This country-specific Q&A provides an overview to Corporate Governance laws and regulations that may occur in Canada.
What is the typical organizational structure of a company and does the structure typically differ if the company is public or private?
Who are the key corporate actors (e.g., the governing body, management, shareholders and other key constituencies) and what are their primary roles? How are responsibilities divided between the governing body and management?
Typically, ownership of a corporation, being the shareholders, and management of the corporation, being the board of directors and the officers, have separate and distinct roles. The shareholders’ main responsibility is to exercise their voting rights to, among other things, elect directors and participate in other fundamental decisions of the corporation. Certain transactions, under either corporate or securities law, as applicable, require varying levels of approval by shareholders including, in limited situations, “majority of minority” approval by unconflicted shareholders.
The board of directors is responsible for managing or, more commonly, supervising the management of the business and affairs of the corporation, with a view to the best interests of the corporation. These duties include appointing the corporation’s officers, who are in turn responsible for the day-to-day affairs of the corporation and reporting to the board of directors.
What are the sources of corporate governance requirements?
What is the purpose of a company?
A Canadian corporation is a legal person established under either the Canada Business Corporations Act (the “CBCA”) or the corresponding provincial or territorial corporate statutes for the purpose of carrying on business or otherwise shielding the shareholders from potential liability. A corporation is capable of, among other things, accumulating debt, issuing share capital and entering into contracts. Shareholders of traditional limited corporations have limited liability. Certain corporate statutes in Canada also provide for unlimited liabilities corporations which render their shareholders subject to the liabilities of the corporation.
Is the typical governing body a single board or comprised of more than one board?
How are members of the governing body appointed and removed from service?
Directors are elected by the shareholders, typically at an annual meeting. In the event of a vacancy between shareholder meetings, a limited number of directors may also be appointed by the board of directors unless in certain situations such authority has been withheld by the shareholders. The board of directors cannot unilaterally remove a director. Shareholders may remove a director with the approval of a majority of the shareholders who cast their votes at a special meeting of shareholders called for such purpose.
Who typically serves on the governing body and are there requirements that govern board composition or impose qualifications for directors regarding independence, diversity or succession?
Any person serving as a director of a CBCA corporation must be 18 years of age or older, must not have an “unsound mind”, must be an individual, and must not be bankrupt. Additionally, at least one quarter of directors of a CBCA corporation must be Canadian residents. If there are less than four directors of a CBCA corporation, at least one director must be a Canadian resident. Other Canadian provincial or territorial corporate statutes provide for a variety of residency requirements, including in some statutes there being no such requirement.
Corporate statutes generally require that public companies have not less than three directors, a majority of whom are not officers or employees of the corporation or any of its affiliates, while securities laws require, subject to certain exceptions, that a board be comprised of at least three directors that are “independent”. Non-binding securities regulatory guidelines also generally provide that a boards of directors should have a majority of “independent” members. A director is considered “independent” under securities law if he or she has no direct or indirect material relationship with the corporation, its subsidiary or any controlling shareholder that would reasonably be expected to interfere with the exercise of a director’s independent judgment.
While diversity, especially gender diversity, has been a recent corporate governance trend, there are currently only securities regulatory guidelines and disclosure requirements concerning diversity, with no binding requirements on inclusive practices.
What is the common approach to the leadership of the governing body?
What is the typical committee structure of the governing body?
While committee structures can vary widely, examples of common board committees include (i) an audit committee (required for public companies), (ii) a governance and nomination committee, (iii) a compensation committee, and (iv) if necessary, ad hoc special committees assembled on as needed basis to consider conflict of interest matters.
How are members of the governing body compensated?
Director compensation is determined by the board of directors or a committee thereof and shareholder approval of such remuneration is not required. As a matter of transparency and disclosure, in accordance with applicable securities laws, public companies are required to disclose the processes by which a board of directors determines its compensation. Director compensation typically includes fees (per meeting and/or as an annual retainer, which may be higher for the chair of the board or any committee) and may include share-based compensation. It is increasingly uncommon for directors to be compensated with stock options.
Are fiduciary duties owed by members of the governing body and to whom are they owed?
Directors owe the fiduciary duty to the corporation. When discharging their duties, directors must act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In determining the nature of the best interests of the corporation, under Canadian law the directors may consider the interests of classes of stakeholders, such as shareholders, creditors or employees, among others.
Do members of the governing body have potential personal liability? If so, what are the key means for protecting against such potential liability?
Directors have potential personal liability for actions of the corporation under a variety of statutes in Canada including corporate law, employment law, environmental law, tax law and securities law. Corporate law allows a corporation to indemnify directors acting in such a capacity provided that the director has acted honestly and in good faith with a view to the best interests of the corporation. Corporate law also permits a corporation to purchase insurance against any liability which may be incurred by directors acting in such capacity.
How are managers typically compensated?
Remuneration of senior management is determined by the board of directors or a committee thereof, while the compensation of non-senior members of management may be determined by senior management. In accordance with securities law, public companies are required to disclose the processes by which compensation for the management is determined. Such compensation typically includes salary and bonus, and may include stock options and/or other share-based compensation, a pension, benefits and perquisites.
How are members of management typically evaluated?
Management is commonly evaluated using performance metrics based on the short-term and long-term business objectives of the corporation as well as personal development objectives, although such practices and the formality thereof vary widely among corporations.
Do members of management typically serve on the governing body?
What are the required corporate disclosures, and how are they communicated?
All companies are required to send annual financial statements to shareholders in advance of their annual meeting of shareholders. Securities law requires public companies to make certain public disclosures of material information and documents on a continuous basis through market dissemination and filings on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website. These continuous disclosure obligations include the dissemination and/or filing of annual and quarterly financial statements, management discussions and analysis, annual information forms, management information circulars (which, among other things, contain detailed disclosure relating to governance practices and compensation) and proxy forms, reports on voting results, material contracts, and reports, news releases and other disclosure documents relating to material information regarding the corporation, its business and its securities.
How do the governing body and the equity holders of the company communicate or otherwise engage with one another?
Are dual or multi-class capital structures permitted and how common are they?
Corporations from a variety of industries have adopted dual class capital structures in Canada. Dual class structures remain relatively uncommon but have been a fixture of the Canadian financial markets for over 65 years. All dual class capital corporations listed on Canada’s senior stock exchange, the Toronto Stock Exchange (“TSX”) must have coattail requirements (except those grandfathered) granting rights to the subordinate voting share class to participate in a take-over bid made for the superior voting share class. Securities law requirements also apply to the creation of, or conversion to, a dual class capital structure at a public company, so such structures are typically implemented in connection with the company’s initial public offering.
What percentage of public equity is held by institutional investors versus retail investors?
What matters are subject to approval by the shareholders and what are the typical quorum requirements and approval standards? How do shareholders approve matters (e.g., voted at a meeting, written consent)?
Shareholders are required to elect the board of directors, appoint an auditor and receive annual financial statements on an annual basis. Corporate laws also require that certain transactions and fundamental changes to the corporation be approved by shareholders. TSX-listed issuers also require shareholder approval for certain share capital transactions where such approval may not otherwise be triggered under corporate law. Quorum requirements for Canadian companies vary, but 20% to 30% is a common standard.
The election of directors is by plurality in Canada and shareholders can withhold their vote from the election of a director, but are unable to vote against such election. However, the TSX requires the adoption of a majority voting policy for elections where the number of candidates is equal to the number of available board seats, pursuant to which elected directors must tender their resignation is they do not receive a majority or votes in favour of their election.
Most matters that are subject to shareholder approval require only a simple majority of the votes cast by the shareholders present or represented by proxy at a shareholder meeting. Fundamental change transactions typically require approval by two-thirds of the votes cast and in certain circumstances securities laws may also require class approval or approval of a majority of unconflicted shareholders, again on the basis of votes cast. Amendments to the articles of a corporation typically require approval by at least two-thirds of the votes cast by shareholders and amendments to the by-laws of the corporation typically require approval by a simple majority. In order to be effective, written consents of shareholders require unanimous approval, so are not a feasible means of approval for a public corporation.
Are shareholder proposals permitted and what requirements must be met for shareholders to make a proposal?
Canadian corporate statutes entitle shareholders to submit proposals describing matters the shareholders wish to raise at shareholder meetings. The CBCA requires that the proposer must have been held shares either equal to 1% of the total number of the outstanding voting shares of the corporation or whose fair market value is at least C$2,000, for at least six months. A proposal may include nominations for the election of directors if the proposer holds shares representing not less than 5% of the shares of a class of shares of the corporation entitled to vote at the meeting. Proposals meeting the requisite criteria must be included by the corporation in the management information circular prepared and submitted to shareholders in advance of the meeting.
May shareholders call special meetings or act by written consent?
Shareholders holding no less than 5% of the issued shares may requisition that the board of directors call a special meeting. Subject to certain limited exceptions, upon receipt of such requisition, the board has a prescribed period of time within which it must call a shareholders meeting or the requisitioning shareholder may apply to a court to have a date set. Shareholder action may also be taken by written resolution signed by all shareholders who would be entitled to vote at a meeting.
Is shareholder activism common and what are the recent trends?
While shareholder activism has traditionally been less prevalent in Canada than in the U.S., it has been on the rise in Canada, both as a result of U.S. activist shareholder activity in Canada and increased participation by Canadian institutional investors.
There has recently been a trend away from “activism” and towards “engagement” by management and boards with a wider base of shareholders. The corporate governance and investor stewardship principles espoused by many major U.S. companies and investors appear to be gaining traction in Canada as well. The scope of shareholder proposals has expanded to encompass a broad range of issues such as environmental, social and governance matters (“ESG”) and ‘say on pay’ votes on executive compensation.
What is the role of shareholders in electing the governing body?
Through voting, shareholders control the composition of the board of directors. Shareholders also have the ability to nominate directors for election through the preparation and mailing of a dissident proxy circular, exempt solicitation, shareholder proposal or floor nomination, depending on meeting eligibility criteria in certain situations.
Majority voting requirements provide that each director of a TSX-listed corporation must tender their resignation to the board if not elected by a majority of the votes cast with respect to his or her election, other than at contested meetings.
Are shareholder meetings required to be held annually or otherwise, and what information needs to be presented?
Do any organizations advise or counsel shareholders on whether to approve matters?
What role do other stakeholders, including debt holders, employees, suppliers and customers and the government, typically play in the corporate governance of a company?
Employees are generally expected to comply with corporate policies, such as a code of ethics and business conduct. In addition, securities laws require audit committees of public companies to establish procedures whereby employees may submit concerns regarding questionable accounting or auditing matters or procedures on a confidential basis.
Corporate law requires that directors, when discharging their duties, act honestly and in good faith with a view to the best interests of the corporation. Canadian jurisprudence provides that in doing so directors are permitted to consider non-shareholder stakeholder interests, including creditors, suppliers, employees and customers. With respect to creditors, corporate law affords an added layer of protection by prohibiting directors from distributing capital or assets to shareholders where such distributions would render the corporation unable to pay debts as they come due.
What consideration is given to environmental and social issues, including climate change, sustainability and product safety issues, and are there any legal disclosure obligations regarding the same?
Corporate performance on ESG matters has received heightened attention in Canada in recent years. Public companies are required to provide disclosure concerning risks and trends in their businesses which may include environmental and social matters. The Canadian securities regulatory authorities also provide guidelines to companies on their corporate governance structure and practices which address legal compliance and the reporting of illegal or unethical behaviour.
How are the interests of shareholders and other stakeholders factored into decisions of the governing body?
Canadian corporate law requires that directors, when discharging their fiduciary duty, act honestly and in good faith with a view to the best interests of the corporation they serve. Canadian boards would be expected to give considerable attention to the interests of shareholders, among other stakeholders, when determining the best interests of the corporation. Corporate statutes also provide that shareholders and creditors may seek remedial orders in respect of action by the corporation which is oppressive, unfairly prejudicial or unfairly disregards their interests. In determining courses of conduct, corporate boards are required to consider the reasonable expectations of shareholders and creditors to ensure that their actions are not oppressive, unfairly prejudicial and do not unfairly disregard interests.
Do public companies typically provide earnings guidance on either a quarterly or annual basis?
May public companies engage in share buybacks and under what circumstances?
The repurchase of equity or voting securities (or securities convertible into equity or voting securities) by public companies in Canada is referred to as an “issuer bid” and is subject to certain rules meant to ensure that all shareholders are treated equally. It is possible for companies to effect large repurchases in what are referred to as “substantial issuer bids” by preparing a bid circular containing prescribed disclosure and following certain prescribed procedures, including keeping the bid open for a minimum of 35 calendar days. In the alternative, companies can effect normal course issuer bids through the facilities of the TSX for up to the greater of 10% of the issuer’s public float and 5% of the issued and outstanding securities of the class that that are subject to the bid. Public companies can also repurchase securities from employees and securities that are redeemable in accordance with their terms.
What do you believe will be the three most significant issues influencing corporate governance trends over the next two years?
Since 2014, the CSA have required TSX-listed issuers to disclose whether they have adopted a written policy relating to the nomination of women directors and executive officers and, if so, how the board or its nominating committee measures the effectiveness of such policy. If no policy has been adopted, issuers must disclose why not. Gender diversity continues to be an important issue for Canadian boards.
To further support diversity on boards and in senior management of federal companies, recent amendments to the CBCA (implementation of these amendments is pending) will require public companies to annually disclose their diversity policies and targets, if any, as well as statistics regarding representation of “designated groups” (such as women, visible minorities and Aboriginal peoples) on the board and at the executive officer level.
“Say-on-pay” is an advisory vote whereby shareholders are provided with the right to approve, on a non-binding basis, the approach to executive management compensation disclosed in the corporation’s management proxy circular for the previous fiscal year. Unlike the U.S. and the U.K., Canadian corporate and securities laws do not obligate companies to hold say-on-pay votes. The Canadian Coalition for Good Governance has recommended that companies hold an annual say-on-pay advisory vote and that the board take the results into account when considering compensation policies, procedures and decisions. The results of a vote can also be useful to determine whether there has been sufficient shareholder engagement.
Recent amendments to the CBCA (implementation of these amendments is pending) will permit shareholders to vote against the election of individual directors (rather than just withholding their voting support) and provide that a director is only elected to the board if he or she receives more votes in their favour than votes against. The imposition of this majority voting standard will be a significant departure from past practice in Canada.