Understanding the New Amendments to the Canada Business Corporations Act

Gregory Ringkamp, 3L, Volume 78 Senior Editor

The Budget Implementation Act, 2019, No 1, SC 2019, c 29 (“Bill C-97”) introduces a number of measures intended to promote corporate transparency and governance. It is the most significant update to the statutory fiduciary duty since the Supreme Court’s 2008 decision in BCE Inc v 1976 Debentureholders, 2008 SCC 69. It also introduces disclosure obligations that will make it easier to track diversity among senior management, and to uncover criminal activity like money laundering and fraud.

Bill C-97 received royal assent June of 2019, but a number of its provisions have still yet to come into effect. This post outlines Bill C-97’s likely impact on the statutory fiduciary duty and on corporate disclosure obligations.

Statutory Fiduciary Duty

Section 122(1)(a) of the Canada Business Corporations Act, RSC 1985, c C-44 ("CBCA") requires directors to act with a view towards the “best interests of the corporation ” This statutory fiduciary duty protects the corporation from being harmed by directors’ improvident or self-interested decisions.

Prior to Bill C-97, the content of the statutory fiduciary duty had largely been filled in by the courts. The duty to act in the best interests of the “corporation” was, for many years, interpreted as a duty to act in the best interests of the shareholders; the so-called duty of “shareholder wealth maximization” (see e.g. Hercules Management Ltd v Ernst & Young, [1997] 2 SCR 165 at para 60).

The Supreme Court revisited the fiduciary duty in 2004 in the case of Re People’s Department Stores Ltd (1992) Inc, 2004 SCC 68. The Court asserted that “various other factors” besides shareholder wealth maximization, including the interests of corporate stakeholders, “may be” relevant in determining the content of the fiduciary duty. [1] The Court went further in BCE v 1976 Debentureholders. It asserted that the obligation to treat stakeholders fairly was a “component” of the fiduciary duty, implying a director had to consider the interests of stakeholders to properly discharge her fiduciary duty. [2]

C-97 codifies the permissive standard for the statutory fiduciary duty laid out by the Supreme Court in People’s. It allows directors latitude to consider the interests of stakeholders other than the shareholders when discharging the fiduciary duty, without requiring them to do so. [3] It should bring clarity to shareholder remedies by clarifying that not every breach of the statutory fiduciary duty will ground an oppression remedy.

Background on the statutory fiduciary duty and shareholder remedies

Before BCE, the fiduciary duty played an indirect role in protecting corporate stakeholders. By protecting the corporation, it protected stakeholder interests that depended on the well-being of the corporation. The classic example was a shareholder’s interest in the value of her shares, because the value of a share is a function of the well-being of the corporation.

But stakeholders found it difficult to enforce the fiduciary duty and thus to protect their dependent interests. Since the corporation possessed separate legal personality, only the corporation itself could sue for a breach of the statutory fiduciary duty. [4]

Unfairness resulted. If directors failed to uphold their fiduciary duties, the resulting harm to the corporation could flow indirectly to the stakeholders’ dependent interests – and if the corporation failed to sue, stakeholders would have no way to redress the harm. To allow stakeholders to redress harm to their dependent interests, Parliament devised the statutory “derivative action.” [5] The derivative action allowed a stakeholder to sue on behalf of the corporation, for the benefit of the corporation, in order to restore the well-being of the corporation on which her interests depended. 

Parliament and the courts also recognized that stakeholders held some interests that were not merely dependent on, or derived from, the corporation’s well-being. These were interests, for example, in advancing the stakeholder’s own rights and goals. They were not submerged in the corporate structure, but were held personally. Parliament devised the oppression remedy to redress harm to reasonable expectations held by the shareholder in respect of these personal interests. [6]

In BCE, the Court essentially collapsed the two remedies. The Court stated that stakeholders could “reasonably expect” to have their interests fairly treated in the exercise of a fiduciary duty. [7] A reasonable expectation to have one’s owninterests fairly treated, in the manner contemplated in BCE, is surely an example of a reasonable expectation held in respect of a personal interest – the violation of which would be redressed by an oppression remedy. The Court therefore implicitly grounded a claim for oppression in every exercise of a fiduciary duty.

As a basic matter, shareholders always prefer to sue in oppression, because a successful oppression claim leads to a payout to the shareholder, rather than to the corporation. A shareholder would typically only be launching a derivative action to protect her share value, by redressing a wrong to the well-being of the corporation on which her share value depended. But after BCE, she could shortcut any recovery to the corporation and sue directly in oppression, alleging that the directors failed to fairly consider her interest in her share value. 

Therefore, it is not clear why any shareholder would sue using the derivative action for harm to her share value after BCE. The derivative action and oppression remedy would have essentially the same standard of liability in these circumstances, because a lack of consideration given to shareholder interests would ground both a breach of fiduciary duty and BCE’s new obligation of fair treatment. There would be no benefit to using the derivative action.

The role of Bill C-97 in undoing BCE

Bill C-97 stands to bring much-needed clarity to the distinction between the derivative action and oppression remedy.

Bill C-97 codifies the permissive standard for considering stakeholder interests from People’s. It amends the statutory fiduciary duty to clarify that, when exercising their fiduciary duty, “the directors and officers of the corporation may consider, but are not limited to” considering the interests of various stakeholders. [8] The permissive language of Bill C-97 seems to head off BCE’s suggestion that treating stakeholders “fairly” is a necessary component of the fiduciary duty. It prevents an oppression remedy from being grounded in every exercise of fiduciary duty, and preserves the distinction between the two shareholder remedies.

That reading of C-97 would accord with the policy rationale originally cited by the Court for broadening the fiduciary duty. The original reason that the Court in Peoples’ permitted directors to consider other interests besides the stakeholders’ was to allow directors to act for a broader social purpose, not to require directors to consider these broader purposes in order to discharge their fiduciary duty. [9]

Disclosure obligations

Bill C-97 also implements a wide range of disclosure obligations, related both to the exercise of the statutory fiduciary duty, and to other ends.

Regarding diversity and well-being

Bill C-97 requires directors to present information regarding “the well-being of employees, retirees and pensioners” and “diversity among directors and ‘members of senior management’” at every annual meeting. [10] Unlike the amendments to the statutory fiduciary duty, these measures are not yet in effect.

Employees, retirees, and pensioners are three of the stakeholder groups that may be considered by directors when discharging the amended statutory fiduciary duty. Since an exercise of fiduciary duty attracts deference, there is a concern that directors could insulate their decisions from judicial scrutiny by tying them to amorphous goals to improve the condition of stakeholder groups, including employees, retirees, and pensioners. An obligation to disclose information on their well-being will help shareholders to understand whether directorial actions purported to advance employee, retiree, and pensioner interests are legitimate. In that respect, it should advance both corporate transparency and good corporate governance. 

The diversity obligation responds to concerns about the underrepresentation of certain disadvantaged groups within corporate senior management. Bill C-97 requires a corporation to reveal its policies about the identification and nomination of senior managers belonging to “designated groups” within the meaning of the Employment Equity Act – including “women, Aboriginal peoples, persons with disabilities, and members of visible minorities”. [11]

Regarding pay

The say-on-pay measures in Bill C-97 would require directors to set forward at each annual general meeting the “approach with respect to remuneration” of “members of senior management.” [12] The approach would be approved or rejected by a non-binding shareholder resolution, the results of which would be disclosed to the public. The say-on-pay measures in Bill C-97 have yet to come into effect. 

In general, say-on-pay measures reflect the understanding that directors are only weakly incentivized to act in the best interests of shareholders when designing executive compensation packages. Although the shareholder vote contemplated by Bill C-97 would be non-binding, it would likely be persuasive for existing and potentially future directors, because new directors and managers are elected at annual general meetings. In any case, it would bring welcome clarity to the approach used by Canadian corporations to determine compensation packages.

Say-on-pay measures are especially useful for protecting shareholder interests in Canada because of the relative deference afforded to directors by the CBCA statutory fiduciary duty. Because the post-People’s fiduciary duty is not owed to the shareholders (as it is in the United States), it is not clear that the fiduciary duty is adequate to protect shareholder interests in executive compensation. Say-on-pay measures will provide a more tailored method of safeguarding those shareholder interests.

Regarding anti-money laundering

Bill C-97 also introduces measures intended to uncover money laundering. Bill C-25, assented to in 2018, required corporations to create a register of shareholders with greater than 25% ownership by market value or voting power, and to record identifying information about those shareholders in the register. [13] Bill C-97 lays out a procedure for law enforcement to access the information contained in that “significant control” register. Taken together, the measures in Bills C-25 and C-97 allow law enforcement to more easily trace funds hidden within the corporation. 

Bill C-97 allows an investigative body, including the Canada Revenue Agency or a police force, to compel disclosure of the significant control register when it has “reasonable grounds to suspect” that the register is relevant to investigating an offence, and that the corporation was involved in the offence or its coverup. [14]

The anti-money laundering provisions of Bill C-97 respond to a problem of corporate transparency. Money can easily be laundered through the purchase and sale of shares of privately-traded corporations, which, because they are unlisted on stock exchanges, are not subject to exchange disclosure requirements. The UK has already implemented public significant control registers to combat money laundering, with arguable success.

Corporate law after Bill C-97

Bill C-97 should narrow the scope of the oppression remedy, and ensure that it does not subsume the derivative action as a remedy for breaches of the fiduciary duty. Its new disclosure obligations will ensure that shareholders, the public, and law enforcement agencies have greater access to corporate information. Together, its provisions stand to bring greater transparency and clarity to Canada’s corporate law regime.

Notes

[1] People’s at para 42.

[2] BCE, at paras 36, 82

[3] CBCA, s 122(1.1)

[4] Foss v Harbottle (1843), 67 ER 189.

[5] CBCA, s 239.

[6] Dickerson Committee Report at para 484.

[7] BCE at para 64.

[8] CBCA, s 122(1.1), emphasis added.

[9] See para 42 of Peoples’, quoting Teck v Millar (1972), 33 DLR (3d) 288: “But if [the directors] observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.”

[10] CBCA, ss 172.1, 172.2

[11] Canada Business Corporations Regulations, 2001, SOR/2001-512, s 72.2(1)

[12] CBCA, ss 172.4(1), 125.1

[13] Bill C-25, SC 2018, c 28

[14] CBCA Regulations, ss 21.31(1), 21.31(2), 21.31(3).