Earlier this year, a private member’s bill was introduced in the Legislative Assembly of Ontario for the purpose of amending the province’s Business Corporations Act. The apparent aim of bill 101, Enhancing Shareholders Rights Act, 2017 is to provide shareholders with greater opportunities for engagement and control within the corporate apparatus and to “modernize” Ontario’s corporate legislation. The proposed sweeping amendments relate primarily to in-vogue discussion topics on board diversity, majority voting requirements and “say on pay.”
However, while the bill is relatively short, its shortcomings are long.
Initiating a shareholder proposal to nominate directors under the act currently requires representation from holders of at least five per cent of the shares of the corporation or five per cent of the class or series of shares entitled to vote at the meeting at which the proposal will be presented. Similarly, to requisition a meeting of shareholders, representation from holders of at least five per cent of the shares of the corporation is required. The bill proposes to reduce the five-per-cent thresholds to three per cent, thereby making it easier for shareholders to advance their interests in this regard.
Those that are skeptical about non-strategic and undisciplined shareholder activism may take issue with this change; what’s the magic with three per cent? Some might argue that this provides activist shareholders with the ability to potentially extend their influence into the operations of the corporation — which properly belongs with the board and management.
This may extend activist shareholders’ personal agendas rather than the best interests of the corporation as a whole.
The act also currently provides for a plurality voting regime in which shareholders can either vote in support of a director nominee or withhold support — there is no “against” option. Under this regime, directors in uncontested elections can be elected to the board with a single vote in support, irrespective of the number of votes withheld. In addition, the act currently allows for director nominees to be elected as a slate and up to a maximum term of three years.
The bill seeks to enhance shareholder democracy in director elections in three key ways. Firstly, the bill proposes a majority voting requirement for all corporations covered under the act, which would require a nominee in an uncontested election to obtain majority support from shareholders.
Secondly, the bill introduces a requirement that each director must be elected individually, effectively prohibiting slate voting. Thirdly, the bill proposes that directors only be permitted to be elected for a maximum term of one year.
While each of these three amendments has its issues, there is a concern that limiting terms to one year may limit the value and benefits of institutional knowledge that a long-serving director may contribute to a meaningful discussion.
The bill proposes to require prescribed corporations to disclose to their shareholders at every annual meeting and prescribed information respecting diversity among the corporation’s board and senior management. It is unclear whether the prescribed diversity disclosure will relate exclusively to gender or be more expansive to include additional categories of diversity — prescribed information is simply being left to the regulations.
In addition, the bill provides shareholders with a definitive voice on executive compensation by permitting shareholders to make a proposal to adopt an executive compensation policy with respect to the remuneration of directors or officers or make a proposal to amend or repeal such a policy. Notably, directors of a corporation under the act will be obligated to comply with any adopted proposal. It proposes not only a binding vote on compensation policies but also the right to develop and propose such policies.
The bill’s proposed amendment on executive compensation marks a divergence from current practices of shareholder oversight of executive compensation, which has taken the form of a “say-on-pay” vote. Say on pay involves the corporation voluntarily proposing an advisory resolution at a meeting of shareholders to enable them to express approval or dissatisfaction with the remuneration of executives. Importantly, say-on-pay votes, while influential, are not formally binding on the board, as the board still maintains its discretion to not abide with the say-on-pay vote. The bill seeks to change this and give shareholders of corporations governed by the act the final say on pay with respect to matters of executive compensation. If adopted, this would fundamentally shift the responsibility and duties related to executive compensation packages and raise certain corporate governance issues, especially as it is the duty of the directors, not the shareholders, to act in the best interests of the corporation (which may include directors developing compensation packages to retain necessary talent). This proposal may have the impact of limiting the director’s ability to exercise that duty.
While the bill has passed second reading and has been referred to the Standing Committee on Finance and Economic Affairs for further study, the passing of the bill into law is not a certainty. Even if passed into law, the final form of the law may differ in material respects from the current draft of the bill.
Perhaps one of the most puzzling aspects of the bill is that, unlike certain amendments recently made to our federal Business Corporations Act, the bill (or at least certain provisions) would apply to all corporations covered by the act — both public and private. As Ontario private corporations are generally closely held, often having the same person or family acting as the shareholder, director, officer and employee, application and implications of the bill on private companies is entirely unclear and may be seen as a flood of impractical additional rules and regulations that may be better suited only for public corporations.
Graham King is a partner at Borden Ladner Gervais LLP and is the manager of BLG’s Corporate & Commercial Group in Toronto. Joseph DiPonio is an associate in BLG’s Securities and Capital Markets who assisted with this column.