On April 8, 2019, the federal government introduced Bill C-97 in order to implement its spring budget. Bill C-97 proposes to effect amendments to a number of federal statutes, including making important changes to the Canada Business Corporations Act (“CBCA“). The proposed amendments to the CBCA include those apparently intended to clarify the nature of the “fiduciary duty” of directors and officers, the introduction of a non-binding “Say on Pay” vote regarding senior management remuneration, and the requirement to provide certain additional annual reports.
The Fiduciary Duty
Under the CBCA, the board of directors of a corporation is responsible for managing or supervising the management of the corporation’s business and affairs, including having the power to delegate the day-to-day management to the corporation’s officers. In managing or supervising management, directors and officers are charged with discharging two statutory duties, the “fiduciary duty” and the “duty of care”, as set out in Section 122 of the CBCA, which states:
“(1) Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interest of the corporation [the “fiduciary duty”] and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances [the “duty of care”].”
The leading case in Canada concerning the fiduciary duty of directors and officers remains the 2008 Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders1 (“BCE“). BCE was not strictly a decision on Section 122 of the CBCA, but rather considered an allegation of oppression by certain BCE debentureholders, in the context of a proposed plan of arrangement by BCE.
In BCE, the Supreme Court made it clear that acting in the best interest of the corporation did not mean acting in the best interest of the corporation’s shareholders, or in fact, any other particular group of stakeholders, whose interests the court recognized could be in conflict with one another and with the interests of the corporation. The court in BCE stated that where conflicts involve the interest of the corporation “it falls to the directors to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen.”
The proposed changes in Bill C-97 appear to substantially codify this aspect of BCE, and in fact, would expand the non-exclusive list of factors and stakeholders whose interests the board of directors is to consider, when acting with a view to the best interests of the corporation. Bill C-97 would add a new section to the CBCA that would provide that directors and officers, when acting with a view to the best interests of the corporation, may consider, but would not be limited to the following: (i) the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments; (ii) the environment; and (iii) the long-term interests of the corporation.
Should the amendments be enacted, directors and officers would be advised to consider these additional factors, as well as other relevant factors and stakeholders’ interests as the circumstances may suggest, in their decision-making process in order to demonstrate that they have discharged their fiduciary duty.
Courts have traditionally deferred to the ultimate decision of the directors – commonly referred to as the “business judgement rule” – provided that the decision reached by the directors, and their ultimate treatment of competing stakeholder interests, is found to have been within a range of reasonable choices that could have been made. However, in order to properly rely on the business judgement rule, directors must be able to demonstrate that they reached a decision in good faith, in an informed manner, including, where appropriate, in reliance upon the advice of legal, financial and other experts, and that the decision was ultimately within a range of reasonableness. As the Ontario Court of Appeal stated in Maple Leaf Foods Inc. v Schneider Corp.:2 “The court will look to see that the directors made a reasonable decision, not a perfect one. Provided the decision is taken within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination”.
Should the amendments to the CBCA proposed by Bill C-97 be effected, it is expected that the business judgement rule will continue to be relied upon by boards of directors in demonstrating that they have met their fiduciary duty, in the context of the expanded, non-exhaustive factors to be considered.
Say on Pay
Within the past 20 years, executive compensation has been a popular topic amongst shareholders of public issuers. Frequently, issuers receive requests from shareholders that they should have the right to vote on the remuneration of executives. This concept has widely become known as “Say on Pay“.
The proposed CBCA changes can be seen as following in the footsteps of the U.S. Congress. In 2010, Congress passed section 951 of the Dodd-Frank Act, requiring public companies in the U.S. to conduct shareholder advisory votes to approve the compensation of executives at least once every 3 years. Although these votes are not binding on a corporation, they are seen to enhance accountability and transparency with shareholders.
Similarly, the proposed CBCA changes would require prescribed corporations to develop an approach with respect to the remuneration of the directors and employees of the corporation who are “members of senior management”. A report on the corporation’s remuneration approach would be provided to shareholders annually. Although it is not currently clear whether or not private or public corporations would be affected, or if the size of the entity would be relevant, if enacted the legislation would allow shareholders to participate in a non-binding vote on remuneration. The corporation would also be required to disclose the results of the vote to shareholders.
Additional Annual Reports
Bill C-97 is proposing additional annual disclosures for prescribed corporations to be placed before shareholders, in addition to the annual report on remuneration approach referred to above. These additional disclosures would include a report on the diversity of the board and the senior management team, a report on the “claw back policy” relating to incentive or other benefits, and a report on the well-being of employees, retirees and pensioners. No detail has been yet provided in terms of what the latter two reports would entail.
1 3 S.C.R. 560
2 42 O.R. (3d) 177.