Business Law Update
November 2001
Major amendments to the
Canada Business Corporations Act
THE FIRST SUBSTANTIAL CHANGES to the Canada Business Corporations Act (“CBCA”)
since 1975 were assented to on June 14, 2001 and came into effect on November 24, 2001. The
comprehensive amendments (the “Amendments”) are accompanied by overhauled Regulations.
By way of highlights, the Amendments:
• allow greater non-Canadian representation on boards of directors and directors’ committees
of most CBCA corporations by lowering or eliminating resident Canadian membership and
quorum requirements;
• eliminate the provisions respecting financial assistance;
• clarify the level of responsibility of and broaden defences available to directors;
• broaden indemnification and liability insurance rules applicable to directors and officers;
• elaborate on the liability and defences of shareholders and other parties to unanimous
shareholder agreements;
• expand shareholder rights to communicate with each other and make proposals, and permit
the use of electronic means for communication with shareholders and participation in
shareholders meetings;
• expand shareholder rights to participate in, and dissent from, major decisions of the
corporation;
• introduce a regime of modified proportionate liability regarding the furnishing of financial
information required under the CBCA;
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• reduce duplication between federal and provincial legislation in connection with such
matters as insider trading, take-over bids and going-private transactions; and
• aim to clarify and modernize wording and terminology and reduce regulatory burden.
Significant changes resulting from the Amendments are outlined below. In light of the Amendments,
consideration should be given to the following steps: (i) reviewing with directors and officers new rules relating to
material interest disclosure (see page 3), liability of directors and related defences (see page 4) and insider trading (see
page 5); (ii) amending by-laws to adapt to the revised definition of the role of directors (see page 4); (iii) taking
advantage of additional flexibility for indemnification of and insurance for directors and officers (see page 4); (iv)
amending articles to provide for a location outside Canada where shareholder meetings may take place (see page 7); and
(v) amending by-laws to provide flexibility in the use of new and emerging technologies for meetings, communications
with shareholders and other purposes (see pages 7 and 11).
Financial assistance
The provisions respecting the giving by a corporation of certain types of financial assistance
(section 44) have been repealed. It is to be noted, however, that directors approving financial
assistance transactions remain subject to statutory fiduciary duties to act in the best interests of the
corporation (122(1)), and can be sued for failure to do so.
Directors
Residency
The requirement that a majority of directors of a CBCA corporation be resident Canadians
(generally, Canadian citizens ordinarily resident in Canada) has been lowered to 25 per cent for
boards of directors, except for prescribed business sectors (uranium mining; book publishing,
distribution and retail; and distribution of film and video) and corporations subject to specified
Canadian ownership or control restrictions. (105(3) and (3.1); R16) At least one director must be a
resident Canadian in all cases.(105(3)) Corresponding amendments have been made to the resident
Canadian quorum requirements for directors’ meetings. (114)
The requirement that a majority of members of committees of the board of directors be
resident Canadians has been eliminated. (115(2) repealed)
As a result of the changes, the CBCA now provides more flexibility than the Ontario Business
Corporations Act but is more restrictive than the corporate statutes of Quebec, Nova Scotia, New
Brunswick, Prince Edward Island and the three territories, which have no director residency
requirements.
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Directors must now notify the corporation of a change of address within 15 days and the
corporation must, in turn, notify the Director. (113(1)(b) and 113(1.1))
Tenure
The election or appointment of a director who was not present at the meeting at which he or
she was elected or appointed will be valid only if the individual consents in writing no later than 10
days after the election or appointment or subsequently acts as a director. (106(9)) Practically, it will
be prudent practice to obtain written consents as a matter of course.
Deemed Directors
The CBCA now implicitly recognizes that all the directors are permitted to resign, leaving the
corporation without directors. If this occurs or if all of the directors have been removed without
replacement, the person who manages or supervises the business and affairs of the corporation is
deemed to be a director. (109(4)) This will not apply, however, to (i) an officer who manages the
business under the direction or control of a shareholder or another person, (ii) a professional who
participates in the management of the corporation for the purpose of providing professional services,
or (iii) a trustee or receiver who realizes on security or administers a bankrupt’s estate. (109(5)) If all
the directors of a corporation have resigned, the Director may dissolve the corporation.
(212(1)(a)(iv))
Disclosure of interest in material contracts and transactions
The disclosure rules for directors and officers have been extended from interests in material
contracts to interests in material transactions. Disclosure will now also be required in situations where
the director or officer of the corporation acts in a capacity similar to a director or officer of another party to
the contract or transaction. (120(1))
The former exception to the general prohibition against voting by an interested director which
permitted a director to vote on a resolution concerning a security agreement for money lent to or
obligations undertaken by him or her has been repealed. (120(5))
Shareholders will be permitted to examine documents and excerpted minutes of meetings of
the directors or of committees of the directors containing a director’s or officer’s disclosure of an
interest in a material contract or transaction. (120(6.1))
Shareholders or the corporation may apply to the courts to set aside a contract or transaction
and/or require the director to account for any profit realized, if he or she has not complied with this
section. (120(8)) Even if the general avoidance standards (compliance with disclosure rules, approval
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by the directors of the contract or transaction and the contract or transaction being reasonable and
fair to the corporation) are not observed, the contract or transaction for which disclosure is required
will not be invalid nor will a director or officer acting honestly and in good faith be accountable to
the corporation or its shareholders for any profits realized, if the contract or transaction is approved
or confirmed by a special resolution of the shareholders after sufficient disclosure and the contract or
transaction is fair and reasonable to the corporation at the time approved or confirmed. (120(7.1))
Scope of responsibility
The directors’ role has been clarified as being either to manage or supervise the management of the
business and affairs of the corporation. (102(1)) Accordingly, the possible inference from the former
text that directors are necessarily responsible for direct, day-to-day management of a corporation has
been eliminated.
Duty of care, indemnification and insurance
In conjunction with the redefined scope of responsibility of directors, a general reasonable
diligence defence has been introduced: a director will not be liable under various liability provisions
of the CBCA (generally relating to employee wages, to issuances of shares for non-monetary
consideration and to various payments which are made while the corporation is insolvent or which
would render the corporation insolvent) and will be deemed to have fulfilled his or her duties to
comply with the CBCA and Regulations and with the corporation’s articles, bylaws and unanimous
shareholder agreement if he or she has exercised the care, diligence and skill that a reasonably prudent person
would have exercised in comparable circumstances. (123(4)) This defence explicitly includes, by way of
example only, the former narrow defence of good faith reliance on reports of professionals or on
financial statements represented by a corporation’s management or auditor to reflect fairly the
corporation’s financial condition. Similarly, a director will be considered to have complied with his or
her duties to act honestly and in good faith with a view to the best interests of the corporation and to
exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances (122(1)) if he or she relies in good faith on such professional reports or financial
statements.
A corporation is now permitted to indemnify present and former directors and officers of the
corporation and other individuals who, at the corporation’s request, act as officers, directors or in a
similar capacity of another entity for any investigative or other proceeding (as well as civil, criminal or
administrative proceedings) in which the individual is involved because of his or her association with
the corporation or other entity. A corporation may now also advance moneys to an indemnified
person for costs of a proceeding but the person is required to repay the moneys if he or she was not
acting honestly and in good faith with a view to the best interests of the corporation or, in the case of
a criminal or administrative action or proceeding enforced by monetary penalty, did not have
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reasonable grounds for believing his or her conduct was lawful. (124(2)) In permitting an advance of
defence costs, the CBCA appears not to require the corporation to be sure, at the time of the
advance, that the charged individual has fulfilled the foregoing conditions. Similarly, an individual
whom a corporation may indemnify has a right to be indemnified by the corporation for his defence
costs relating to the extended range of proceedings if, in addition to fulfilling the general conditions,
he is not judged by the court or other competent authority to have committed any fault or omitted to do anything that
the individual ought to have done. (124(5)) The former version of the provision required the individual to
be “substantially successful on the merits in his defence of the action or proceeding”.
A corporation will now be permitted to purchase and maintain directors’ and officers’ liability
insurance to cover liability relating to failure to act honestly and in good faith with a view to the best
interests of the corporation. (124(6)) It has been left to the insurance market to determine what
coverage may be obtained.
Insider trading
The changes to insider trading rules eliminate duplication and clarify and expand the existing
rules. The insider reporting requirements have been eliminated as being redundant to existing
provincial securities rules. The definition of insider for the purposes of the prohibition of short sales,
puts and calls has been extended to apply to persons employed or retained by a distributing
corporation (126 (1)) and the inclusion of the five highest paid employees of the corporation in the
definition of officer for the purposes of the insider rules has been eliminated. (126(1))
The prohibition against short sales has been expanded to cover transactions relating to a
“security”, a term which includes a debt obligation as well as a share. (130 (1) and 2(1)) The
application of the prohibitions regarding puts and calls has similarly been expanded by referring to a
“security” rather than a “share” but has been narrowed to prohibit only the purchase of put options and
the sale of call options. (130(2)) The civil liability for breach of these provisions has been dramatically
increased from $5,000 to the greater of $1,000,000 and three times the profit made on the transaction. (130(4))
For the purposes of establishing civil liability for insider trading, the definition of “insider” has
been expanded to include the following: directors and officers of affiliates; a person who engages in
or proposes to engage in any business or professional activity with or for the corporation and any
officer or director of such person; a person who proposes to make a take-over bid (defined in the
Regulations by reference to applicable provincial securities legislation - R41) or to enter into a
business combination relating to the corporation and any director or officer or insider of such a
person; a former insider who received material confidential information while an insider; a person
who receives material confidential information from an insider and who knows or ought reasonably to
have known that the person providing the information is an insider; and other prescribed persons (not
yet defined in the Regulations). (131(1), 131(3) and 131(3.1))
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The scope of liability and required degree of knowledge for insider trading have also been
changed to harmonize the provisions with comparable provisions in provincial securities legislation.
The previous requirements that the insider “make use of” information “for his own benefit or
advantage” and that the information be “specific” have been deleted. The newly formulated rule is
to the effect that an insider who trades with knowledge of confidential information which, if
generally known, might reasonably be expected to affect materially the value of the securities of the
corporation, will be liable to compensate any person with whom he trades for damages suffered by that
person unless the insider establishes that: the insider reasonably believed that the information had
been generally disclosed; the information was known or ought reasonably to have been known by the
other person with whom the insider traded; or that the trade took place in circumstances to be set
out in the Regulations. The insider is also accountable to the corporation for any resulting benefit or
advantage unless the insider establishes that he or she reasonably believed that the information had
been generally disclosed. (131(5))
In line with provincial legislation, an insider who tips or discloses confidential information to
another person will be liable for damages to any third party who trades with that other person, subject
to the defences set out above. (131(6)) Additional exceptions to liability for tipping include situations
where the information was given in the ordinary course of business or in connection with effecting a
take-over bid or business combination. (131(6) (c) and (d))
Shareholders
Unanimous shareholder agreements (“USA”)
The Amendments attempt to clarify that the transfer of the directors’ powers to shareholders
under a USA also transfers the obligations and liabilities (and all related defences) of the directors.
(146(5)) How precisely this concept will be applied in cases where the shareholders have not assumed
all the powers of directors remains to be clarified by the courts. New shareholders who are not
informed that a USA is in place will be able to cancel the transaction by which they acquired the
shares within 30 days after they became aware of the existence of the USA. (146(4)) Shareholders are
explicitly permitted to limit their discretion when exercising the powers of directors under a USA
(unlike directors themselves). (146(6))
Meetings
Shareholder meetings may take place outside Canada if such a location is specified in the articles or,
as previously, if all the shareholders agree. (132(2))
Unless the by-laws otherwise provide, attendance and voting at meetings by electronic or other
communication facility is now possible. (132(4) and 141(4)) In addition, if the by-laws so allow,
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meetings will be permitted to be held exclusively by telephone, electronic or other communication
facility (132(5)) and, unless the by-laws otherwise provide, voting at a meeting may be carried out
exclusively by telephone, electronic or other communication facility. (141(3))
The time for holding annual shareholder meetings has been slightly changed (as before, no
later than 15 months after the last annual meeting, but now also, no later than six months after the end of
the previous financial year) (133(1)(b)) and the corporation may obtain a court order extending the time
for calling the annual meeting. (133(3))
The directors may now fix a record date for determining shareholders entitled to vote at a
shareholder meeting. Previously, record dates could be fixed for various purposes, including
determining shareholders entitled to notice of a meeting but excluding determining shareholders
entitled to vote at a meeting. (134(1)) The establishing of a record date for voting would, for
example, preclude a vote by a transferee of shares who becomes owner before the meeting but after
the voting record date. Prior to the amendment, such a transferee would have been entitled to vote
upon proof of the transfer, sometimes engendering possible double counts of votes representing the
same shares.
Proposals
The mechanisms for individual shareholders submitting proposals have been liberalized and a
minimum share ownership level and length of ownership have been prescribed as prerequisites for
submitting a proposal as set out in the Regulations. (137(1.1.)(a) and R46) Beneficial shareholders are
now explicitly entitled to submit proposals (137(1)) and pooling of shareholdings will be permitted
for the purposes of meeting the threshold. (137(1.1)(b))
A corporation will no longer be entitled to reject a proposal for the reason that its purpose is
primarily “promoting general economic, political, racial, religious, social or similar causes” but will
now be entitled to reject a proposal if it “does not relate in a significant way to the business or affairs of the
corporation”. (137(5))
Shareholder communications and proxy rules for distributing corporations
The Amendments have increased the rights of shareholders to communicate among
themselves as long as there is no solicitation of a proxy. Accordingly, “solicitation” has now been
defined to exclude (i) a public announcement (as prescribed in the Regulations - speeches, press
releases and advertisements) of how the shareholder intends to vote (R67), (ii) a communication for
the purpose of obtaining the number of shares required for a shareholder proposal and (iii)
communications in prescribed circumstances such as those which concern the business and affairs of
the corporation but which are not management solicitations. (147, R68)
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Prior to the Amendments, management of all corporations (whether distributing or nondistributing) with 15 or more shareholders were required to send each shareholder a form of proxy in
connection with any annual or special meeting. Henceforth, management will not be required to send
a proxy if the corporation is not a distributing corporation and has fewer than 50 shareholders entitled to
vote at a meeting. (149(2))
Section 150 provides that a person shall not solicit a proxy unless a proxy circular is sent to
each shareholder whose proxy is solicited, the auditor and the directors of the corporation and, if it is
a dissident circular, to the corporation. An exception has been created to this general rule in cases
other than management solicitations if there are 15 or fewer shareholders whose proxies are solicited.
(150 (1.1)) A further exception is provided if a solicitation, other than by management, is made by
public broadcast, speech or publication, in prescribed circumstances (requiring that certain limited
information which would otherwise be required in a dissident proxy circular be conveyed and that
notice and a copy of any publication be given to the Director and the corporation before soliciting
proxies). (150(1.2) and R69)
Financial disclosure and liability
Financial statements and auditors
A distributing corporation is required to send copies of its annual financial statements to the
Director not later than 6 months after the corporation’s preceding financial year. (160)
Where an auditor is being replaced, whether through removal or at the end of his or her term,
the corporation must make a statement containing the reasons for the proposed replacement and the
replacement auditor may make a statement commenting on it (the replaced auditor continues to be
entitled to comment). Copies of these statements must be sent to every shareholder and to the
Director. (168(6))
A person who in good faith furnishes an auditor with any information the auditor requests in
order to make the examinations necessary to report on the financial statements will not be subject to
civil liability for such communication. (170(3))
Modified Proportionate Liability
The Amendments introduce a regime of modified proportionate liability in respect of persons
involved in furnishing financial information required under the CBCA and Regulations. Previously,
individuals found negligent in the preparation of financial information were subject to joint and
several/solidary liability and the injured party could seek full compensation from any of the
defendants found liable. The general rule introduced by the Amendments is that every defendant
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found responsible for a financial loss arising out of an error, omission or misstatement in financial
information that is required under the Act or the Regulations will be liable to the plaintiff only for
the portion of the damages corresponding to the defendant’s degree of responsibility. (237.3)) There
are, however, exceptions to this rule, including reallocation of responsibility amongst the parties in
the event some defendants are insolvent or unavailable. (237.3(2)) The degree to which these new
rules may be beyond the powers of the federal Parliament (in that they deal with tort or extracontractual liability, which is clearly a matter of provincial jurisdiction) remains to be determined.
The joint and several/solidary liability regime would continue to be applicable to designated
categories of plaintiffs, specifically the Crown, Crown agents (unless significantly involved in trading
in securities or other financial instruments), charitable organizations, unsecured trade creditors in
respect of goods or services provided (237.2(2)) and individuals or personal corporations whose
investment in the corporation is below a prescribed threshold ($20,000) (although a court may find
joint and several/solidary liability even if the threshold is exceeded, if the court considers it just and
reasonable to do so). (237.5, 237.6 and R95) In cases of fraud, the defendant would always be
subject to joint and several/solidary liability (although it is to be expected that fraud allegations
would be made sparingly, since fraud may invalidate any insurance coverage). (237.4))
Fundamental changes
Arrangements - Going-private and squeeze-out transactions - right to dissent
The right to dissent has been extended to shareholders of a corporation that resolves to carry
out a “going-private transaction” (“GPT”) or a “squeeze-out transaction”. A GPT is defined in the
Regulations to mean an amalgamation, arrangement, consolidation or any other transaction involving
a distributing corporation (other than a compulsory acquisition) that would result in the termination of
the interest of a participating security holder without consent and without substituting an equivalent
value of participating securities. A “squeeze-out transaction” is a transaction by a non-distributing
corporation that will require an amendment to its articles and result in a shareholder’s interest being
terminated without consent and without substituting an equivalent value of shares. (2(1), 190 (1)(f)
and R3)
The definition of “arrangement” for which court approval may be sought has been expanded
to include GPT’s and squeeze-out transactions. (192(1)(f.1))
GPT’s will be expressly permitted for distributing corporations, subject to compliance with
provincial securities laws (relating to such matters as fairness criteria), if applicable. (193) A squeezeout transaction must be approved by a simple majority of the holders of each class of affected shares,
excluding from the vote, however, affiliates of the corporation and shareholders that will be entitled
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to a greater consideration or superior rights or privileges than those available to other shareholders of
the same class following the squeeze-out transaction. (194)
Compulsory and compelled acquisitions – Former “Take-over bids”
The take-over bid provisions have been eliminated to avoid duplicating subject matter already
regulated by provincial securities laws. Minor changes have been made to the rules respecting the
offeror’s right of “compulsory acquisition” if 90% of the shares have been acquired pursuant to a
take-over bid.(206) A dissenting shareholder must now elect to transfer his shares on the terms
offered or demand payment of their fair value, failing which he will be deemed to have elected to
transfer his shares on the same terms as those on which the offeror acquired shares from accepting
shareholders. In addition, a “compelled acquisition” provision has been added to give minority
shareholders the right to require the offeror to acquire their shares on the same terms as under the
take-over bid if 90% of the shares or a class of shares have been acquired pursuant to the take-over
bid.(206.1) For the purposes of the compulsory and compelled acquisition provisions, the definition
of “take-over bid” has been simplified to mean any offer to shareholders of a distributing
corporation at approximately the same time to acquire all the shares of any class, including an offer
by the corporation to repurchase all shares of a class of its shares, and “share” has been redefined to
include non-voting as well as voting shares. (206(1))
A corporation making an offer to repurchase its own shares (an “issuer bid”) must now place
the payment owing to dissenting offerees in trust in a separate bank account within 20 days after the
notice of compulsory acquisition is sent.(206(7.1)) The corporation making the issuer bid will not be
entitled to cancel a dissenting shareholder’s share certificates unless the foregoing provision has been
complied with.(206(8)(c)) It has been made explicit that a corporation cannot issue to an offeror who
exercises his compulsory acquisition right a share certificate corresponding to the dissenting
shareholders’ shares unless the offeror has paid to the corporation the amount required to be held in
trust for dissenting shareholders. (206(8)(a) and 206(6))
Liquidation and dissolution - revival
The provisions relating to the revival of a dissolved corporation have been amended and
clarified. In addition to permitting the Director to impose reasonable conditions precedent before
issuing a certificate of revival (209(3)(a)), the Amendments state that the revived corporation is
restored to its previous position in law, including the restoration of any rights and privileges arising before
or after its dissolution, and is liable for the obligations it would have had but for its dissolution arising
before or after its dissolution. (209(4))
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As well, any legal action in respect of the affairs of a revived corporation taken between the
time of its dissolution and revival is valid and effective.(209(5)) How these provisions will impact on
legal actions which have been finally determined before revival remains to be clarified.
Miscellaneous
Electronic Communications
The Amendments permit corporations to employ new and emerging technologies to
communicate with shareholders. A notice, document or other information required under the CBCA
or the Regulations may be provided as an electronic document if the addressee consents but
addressees will have the option of revoking their consent and insisting on paper-based
communications. (252.3(2)) Similarly, shareholders will not be able to force the corporation to send
information electronically if the corporation wishes to continue using paper.(252.3(1)) The
Amendments also address the conditions under which electronic documents and electronic
signatures will be considered to satisfy requirements in the CBCA or the Regulations for (i) the
creation or furnishing of notices, documents or other information, whether generally or specifically
in writing, (ii) signature or execution of documents and (iii) the creation or furnishing of statutory
declarations and affidavits (252.4, 252.5, 252.6 and 252.7) Generally, the conditions require
compliance with any applicable regulations and that the by-laws or articles of the corporation do not
provide otherwise. The new provisions do not, however, apply to notices, documents or other
information to be sent to or by the Director or to any “prescribed” notice, document or other
information. (252.2)
Registered office and records
The registered office, which must be specified in a corporation’s Articles, may now be
designated simply by reference to the “province” in which it is located, as opposed to the “place”.
(6(1)(b) and 19(1)) Subject to certain tax statutes, a corporation will be entitled to maintain records
outside Canada if the records are accessible by computer terminal in Canada. (20(5.1))
Persons wishing to access the securities register or shareholder’s list of a corporation will be
required to file an affidavit that the information received by them will only be used in connection
with the matters permitted pursuant to subsection 21(9).
A corporation will not be obliged to adopt a corporate seal. (23)
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Corporate interrelationships
A corporation may now permit any of its subsidiaries to acquire shares of the corporation in
the subsidiary’s capacity as legal representative or by way of security for purposes of a transaction by
the subsidiary in the ordinary course of business that includes lending. (31(3)) In an effort to allow
foreign subsidiaries to acquire shares of their CBCA parents for the purpose of merging with or
acquiring a foreign corporation, a CBCA corporation may also permit any subsidiary to acquire
shares of the corporation by issuance of such shares provided prescribed conditions precedent and
subsequent are met. The Regulations also prescribe the consequences of a subsidiary’s purchasing
shares in breach of these provisions. (31(4),(5) and (6) and R35 to 38))
Contract to redeem shares
A contract requiring the corporation to purchase its own shares is not enforceable if the
corporation can prove that it could not pass the financial tests in section 36 governing redemption of
shares or would be in breach of section 34 and 35 with respect to acquisition of its own shares.
(40(1))