Amendments To Business Corporations Act (Ontario)

Recently, the Provincial government introduced new legislation that will reform business law in Ontario. Bill 152, which received Royal Assent on December 20, 2006, will result in considerable changes to, among other statutes, the Business Corporations Act (Ontario) (“OBCA”). This new piece of legislation is actually the second of three phases of business law reforms the government committed to in 2005. The following is a summary of the amendments to the OBCA, which amendments are expected to come into force on August 1, 2007:

Indemnification of and Insurance for Directors
Bill 152 provides increased indemnity and insurance protection for directors and officers. For example, officers and directors who are held by a court or tribunal of competent jurisdiction not to have committed any fault or omission are now entitled to indemnification. This represents a considerable change from the former regime in which an officer or director could only be indemnified by the corporation if he or she was substantially successful on the merits of the defence.

The new indemnification provisions will also extend to directors and officers of a corporation or those acting on behalf of the corporation for another entity including non-corporate entities such as partnerships, trusts, joint ventures, limited liability companies and unincorporated organizations.

In response to increased regulatory scrutiny, indemnification of directors, which has generally been limited to civil, criminal and administrative proceedings, will soon extend to investigative and other proceedings, such as an investigation by a provincial securities commission. Further, Bill 152 will permit a corporation to advance funds to a director to cover actual defence costs. This ability to advance funds may also apply to derivative actions, subject to court approval.

Liability of Directors
In an attempt to clarify any confusion resulting from the Supreme Court of Canada’s decision in Peoples Department Stores Inc. (Trustee of) v. Wise, Bill 152 confirms that directors and officers owe a statutory duty of care exclusively to the corporation and not to any other stakeholder, including creditors.

Directors can now rely on a reasonable due diligence defence for certain claims including claims for unpaid employee wages and expenses as well as for failing to comply with the OBCA.

Conflict of Interest
Consistent with past amendments to the Business Corporations Act (Canada), Bill 152 establishes that in addition to abstaining from a vote, a conflicted director cannot even participate or attend a meeting wherein the subject matter to which he or she is interested is being discussed.

Board and Committee Residency Requirements
Under Bill 152, the Canadian residency requirement for directors of an Ontario corporation will be reduced from a majority (51%) to 25% of the directors. This change, however, will not supersede a corporation’s existing by-laws. Still, it may be prudent for corporations to review and possibly amend by-laws that had codified the former residency requirement.

Further, Bill 152 will eliminate any requirement that a minimum number of resident Canadians attend at board meetings or sit on any board committees. It is also important to note that the managing director of an Ontario corporation is no longer required to be a Canadian resident.

Share Capital
Bill 152 confirms that a corporation may issue separate classes of shares with identical attributes. Previously, in order to comply with the OBCA, it was thought necessary to distinguish between classes of shares by attaching different rights, restrictions or conditions to the respective classes.

Unanimous Shareholder Agreements
Shareholders who are a party to a unanimous shareholders’ agreement are now afforded the same defences as are available to the directors of the corporation. However, such defences are available only to the extent that the agreement restricts the powers of directors to manage and supervise the business and affairs of the corporation.

In addition to the foregoing amendments, certain other changes to the unanimous shareholder agreement provisions already came into force on January 1, 2007 to address the issue of how and when such agreements bind new shareholders. The impact will be that, subject to the exceptions noted below, anyone who acquires shares, whether as a transferee or through a new issue of shares, is deemed to be a party to any unanimous shareholder agreement regardless of whether notice was given. Previously, only those transferees of shares that received notice by way of a marked share certificate could be deemed to be parties to an existing unanimous shareholder agreement.

There is, however, an important caveat to this change. If the shareholder acquired their shares directly from the corporation and did not receive notice of an existing unanimous shareholder agreement, he or she may rescind the contract under which the shares were acquired within 60 days of receiving the unanimous shareholders agreement. On the other hand, if the shareholder acquired their shares as a transferee, the shareholder may either rescind the contract as outlined above or demand the transferor pay the greater of fair market value and the original purchase price. This is provided that notice of an objection to the transfer is given to the corporation and the transferor within 60 calendar days of receiving the unanimous shareholders agreement.

Bill 152 amends a number of other provisions of the OBCA, including areas such as financial assistance, proxy solicitation rules, shareholder proposals and the circulation of financial statements. For further details you may access a copy of Bill 152 at the following link: https://www.ola.org/en/legislative-business/bills/parliament-38/session-2/bill-152

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.