a requirement to compensate for damages suffered. Liability could be avoided if the insider established that he or she had reasonably believed that the information had been generally disclosed, if the information was known, or ought reasonably to have been known, by the person alleged to have suffered damages or if the transaction took place in prescribed circumstances. Furthermore, an insider would be accountable to the corporation for any benefit or advantage received resulting from the transaction. A new element in the civil liability provisions would impose civil liability on a person who communicated undisclosed confidential information (the “tipper”); it would also set out applicable defences. This would align the CBCA provisions with provincial securities legislation. A new provision would also be added to help guide the courts in their assessment of the damages. In the case of distributing corporations, when the plaintiff was a purchaser, the court would have to consider the price paid by the plaintiff less the average market price over the 20 trading days immediately following general disclosure of the information. When the plaintiff was a seller, the court would have to consider the average market price over the 20 trading days immediately following general disclosure of the information, less the price received by the plaintiff. E. Unanimous Shareholder Agreements (22) A unanimous shareholder agreement is an agreement by all shareholders in relation to the management of the corporation whereby some or all of the powers of directors are transferred to shareholders. Currently, the CBCA does not expressly state that when the “rights, powers and duties” are transferred, the shareholders also assume the liabilities and associated defences of directors. Clause 66 would amend section 146 to permit more than one person who was not a shareholder to participate in a unanimous shareholder agreement. In addition, the provision would clarify that parties to a unanimous shareholder agreement who were given the power to manage or supervise the management of the corporation would have all “the rights, powers, duties and liabilities” of a director, whether they arose under the CBCA or otherwise, including any defence available to the directors. Under a new provision, new shareholders who had not been informed of the existence of a unanimous shareholder agreement at the time of acquisition would be able to cancel the transaction no later than 30 days after they had become aware of such an agreement. F. Shareholder Communications (23) The CBCA provides shareholders with the opportunity to participate in major decisions of a corporation in which they have an interest. This is done in part by providing access to corporate information and by granting shareholders the right to vote. Certain of the proposed amendments to the CBCA are intended to facilitate shareholder participation in corporate governance. Some are concerned that the current proxy solicitation rules impede communication among shareholders. This is a significant drawback since communications among shareholders can be an important instrument for monitoring and influencing corporate performance. Section 147 of the CBCA defines proxy solicitation to include:
A Discussion Paper prepared by Industry Canada “points out that, according to this definition, many views expressed by shareholders, including informal discussions or personal letters criticizing management, may be deemed to be solicitation under section 147. Violations of section 147 carry a fine as well as a term of imprisonment.”(24) There is no violation when a proxy circular is sent to all shareholders. The bill would amend the legislation to facilitate communication among shareholders. Clause 67 would amend the definition of “solicit” or “solicitation” in section 147 to exclude: a public announcement, as prescribed, by a shareholder of how he or she intends to vote and the reasons for that decision;(25) a communication for the purpose of obtaining the number of shares required for a shareholder proposal; a communication, other than a solicitation by or on behalf of the management, made to shareholders in any prescribed circumstance. These communications would be exempted from the proxy circular delivery requirements. In addition, clause 68 would amend section 149 to exempt management of a non-distributing corporation with 50 or fewer shareholders (rather than the current 15) from having to send a form of proxy to each shareholder entitled to receive notice of a meeting of shareholders. Clause 69 would add a new provision to allow persons to solicit proxies from no more than 15 shareholders without having to send a dissident’s proxy circular. (This exemption would not apply to a solicitation by management.) In addition, a person could commence a solicitation without sending a proxy circular if the solicitation was conveyed by public broadcast, speech or publication in the prescribed circumstances.(26) Clause 69 of Bill S-11 does not contain the exemption relating to the filing of a preliminary proxy circular found in Bill S-19. This exemption, which would have allowed persons to commence a solicitation provided they had filed a preliminary proxy circular with the corporation and the Director, was based on the premise that the Director would review preliminary proxy circulars and the information would be available to the public. However, because the CBCA does not require preliminary proxy circulars to be filed, such documents would not have been reviewed. Considered unnecessary, this exemption was not included in Bill S-11. It is hoped that the proposed changes to the proxy solicitation rules would “eliminate unnecessary obstacles to the exchange of views and opinions by shareholders and others concerning management performance and initiatives presented for a vote of shareholders.”(27) Section 137 of the CBCA allows shareholders to add items to the agenda of shareholder meetings by means of shareholder proposals. The shareholder proposal must be included with the management proxy circular if the corporation is required to send one out. The Act sets out five circumstances in which the corporation is not required to circulate the proposal. Clause 59 would make changes to the eligibility requirements for making shareholder proposals. It would permit beneficial owners of sharesto make shareholder proposals, rather than only registered shareholders, as is the case at present. Beneficial owners are persons who have purchased shares and are entitled to dividends and capital gains but are not “registered” on the corporation’s records. In addition, clause 59 would set minimum ownership and length of ownership requirements with respect to eligibility to make shareholder proposals (currently, any shareholder entitled to vote may do so). These new requirements would be set out in the regulations. Under the draft regulations, to be eligible the person would have to be, for at least six months prior to submitting a proposal, the registered owner or beneficial owner of 1% of the total number of outstanding voting shares or of outstanding voting shares whose fair market value was $2,000. The goal is to limit abuse and to “ensure that proposals are founded on a genuine stake and interest in the affairs of the corporation.”(28) Shareholders would, however, be permitted to pool their shares to meet the minimum requirements. Thus, a shareholder who had the required support of other shareholders would not have to acquire more shares to be eligible. In certain circumstances, acquiring more shares could have raised an economic barrier to shareholder proposals. Shareholders submitting proposals would be required to provide the corporation with their name, address, number of registered or beneficial shares owned and the date acquired, and would have to continue to hold or own the required number of shares up to and including the day of the meeting. If requested by the shareholder, the corporation would still have to include a statement by the shareholder supporting the proposal in its management proxy circular. The maximum length of the statement and proposal would be prescribed by regulation. The draft regulations provide that it would not be able to exceed 500 words (currently, the CBCA has a limit of 200 words). In addition, the proposed amendments aim to limit the scope for a corporation’s rejection of shareholder proposals. A corporation would be given more time to give notice of its rejection(29) and would be able to reject a proposal that did not relate in a significant way to the business or affairs of the corporation. However, a corporation would no longer be able to reject a proposal on grounds that its primary purpose was to promote general economic, political, racial, religious, social or similar causes. Eliminating a corporation’s ability to reject a proposal on general economic, political, racial, religious, social or other grounds is a substantive change from Bill S-19, which retained those grounds for rejection and placed the onus on the shareholder making a proposal to demonstrate that the proposal related in a significant way to the business or affairs of the corporation. When Bill S-19 was being examined by the Standing Senate Committee on Banking, Trade and Commerce, organizations such as the Taskforce on the Churches and Corporate Responsibility, Corporate Responsibility Coalition and the Social Investment Organization strongly argued in favour of eliminating the ability to reject a proposal on general economic, political, racial, religious, social or other grounds. The bill would also set out rules through the regulations with respect to submitting similar proposals year after year. The time frame for resubmitting a substantially similar proposal would be increased from two years to five years. A proposal that received a prescribed minimum amount of support at the meeting could not, however, be rejected.(30) The CBCA does not allow electronic communications between a corporation and its shareholders. Clause 121 would allow corporations to use emerging technologies to communicate with shareholders.(31) This would be permitted only where the shareholder consented and designated an information system for receipt of the electronic documents. Thus, the shareholder would retain the right to insist on paper-based communications. Conversely, the corporation could not be forced to communicate electronically. While the CBCA contains many provisions explicitly requiring that documents be in writing or be provided to the intended recipient in written form, such requirements would be satisfied by the creation or provision of electronic documents, provided the conditions set out in the legislation were satisfied. The proposed amendments also set out other rules with respect to electronic documents which would be supplemented by detailed rules for electronic communications in the regulations. G. Take-over Bids and Going Private Transactions (32) Industry Canada describes a take-over bid as “an offer to all or most shareholders to purchase shares of a corporation, where the offeror, if successful, will obtain enough shares to control the target corporation.” (33) In the CBCA, it is defined as:
The primary goal of take-over bid provisions is to protect the rights and interests of the various parties involved in a take-over bid ? the offeror, shareholders and the target corporation. The CBCA provisions apply to all CBCA corporations whose shares are publicly traded or that have more than 15 shareholders. It is important to point out that provincial securities legislation also contains take-over bid provisions that apply to publicly traded corporations. Clause 98 would repeal the CBCA take-over bid provisions, leaving the area to be regulated by provincial securities laws. Industry Canada describes “going-private” transactions as a variety of corporate transactions relating to distributing corporations “that result in termination of shareholder interest with compensation but without consent.”(35) For non-distributing corporations, a “squeeze-out” is a similar type of transaction. The CBCA currently sets out rules for one type of going-private transaction (compulsory acquisition). “Under section 206(2) of the CBCA, an offeror who acquires 90% of the outstanding shares of a particular class of shares has the right to acquire the remaining 10%. This compels non-tendering shareholders to sell their shares and permits the majority shareholder to ‘take the corporation private’.”(36) The CBCA does not, however, address other forms of going-private transactions or whether they are permitted. Clause 1(5) would add a new definition to the CBCA to provide that the definition of “going-private transactions” (relating to distributing corporations) would be set in the regulations. Clause 97 specifies that going-private transactions would be allowed, subject to complying with any applicable provincial securities law. Clause 1(5) would also define “squeeze out transaction” (relating to non-distributing corporations). Under proposed amendments, the majority of minority shareholders would have to approve such transactions.(37) Thus, the standard of fairness would not be the same for squeeze-out transactions, in recognition of the fact that different circumstances are involved in distributing and non-distributing corporations. Clause 99 would also make changes to the compulsory acquisition provision. As explained above, an offeror who acquires 90% of the outstanding shares of a particular class of shares has the right to acquire the remaining 10%. Certain aspects of the provision would be clarified and amendments to the definitions would be made to take into account the proposed repeal of the take-over bid provisions. The obligation on the dissenting offeree to elect to transfer shares on the terms of the take-over bid or to demand payment of fair value would be expressly set out, as would be the consequences for the dissenting offeree of not having elected to demand such payment (i.e., the offeree would be deemed to have elected to transfer the shares at the take-over bid price.) Clause 100 would add a new provision providing a right of compelled acquisition, thereby giving shareholders the right to compel acquisition of their shares by the offeror within a certain time frame, and at the take-over bid price, where a take-over had been accepted by 90% of shares or shares of a class. The compulsory and compelled acquisition provisions would apply only to distributing corporations. H. Modified Proportionate Liability Currently, those who are involved in the preparation of financial information required by the Act are subject to joint and several liability with respect to a financial loss resulting from an error, omission or misstatement. This means that a defendant can be sued and held liable for the entire loss, notwithstanding the defendant’s degree of fault, and then has to recover the amounts from the other negligent parties. The Standing Senate Committee on Banking, Trade and Commerce stated that the current regime could have adverse implications for the financial reporting system and capital markets and recommended a regime of modified proportionate liability.(38) Clause 115 (sections 237.1 to 237.9)would set out a regime of modified proportionate liability in relation to claims for financial loss arising out of an error, omission or misstatement in respect of financial information required by the CBCA. The regime would apply after a court had found more than one defendant or third party responsible for the financial loss. Thus, a defendant or third partywould be liable only for the portion of the damages corresponding to theirdegree of responsibility for the loss. If damages awarded against a defendant or third partyproved to be uncollectable (for example, because of a defendant’s insolvency), the plaintiff could apply to the court for a reallocation of the uncollectable amount amongst the other responsible defendants or third parties. The reallocated amount would be calculated by multiplying the uncollectable amount by the defendant’s or third party’sdegree of responsibility, with a 50% cap on reallocated liability (the amount would be limited to 50% of the defendant’s or third party’soriginal proportionate liability). This procedure could result in cases where the plaintiff was unable to recover full damages. A defendant or third partywould continue to be subject to joint and several liability in case of fraud or dishonesty and this regime would also continue to apply to certain categories of plaintiffs: the Crown, charitable organizations, unsecured trade creditors, as well as individual plaintiffs and personal bodies corporate whose totalfinancial interest in the corporation was not more thana prescribed threshold.(39) In addition, a court that considered it was just and reasonable to do so would be permitted to apply joint and several liability in the case of individual plaintiffs whose financial interest in the corporation was above the prescribed threshold. A provision would be added to establish how a person’s financial interest would be calculated. Clause 229would provide that the modified proportionate liability regime would not apply to any proceedings that had been commenced before the coming into force of the section setting out the regime. Some other proposed amendments are set out below; the parts of the CBCA to which the amendments relate and the relevant section of the CBCA are identified where appropriate.
2. Part 1 – Interpretation and Application
4. Part 4 – Registered Office and Records
6. Part 10 – Directors and Officers
9. Part 14 – Financial Disclosure
10. Part 15 – Fundamental Changes
11. Part 18 – Liquidation and Dissolution
12. Part 20 – Remedies, Offences and Punishment
The bill would also make a series of technical amendments to the CBCA with the intention of clarifying ambiguous language, updating terminology, and eliminating regulatory and paper burdens. As stated above, many of the proposed amendments to the CCA are intended to harmonize the legislation with the proposed amendments to the CBCA. Thus, many of the same themes are repeated. An element added to the CCA in 1998 was the power of cooperatives to issue investment shares and thereby obtain additional sources of capital. The degree of shareholders’ power is decided upon by the members of the cooperative, subject to strict upper limits imposed by the CCA. Shareholders do have a role in cooperative decision-making and are allowed to make proposals at annual meetings. The eligibility requirement for persons other than members to submit shareholder proposals in the CCA would be harmonized with the proposed CBCA amendments. Clause 153 would amend section 58 to set minimum share ownership and length of ownership requirements for submitting a proposal. The provisions would also allow for the pooling of shareholdings to meet the minimum requirement. Other elements proposed in the CBCA amendments are repeated here. Section 58(2) of the CCA provides for no restrictions on members submitting a proposal to amend the articles of the cooperative. No amendments are proposed to the provisions dealing with proposals submitted by members. Proposed section 58(4.1) would provide that a cooperative would not have to circulate a proposal submitted by a shareholder or a member if at the date of the meeting the shareholder did not own the requisite number of shares or the member had voluntarily withdrawn as a member of the cooperative. The CCA restricts the loans, guarantees and other kinds of financial assistance that can be given by a cooperative to members, shareholders, directors, officers or employees where the directors have reasonable grounds for believing that, as a result, the cooperative either would be or would become insolvent or the cooperative’s assets either would be or would become less than all of its liabilities and stated capital. Clause 184 would repeal the provision on financial assistance. The rationale is that directors dealing with such transactions are subject to statutory fiduciary duties to act in the best interest of the cooperative, and they can be sued for failing to do so. It is argued that this provides adequate safeguards. The proposed amendment would harmonize the CCA provisions with the proposed amendments to the CBCA (clauses 191, 192, 193). 1. Prohibition against Speculative Trading The proposed amendments would replace the word “share” with the word “security” to cover more fully those transactions that could give rise to a conflict of interest. The proposed amendments would also change the definitions of “insider,” “officer,” and “business combination” for the purposes of speculative trading provisions. The proposed amendments would clarify and expand the scope of the civil liability provisions. This would be accomplished in part by expanding the definition of “insider” and “security” for the purpose of such provisions. In addition, the civil liability provision would be re-worded to expand its scope. Liability could be avoided if the insider established that he or she had reasonably believed the information to have been generally disclosed. A new element to the civil liability provisions would impose civil liability on person who communicated undisclosed confidential information (the tipper) and would set out applicable defences. Another new provision would guide the courts in their assessment of the damages. In the case of a distributing cooperative, when the plaintiff was a purchaser the court would have to consider the price paid by the plaintiff, less the average market price over the 20 trading days immediately following general disclosure of the information. When the plaintiff was a seller, the court would have to consider the average market price over the 20 trading days immediately following general disclosure of the information, less the price that the plaintiff had received. D. Modified Proportionate Liability Clause 218 (proposed sections 337.1 to 337.9) would set out a regime of modified proportionate liability in relation to the preparation of financial information required by the CCA. Currently, those who are involved in the preparation of financial information are subject to joint and several liability. The amendment would harmonize the CCA with the proposed amendments to the CBCA (above) and the same rules would apply. According to clause 234, the modified proportionate liability regime would not apply to any proceedings commenced before the coming into force of the section setting out this regime.
A series of technical amendments are also being proposed to update terminology. AMENDMENTS TO OTHER ACTS (Ownership Restrictions) Bill S-11 was amended at committee stage in the Senate by adding several new clauses. Clauses 235 to 238 would amend the Air Canada Public Participation Act, the Canada Development Corporation Reorganization Act, the CN Commercialisation Act and the Nordion and Theratronics Divestiture Authorization Act by repealing the definition of “associate” that applied to specific sections of these acts. The term “associate” would therefore have the same meaning as in the CBCA.(44) The sections in question set out that the articles of continuance or amendment of these corporations shall contain, among other things, ownership restrictions that apply to any one person, together with the associates of that person. Certain relationships between two persons that currently make them associates for the purposes of statutory ownership restrictions would no longer be considered to qualify as “associate relationships.” It would appear that this will expand the rights of individuals, corporations, partnerships, and trusts to more freely communicate among themselves and/or act in concert with respect to their interests without running afoul of any statutory ownership restrictions. The House of Commons Standing Committee on Industry, Science and Technology amended the bill by deleting clauses 235 to 238 added at committee stage in the Senate. The amendments proposed to both the CBCA and the CCA would come into force at a date set by Governor in Council. Most of the amendments proposed in Bill S-11 are unlikely to engender a great deal of debate. The extensive consultation process conducted by the Department of Industry prior to the introduction of the bill was designed to obtain stakeholder input into the amendment process. Despite the consultations, some of the proposals are likely to raise concerns. The directors’ residency requirements may be a controversial issue. The bill would require only 25% of the board of directors of a CBCA corporation to be resident Canadians (rather than a majority, as at present) and would eliminate the residency requirement for committees of the board. Some argue that residency requirements are outmoded and inhibit Canadian corporations from moving into foreign markets and obtaining the best directors. Others contend that they promote Canadian participation in corporate decision-making, foster compliance with legal obligations, and allay concerns about the amount of foreign investment in Canada. The provisions of Bill S-19 with respect to shareholder proposals engendered considerable debate before the Standing Senate Committee on Banking, Trade and Commerce. The provision that continued a corporation’s right to reject a shareholder proposal whose primary purpose was to promote general economic, political, racial, religious, social or similar causes was of particular concern to a number of shareholder rights advocates. Bill S-11 would remove these grounds for rejecting a proposal. Under Bill S-11, management could reject a proposal if it did not relate in a significant way to the business or affairs of the corporation. This amendment would appear to address a number of the concerns raised before the Senate Committee. Bill S-11, however, would continue the minimum share ownership and length of ownership requirements before being able to make shareholder proposal that were proposed in Bill S-19. Bill S-11 also contains several technical amendments that would address a number of concerns raised about Bill S-19. The introduction of a modified proportionate liability regime in relation to financial loss for claims arising out of errors, omissions or misstatements in connection with financial information required by the CBCA and the CCA would break new ground. While various forms of modified proportionate liability are common in the United States, the proposals in Bill S-11, if implemented, would be a first for corporations law regimes in Canada. (1) In 1995 and 1996, Industry Canada released nine discussion papers on various issues in relation to the CBCA. (2) Senate of Canada, Standing Senate Committee on Banking, Trade and Commerce, Corporate Governance, August 1996. (3) Senate of Canada, Standing Senate Committee on Banking, Trade and Commerce, Modified Proportionate Liability, September 1998 and Joint and Several Liability and Professional Defendants, March 1998. (4) This would include a due diligence defence for directors, relaxed proxy solicitation rules, allowing beneficial shareholders to submit proposals, the repeal of insider reporting requirements and enhanced electronic communication. (5) For a more detailed discussion of the financial assistance provision, see Margaret Smith, PRB 99-41, Financial Assistance under the Canada Business Corporations Act, 26 January 2000. (6) Ibid., p. 1. (7) For a more detailed discussion of the residency requirements, see Margaret Smith, PRB 99-31, Canada Business Corporations Act: Directors’ Residency Requirements and Other Residency Issues, 7 December 1999. (8) While committees of the board have a residency requirement, there is no requirement that the quorum needed at meetings of committees of the board must be composed of a majority of resident Canadian members or even that any Canadian be present. (9) Industry Canada, Briefing book, Clause-by-Clause, Bill S-19, Canada Business Corporations Act. (10) It is worth pointing out that this reduction in the residency requirement would not apply to sectors where federal legislation or policy imposes ownership restrictions. Some of these sectors are to be listed in the Regulations. See section 14 of the draft regulations for a list of prescribed business sectors. In these cases, the current requirement that a majority of directors be resident Canadians would continue to apply and the proposed amendments would clarify that where there were only two directors, only one of the two would have to be a resident Canadian. Once again, an exception would be provided for holding corporations that earned less than 5% of gross revenues in Canada. Only one-third of the directors of these corporations would have to be resident Canadians. (11) The requirement for a majority of resident Canadians would be kept for certain sectors. See footnote 10 for further details. (12) This was recommended by the Standing Senate Committee on Banking, Trade and Commerce, Corporate Governance, Recommendation 16. (13) For a more detailed discussion of directors’ liability, see Margaret Smith, PRB 99-44, Directors’ Liability, Parliamentary Research Branch, Library of Parliament, 29 February 2000. (14) These include improper share issuances or payments (s. 118), unpaid wages (s. 119) or breach of fiduciary duty and the duty of care (s. 122). (15) Directors’ Liability (2000), p. 4. (16) For a more detailed discussion of insider trading, see Margaret Smith, PRB 99-38, Insider Trading, Parliamentary Research Branch, Library of Parliament, 22 December 1999. (17) Ibid., p. 1. (18) Ibid. (19) Ibid., p. 4. (20) The civil liability provision would still apply if an insider completed such a transaction with knowledge of material confidential information. (21) Insider Trading (1999), p. 4. (22) For a more detailed discussion of unanimous shareholder agreements, see Margaret Smith, PRB 99-32, Canada Business Corporations Act: Unanimous Shareholder Agreements, Parliamentary Research Branch, Library of Parliament, 20 January 2000. (23) For a more detailed discussion of shareholder communications, see Margaret Smith, PRB 99-33, Canada Business Corporations Act: Shareholder Communications, Parliamentary Research Branch, Library of Parliament, 18 January 2000. (24) Ibid., p. 6. (25) Under the draft regulations, a public announcement would include a speech in a public forum, a press release, a published or broadcast opinion or a statement or advertising appearing in a broadcast medium or a newspaper, a magazine or other recognized publication dissemination on a regular basis. (26) Section 63 of the draft regulations would set out the information that would have to be contained in the communication. (27) Industry Canada, Backgrounder, Summary of Amendments to the Canada Business Corporations Act, p. 2. (28) Ibid., p. 3. (29) Section 47 of the draft regulations would give the corporation 21 days instead of the current 10 days. (30) See section 45 of the draft regulations. (31) Part XX.1, Documents in Electronic or Other Form, would not apply to any information sent to or issued by the CBCA Director. (32) For a more detailed discussion of take-over bids and going-private transactions, see Margaret Smith, PRB 99-40, Take-over Bids, Parliamentary Research Branch, Library of Parliament, 25 January 2000. (33) Industry Canada, Discussion Paper, Take-over Bids, February 1996, p. 2. (34) Canada Business Corporations Act, R.S.C. 1985, s. 194. (35) Industry Canada, Backgrounder, p. 8. (36) Margaret Smith, Take-over Bids, p. 6. (37) The rules relating to squeeze-out transactions can be avoided if all shareholders consent in writing. (38) The Standing Senate Committee on Banking, Trade and Commerce, Joint and Several Liability and Professional Defendants, March 1998. (39) The draft regulations (section 89) prescribe the value of the plaintiff's total financial interest as $20,000. (40) See section 3 of the draft regulations. (41) See section 2(1) of the draft regulations. (42) (1993) 1 S.C.R. 1027. (43) Section 133 does set out other time limits for holding shareholder meetings. (44) See sections 2(2) of the above-mentioned Acts. |
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