Regulatory Impact Analysis Statement – Amendments to the Canada Cooperatives Regulations

(This statement is not part of the Regulations.)

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Description

Bill S-11 which received royal assent on June 14, 2001 amends both the Canada Cooperatives Act (CCA) and the Canada Business Corporations Act (CBCA). The federal cooperatives statute was reformed in 1998 and was modelled after the CBCA. When it was adopted by Parliament, the CCA already incorporated a number of the amendments that have just been made to the CBCA under Bill S-11. However, many issues were set aside in the 1998 reform, pending ongoing consultations on the CBCA. The Bill S-11 amendment completes the reform of the CCA.

Bill S-11 will come into effect once the regulatory framework is in place. The regulations amend the current Canada Cooperatives Regulations to include the following new regulations:

  • definition of "distributing cooperative"
  • electronic documents
  • combined English and French form of cooperative name
  • insider trading
  • electronic meeting
  • shareholder proposals
  • proxy solicitation and proxy circular exemption
  • modified proportionate liability
  • cancellation of certificates
  • reduction of incorporation and annual return fees
  • transfer of prescribed requirements to the regulations

Definition of "distributing cooperative"

The 1998 reform of the federal cooperatives legislation enhanced cooperatives' competitiveness by allowing them to access capital markets through theissuance of investment shares. Generally speaking, a distributing cooperative is a cooperative that receives some of its funds through investment shares. These shares may be distributed to the public and publicly listed on an exchange. In the regulations, the definition of "distributing cooperative" is based on the provincial security legislation definitions of "reporting issuer". Cooperatives that are subject to an exemption under provincial legislation are not considered distributing cooperatives.

Electronic documents

The amendments to the CCA permit cooperatives to use electronic documents in communicating with its members or any shareholders. The regulations fix the manner in which consent to electronic communication may be given (and revoked) and allow documents to be posted on websites provided the addressee receives notice about the location of the document. Certain documents cannot be posted on websites, however, namely documents required by the CCA to be sent to a specific place such as a registered office. When documents must be sent to several addressees, the regulations require the documents be sent to addressees at the same time, regardless of the manner in which it is being provided. Documents may also be sent to a specific information system instead of the specific place established in the CCA, such as the registered office of the cooperative. Finally, the regulations clarify that an electronic document is considered to have been received when it enters an information system, such as a server, or if it is made available through a website or other electronic source, when the notice of the availability is received by the addressee. The notice could be sent electronically and is considered received when it enters an information system designated by the addressee.

The electronic documents regulations do not apply to the transmission of security certificates and to documents or information sent to or issued by the Director. The Director administratively specifies how these electronic documents are to be sent.

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Combined English and French form of cooperative name

The CCA was amended to allow combined English and French names for cooperatives. The regulations establish the criterion for English and French forms which is that the name can include only one legal element such as "cooperative" or "coopérative" but not both. The regulations also make some minor changes to the existing name regulations to ensure that they are consistent in substance with the name regulations under the CBCA. When the name regulations under the CCA were first enacted, the intention was not to deviate from the substance of the CBCA name regulations unless they did not apply in the cooperative context.

Insider trading

The regulations specify the number of voting investment shares that an individual must hold to be deemed an "insider" of a cooperative since the number is no longer set out in the CCA. (See section on Transfer of prescribed requirements to regulations for a discussion on the policy decision in Bill S-11 to prescribe certain requirements in the regulations rather than in the statute.) The prescribed amount of ten per cent is not a change from the former statutory requirement. The CCA was also amended so that a person who proposes to make a take-over bid is deemed to be an insider. The definition of "take-over bid" is also set out in the regulations. Consistent with the objective of harmonizing federal and provincial law wherever possible, the definition of "take-over bid" incorporates the relevant provincial definitions.

In addition, the regulations set out the circumstances under which an insider is exempt from liability: where the insider was acting as an agent or trustee; where the insider participated in an automatic dividend reinvestment plan; and where the insider was fulfilling a legal obligation.

Electronic members' or shareholders' meeting

The regulations permit members and shareholders to vote by telephonic or electronic means provided that the voting mechanism allows a verification of the votes cast while preventing the cooperative from finding out how a particular member voted.

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Proposals

The CCA has been amended to enhance the rights of investment shareholders to make a proposal to amend the articles of a cooperative at an annual meeting of members and shareholders (a "proposal"). To be eligible to submit a proposal, a person must hold, or have the support of persons who hold, 1 percent of the total number of outstanding investment shares of the cooperative or the number of shares with a value of $2 000. The person or those supporting him or her must have held the shares for at least six months. A cooperative may ask the shareholder to provide proof that he or she owns the required amount of shares and has owned them for at least the minimum period required. The shareholder must respond within 21 days after the cooperative's request.

The regulations fix the word limit for a proposal and its supporting statement to 500 words and prescribe the deadline for submission as 90 days before the anniversary date of the notice of meeting that was sent in connection to the previous annual meeting of members and shareholders.

A cooperative can also refuse to attach a person's proposal to its notice of meeting if, within the two-year period before the submission, the person failed to present, in person or by proxy, at the annual meeting a proposal that was attached to a notice of a meeting.

If substantially the same proposal was submitted previously, the cooperative can refuse to attach the proposal to its notice of meeting if the minimum amount of support was not achieved within the previous five year period. The minimum amount is 3 percent of the total number of votes if the proposal was introduced at one annual meeting, 6 percent if the proposal was introduced at two annual meetings, and 10 percent if the proposal was introduced at three or more annual meetings. The scale is based on Rule 14 made under the U.S. Securities and Exchange Act of 1934.

If a cooperative attached the proposal to the notice of meeting and the person who submitted it failed to continue to hold the required number of investment shares until the actual meeting, the regulations allow the cooperative to refuse to include any subsequent proposal submitted by that shareholder in its proxy circular for a period of two years.

The regulations require a cooperative that wishes to exclude a proposal from its notice of a meeting to notify the person submitting the proposal of its intention to do so, within 21 days of receipt of the proposal or of proof of ownership.

The CCA was amended so that the deadline date for submitting a proposal is pegged to the anniversary date of the notice of the previous annual meeting rather than to the annual meeting date itself. There was some concern that this change may cause confusion among members and shareholders. To avoid confusion, the regulations require that management proxy circulars include a statement indicating the final date by which a cooperative must receive a proposal that a person proposes to raise at the next annual meeting.

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Proxy solicitation and proxy circular exemption

The amendments to the CCA increase the rights of shareholders to communicate among themselves. The CCA is structured so that a person engaging in an activity that falls under the statutory definition of "solicitation" must send a proxy circular to all other shareholders at his or her own expense. Holders of investment shares may use proxies. To expand the rights of members who are shareholders and other shareholders, the definition in the CCA was amended to exclude certain shareholder communications from this requirement.

For example, the CCA requires the regulations to prescribe the type of public announcements that are excluded from definition of "solicitation". The regulations exclude speeches made in public for as well as press releases, statements, or advertisements provided through broadcast or telephonic means, or other publications available to the public.

The regulations also set out the conditions under which persons other than management can communicate with shareholders without having to produce a dissident proxy circular.

The regulations also set out the circumstances under which a person may solicit proxies by public broadcast without sending a dissident's proxy circular. These circumstances relate to the content of the public broadcast and that the person must send a notice and a copy of any related publication to the Director and to the cooperative before soliciting proxies.

Modified proportionate liability

The CCA was amended to included a regime of modified proportionate liability with respect to the provision of financial information required under the Act. Modified proportionate liability means that every defendant found by a court to be responsible for a financial loss arising out of an error, omission or misstatement in financial information required by the legislation or the regulations would be liable to the plaintiff for the portion of the damages corresponding to the defendant's degree of responsibility. This is a departure from the joint and several liability regime that existed in the CCA and the CBCA prior to the amendments and that applied to all plaintiffs. (Under a joint and several liability scheme, a plaintiff can seek full compensation from any of the defendants found liable.) The joint and several liability regime continues, however, to apply in certain cases, one of which is where the plaintiff's financial interest or investment in the cooperative is below a threshold to be prescribed by the regulations. The regulation fixes the investment value threshold for joint and several liability at $20 000.

In its original report on modified proportionate liability, the Senate Standing Committee on Banking, Trade and Commerce recommended a net worth test to differentiate between those members or shareholders who would have access to joint and several liability and those who would be governed under modified proportionate liability. Given the privacy issues with a net worth test, the investment value threshold, set at $20 000, is intended to meet the same policy purpose. It is intended to provide protection to small investors without requiring plaintiffs to disclose all of their personal assets to the court. The Senate Standing Committee agreed with this approach.

Cancellation of certificates

The amendment to the regulations set out the conditions under which the Director may cancel the articles and related certificates of a cooperative. These circumstances are: (a) where the error is obvious; (b) where the error was made by the Director; (c) where ordered by a court; or (d) where the Director lacked the authority to issue the articles and related certificate.

The regulations also establish the circumstances under which the Director can cancel a certificate at the request of the cooperative or an interested party. Those circumstances are: (a) where there is no dispute among the directors, members and shareholders on the circumstances of the application; or (b) where the cooperative has not used the articles and related certificate, or, if it has, where anyone dealing with the cooperative on the basis of the certificate has consented to the cancellation.

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Transfer of prescribed requirements to the regulations

A policy decision was taken when amending the CCA to transfer certain requirements such as time limits from the statute to the regulations. An example is the time period the Director must retain certain records of a particular corporation. The CCA formerly stipulated the period to be six years; now the regulations prescribe that time period. The reason for this amendment is to allow government to respond more quickly to a changing environment without having to take up valuable parliamentary time to amend the statute. Where the prescribed requirements have been transferred to the regulations, they remained the same except where they were changed to harmonize with provincial requirements.

Reduction of incorporation and annual return fees

The schedule of fees has been amended to reduce the incorporation fee from $500 to $250 and the annual return fee from $50 to $40. This change reflects an amendment to the equivalent CBCA fees which came into effect April 1, 2001 and which purpose was to align the cost of providing the service with the amount of fee charged.

Alternatives

There are no alternatives to the regulations because they are required for the proper functioning of the CCA. For example, a number of the regulations prescribe time periods and amounts such as dollar values for specific sections of the CCA. Without these specifications, the provisions in Bill S-11 amending the CCA cannot come into force.

Benefits and Costs

Most of the changes in the new regulations are enabling rather than restricting, meaning that they will allow a cooperative or members to do or perform an action which could not be done previously or otherwise. For instance, the CCA was amended to allow electronic communications. The regulations set out the requirements that must be met so that the communication could take place (e.g., how consent must be obtained, how voting must be conducted). These provisions are enabling because there is nothing in the CCA nor the regulations that requires a cooperative to use electronic means when communicating with its members or shareholders. Therefore, a cooperative electing to use electronic communications will do so on the basis that the benefits of using electronic means exceed the costs of having to comply with the relevant sections of the regulations. For instance, if a cooperative wanted to hold an electronic vote, the costs imposed by the regulations is that it must have an electronic voting system that ensures subsequent verification of the votes and permits votes to be presented without it being possible for the cooperative to identify how each shareholder or group of shareholders voted.

A similar enabling provision concerns communications among investment shareholders. The regulations prescribe the circumstances that allow a shareholder to communicate with other shareholders without incurring the expense of publishing a dissident proxy circular or seeking an exemption from the Director. There is no additional cost to the cooperative, the shareholders, or the Director. In fact, it is expected that the Director will receive fewer exemption requests, resulting in marginal savings for the dissident.

The proposal provisions also do not impose costs since they set out the rules that a person must follow in order to submit a proposal. The CCA requires the regulations to set out the deadlines that must be met. The regulations themselves do not impose a cost. Instead, the objective of the regulation is to strike a balance between the interests of the person submitting the proposal and the cooperative in terms of giving each party sufficient time to submit a proposal and respond to it.

The enabling regulations do not impose any tangible costs since they provide the necessary details to make the federal corporate framework operational. Most of the benefit and cost considerations were considered at the policy level when the amendments were made to the CCA. Therefore, the costs of not having the regulatory framework would be the denial of the rights of a cooperative or person that is conferred on them by the amendments to the CBCA.

With respect to benefits, cooperatives will benefit from the regulations that harmonize requirements with provincial securities requirements, such as the definition of "distributing cooperative" and the insider securities provisions. Harmonization would result in lower compliance for public CCA cooperatives since they have only one set of standards to follow rather than two.

Cooperatives will also benefit from the lower fees for incorporation and for filing an annual return. With lower fees to pay, federal cooperatives will be able to allocate their resources more effectively and increase productivity.

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Consultations

Consultations on the draft regulations were held twice. The first was in the Spring of 2000 in conjunction with the first tabling of the bill, then Bill S-19. The draft regulations were tabled in the Senate along with the bill and were also posted on Industry Canada's website. After Bill S-19 died on the order paper because of the Fall election, the bill was retabled as Bill S-11 in February 2001. The accompanying draft regulations included new provisions related to electronic documents.

During prepublication, one submission was received from the Canadian Cooperatives Association which is the national umbrella organization of anglophone cooperatives. Overall, the association supported the regulations.

Because the regulations are similar to the regulations under the CBCA, suggested changes proposed during the CBCA consultations that were adopted were also made to the CCA regulations. These changes ensure a level playing field between federal cooperatives and corporations.

Compliance and Enforcement

The CCA is essentially a self-enforcing statute where interested parties can resolve their disputes through the courts. The Director, as a policy, will only intervene in limited circumstances where a significant public interest is involved and the spending of public funds is justified. With respect to the administration of the CCA, e.g. cancelling certificates, the Director already has in place procedures and mechanisms to ensure compliance with the CCA and the associated regulations. The amendments to the regulations do not require any new compliance procedures.

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