Part 10 Directors ans Officers (clauses 35-38)

There are a number of important amendments included in this Part. First, is the proposed general reduction of the residency requirement for directors of corporations from a majority to 25 percent (s. 105). This amendment would not apply to sectors or corporations that are subject to ownership restrictions as specified in the regulations. Similarly, CBCA corporations that individually are subject to ownership restrictions (e.g., Air Canada and Petro- Canada ) would continue to be required to have a majority of Canadian residents on their boards.

An obligation on directors to provide notice of a change of address within fifteen days of the event has been introduced. Once this notice is received, the corporation would then be obliged to notify the CBCA Director of this change within fifteen days of receiving notice from a director (s. 113).

Second, the Act would be amended to eliminate the director's residency requirement for committees of boards of directors (s. 115(2)).

Third, the good faith reliance defence would be replaced by a due diligence defence whereby a director is not liable if that director exercises the same degree of care, diligence and skill that a reasonably prudent person would have exercised, in comparable circumstances (s. 123).

Fourth, the statutory indemnification rules would be broadened to, among other things, expressly allow the corporation to advance defence costs, provide for indemnification in respect of investigative proceedings, and allow the corporation to indemnify a director or officer (or person acting in a similar capacity) of a body corporate, a partnership, a trust, a joint venture, or other entity (s. 124).

Fifth, the provisions governing the appointment and removal of directors (s. 106 to 115) and the conflict of interest provisions (s. 120) would be updated and clarified.

A number of minor technical amendments to both the English and French versions are also included, as well some amendments which are designed to facilitate the efficient operation and administration of the statute.

Briefing Book
An Act to amend the Canada Business Corporations Act and the Canada Cooperatives Act

Bill Clause No. 35
CBCA Section No. 102(1) and (2)
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law 
TSE report on corporate governance in Canada

Changes From Present Law 
Specify in subs. 102(1) that the directors shall manage or supervise the management of the business and affairs of a corporation. Consequential amendments to other provisions would also me made (s.146(2), (3), and (5)).

Purpose of Change 
In the case of a small corporation, the board of directors is often composed of the officers/owners of the corporation. In this situation, the board really manages the corporation on a day-to-day basis. However, in the case of a large corporation, the board can supervise, direct or oversee but it cannot manage, at least not in the day-to-day sense.

The TSE report on corporate governance in Canada recommends the elimination of any possible interpretation of the directors' responsibilities as being to manage the business day-to-day and to describe the responsibility as being to supervise the management of the business. The Business Corporations Act (Ontario) defines the general duty of the board as being to "manage or supervise the management of the business and affairs of a corporation."

This change would add flexibility to the Act by clarifying that directors have the power manage and/or supervise the corporation. They can choose to delegate some of their managing powers (s. 121) to officers or keep all powers for themselves. Consequently, it is important to keep "manage" in the directors' duties definition.

Similar Provincial Laws 
Business Corporations Act (Ontario)

Current Wording 
102. (1) Subject to any unanimous shareholder agreement, the directors shall manage the business and affairs of a corporation.

(2) A corporation shall have one or more directors but a corporation, any of the issued securities of which are or were part of a distribution to the public and remain outstanding and are held by more than one person, shall have not fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates.

Proposed Wording 
102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.

(2) A corporation shall have one or more directors but a distributing corporation, any of the issued securities of which remain outstanding and are held by more than one person, shall have not fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates.

Bill Clause No. 36
CBCA Section No. 103(1)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law 

Changes From Present Law 
Amend the French version of s. 103(1) to replace the words "affaires tant commerciales qu'internes" with "activités commerciales ou les affaires internes".

Purpose of Change 
This technical change clarifies the wording and application of the Act.

Similar Provincial Laws 

Current Wording 
103. (1) Sauf disposition contraire des statuts, des règlements administratifs ou de conventions unanimes des actionnaires, les administrateurs peuvent, par résolution, prendre, modifier ou révoquer tout règlement administratif portant sur les affaires tant commerciales qu'internes de la société.

Proposed Wording 
103. (1) Sauf disposition contraire des statuts, des règlements administratifs ou de conventions unanimes des actionnaires, les administrateurs peuvent, par résolution, prendre, modifier ou révoquer tout règlement administratif portant sur les activités commerciales ou les affaires internes de la société.

Bill Clause No. 37
CBCA Section No. 105(3), (4) and new (3.1), (3.2) and (3.3)
Topic : Directors and Officers (Directors' Residency)

Sources of Proposed Law 

Changes From Present Law 
The current requirement that a majority of directors be resident Canadians would be reduced to a requirement that 25 percent be resident Canadians. It would provide that where a corporation has less than four directors at least one director must be a resident Canadian.

The current requirement that a majority of directors be resident Canadians would continue to apply to CBCA corporations in sectors where there are ownership restrictions. It would provide that where a corporation has only two directors, only one of the two must be a resident Canadian.

Purpose of Change 
Since 1975, the CBCA has required that a majority of the board of directors of a corporation be resident Canadians. This was intended to specifically promote a Canadian viewpoint at meetings of directors of corporations controlled by non-resident Canadians. However, this requirement is now posing a constraint on Canadian corporations which are growing to global size and expanding their investments. More and more, corporations require a board that reflects the international character of their business.

There are several reasons for why broader international representation on the board of directors may be strategically important for some Canadian businesses. Export-oriented Canadian corporations may wish to appoint foreigners to assist the corporation in developing new export markets. Similarly, a Canadian corporation growing to global size and expanding its investments may require a board that reflects the international character of its business. Under the current situation such corporations are forced to add a Canadian every time a foreign national is appointed to the Board. This has the effect of leading to large unwieldy boards. Reducing the residency requirement would enhance the ability of Canadian firms to develop export markets. Currently, the CBCA may not accommodate the needs of such corporations, sending a wrong message to both Canadian and foreign investors.

In reducing the residency requirement, the CBCA would be structured so as to encourage corporations to rely on Canada as a place of incorporations and site of global headquarters.

The amendment to reduce the directors' residency requirement to 25 percent would not apply to CBCA corporations in sectors where there are ownership restrictions. These sectors will be listed in the regulations. In addition, where a sector has a specific directors' residency requirement that exceeds that found in the CBCA, that requirement would be paramount.

Similar Provincial Laws 

Current Wording
105. (3) A majority of the directors of a corporation must be resident Canadians.

(4) Notwithstanding subsection (3), not more than one-third of the directors of a holding corporation need be resident Canadians if the holding corporation earns in Canada directly or through its subsidiaries less than five per cent of the gross revenues of the holding corporation and all of its subsidiary bodies corporate together as shown in

Proposed Wording 
105. (3) Subject to subsection (3.1), at least twenty-five per cent of the directors of a corporation must be resident Canadians. However, if a corporation has less than four directors, at least one director must be a resident Canadian.

(3.1) If a corporation engages in an activity in Canada in a prescribed business sector or if a corporation by an Act of Parliament or by a regulation made under an Act of Parliament, is required, either individually or in order to engage in an activity in Canada in a particular business sector, to attain or maintain a specified level of Canadian ownership or control, or to restrict, or to comply with a restriction in relation to, the number of voting shares that any one shareholder may hold, own or control, then a majority of the directors of the corporation must be resident Canadians.

(3.2) Nothing in subsection (3.1) shall be construed as reducing any requirement for a specified number or percentage of resident Canadian directors that otherwise applies to a corporation referred to in that subsection.

(3.3) If a corporation referred to in subsection (3.1) has only one or two directors, that director or one of the two directors, as the case may be, must be a resident Canadian.

(4) Despite subsection (3.1), not more than one third of the directors of a holding corporation referred to in that subsection need be resident Canadians if the holding corporation earns in Canada directly or through its subsidiaries less than five per cent of the gross revenues of the holding corporation and all of its subsidiary bodies corporate together as shown in

Bill Clause No. 38
CBCA Section No. 106(1) (7), (8) and new (9)
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law 

Changes From Present Law 
The word "prescribed" has been replaced with "that the Director fixes".

Addition of the word "additional" in subs. 106(8) after the word "more".

New directors would have to consent to their appointment and a person elected or appointed as a director will not be deemed to hold this position unless they have acted in that capacity subsequent to the election or appointment.

Add "lack of consent" to the list of reasons for director vacancy in s. 106(7).

Purpose of Change 
Subsection 106(1): See explanation at clause 3.

The addition of the word "additional" would clarify subs. 106(8) by making it clear that the directors may appoint one or more additional directors only when the shareholders fail to elect the required number of directors under subs. 106(7).

Currently, under the CBCA someone could be listed as a director without his/her consent or knowledge. This has raised concerns that unsuspecting individuals could be exposed to extensive liability as a director. A number of provincial corporations laws presently require written consent of persons acting as directors.

The provision would provide that if a person was present at the meeting where they were elected or appointed as director and did not refuse such election or appointment, then written consent is not required for the election or appointment to be valid. A written consent would be required if the person was not present at the relevant meeting.

Further, a person elected or appointed as a director will not be deemed to hold this position unless they have acted in that capacity subsequent to the election or appointment.

This amendment would reduce exposure to liability and promote harmonization with provincial statutes.

(D) In s. 106(7) the words "lack of consent" are being added as a correlative amendment to the change being made to s. 106(9).

Similar Provincial Laws 
Company Act (British Columbia)
Business Corporations Act (Ontario)

Current Wording 
106. (1) At the time of sending articles of incorporation, the incorporators shall send to the Director a notice of directors in prescribed form, and the Director shall file the notice.

(7) If a meeting of shareholders fails to elect the number or the minimum number of directors required by the articles by reason of the disqualification, incapacity or death of any candidates, the directors elected at that meeting may exercise all the powers of the directors if the number of directors so elected constitutes a quorum.

(8) The directors may, if the articles of the corporation so provide, appoint one or more directors, who shall hold office for a term expiring not later than the close of the next annual meeting of shareholders, but the total number of directors so appointed may not exceed one third of the number of directors elected at the previous annual meeting of shareholders.

Proposed Wording 
106. (1) At the time of sending articles of incorporation, the incorporators shall send to the Director a notice of directors in the form that the Director fixes, and the Director shall file the notice.

(7) If a meeting of shareholders fails to elect the number or the minimum number of directors required by the articles by reason of the lack of consent, disqualification, incapacity or death of any candidates, the directors elected at that meeting may exercise all the powers of the directors if the number of directors so elected constitutes a quorum.

(8) The directors may, if the articles of the corporation so provide, appoint one or more additional directors, who shall hold office for a term expiring not later than the close of the next annual meeting of shareholders, but the total number of directors so appointed may not exceed one third of the number of directors elected at the previous annual meeting of shareholders.

(9) An individual who is elected or appointed to hold office as a director is not a director and is deemed not to have been elected or appointed to hold office as a director unless

(a) he or she was present at the meeting when the election or appointment took place and he or she did not refuse to hold office as a director; or

(b) he or she was not present at the meeting when the election or appointment took place and

(i) he or she consented to hold office as a director in writing before the election or appointment or within ten days after it, or

(ii) he or she has acted as a director pursuant to the election or appointment.