Part 10 Directors and Officers (clauses 39-44)

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. 39
CBCA Section No. 107(g) and (h)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law

Changes From Present Law 

Clarification of the English version.

Purpose of Change 
This technical change clarifies the wording and application of the Act and ensures that the English and French versions have the same interpretation.

Similar Provincial Laws 

Current Wording 
107. Where the articles provide for cumulative voting,

…

(g) a director may not be removed from office if the votes cast against his removal would be sufficient to elect him and such votes could be voted cumulatively at an election at which the same total number of votes were cast and the number of directors required by the articles were then being elected; and

(h) the number of directors required by the articles may not be decreased if the votes cast

against the motion to decrease would be sufficient to elect a director and such votes could be voted cumulatively at an election at which the same total number of votes were cast and the number of directors required by the articles were then being elected.

Proposed Wording 
107. (g) a director may be removed from office only if the number of votes cast in favour of the director's removal is greater than the product of the number of directors required by the articles and the number of votes cast against the motion; and

(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to decrease the number of directors is greater than the product of the number of directors required by the articles and the number of votes cast against the motion.

Bill Clause No. 40
CBCA Section No. new 109(4) and (5)
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law 

Changes From Present Law 
The CBCA is amended to provide that, where all of the directors have resigned or have been removed by shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director. Broad exemptions would be provided for officers, professionals and receivers. Also, the CBCA Director would be allowed to dissolve a corporation where it has no directors.

Purpose of Change 
The CBCA requires that a corporation has directors, but directors are entitled to resign. The new provision would deem any person who manages or supervises the management of a directorless corporation to be a director. Potential directors' liability would fall on the deemed directors. As a result, these deemed directors would have an incentive to ask shareholders to nominate new directors. The CBCA Director's new power to dissolve directorless corporations would provide for an added incentive for shareholders to nominate new directors.

Similar Provincial Laws 
Business Corporations Act (Ontario)

Current Wording 
N/A

Proposed Wording 
109. (4) If all of the directors have resigned or have been removed without replacement, a person who manages or supervises the management of the business and affairs of the corporation is deemed to be a director for the purposes of this Act.

(5) Subsection (4) does not apply to

(a) an officer who manages the business or affairs of the corporation under the direction or control of a shareholder or other person;

(b) a lawyer, notary, accountant or other professional who participates in the management of the corporation solely for the purpose of providing professional services; or

(c) a trustee in bankruptcy, receiver, receiver-manager or secured creditor who participates in the management of the corporation or exercises control over its property solely for the purpose of the realization of security or the administration of a bankrupt's estate, in the case of a trustee in bankruptcy.

Bill Clause No. 41
CBCA Section No. 111(1), (2) and (3)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law 

Changes From Present Law 
Clarification of subs. 111(1) to (3).

Purpose of Change
Clarify that the directors cannot fill a vacancy resulting from an increase in the number or the minimum or maximum number of directors or a failure by the shareholders to elect the number or the minimum number of directors provided for in the articles. Only the shareholders have the ability to elect these directors.

To make the wording consistent throughout the section.

Similar Provincial Laws 

Current Wording 
111. (1) Notwithstanding subsection 114(3), but subject to subsections (3) and (4), a quorum of directors may fill a vacancy among the directors, except a vacancy resulting from an increase in the number or minimum number of directors or from a failure to elect the number or minimum number of directors required by the articles.

(2) If there is not a quorum of directors or if there has been a failure to elect the number or minimum number of directors required by the articles, the directors then in office shall forthwith call a special meeting of shareholders to fill the vacancy and, if they fail to call a meeting or if there are no directors then in office, the meeting may be called by any shareholder.

(3) Where the holders of any class or series of shares of a corporation have an exclusive right to elect one or more directors and a vacancy occurs among those directors,

(a) subject to subsection (4), the remaining directors elected by the holders of that class or series of shares may fill the vacancy except a vacancy resulting from an increase in the number or the minimum or maximum number of directors for that class or series or from a failure to elect the number or minimum number of directors provided for in the articles for that class or series; or

(b) if there are no remaining directors any holder of shares of that class or series may call a meeting of the holders of shares of that class or series for the purpose of filling the vacancy.

Proposed Wording 
111. (1) Despite subsection 114(3), but subject to subsections (3) and (4), a quorum of directors may fill a vacancy among the directors, except a vacancy resulting from an increase in the number or the minimum or maximum number of directors or a failure to elect the number or minimum number of directors provided for in the articles.

(2) If there is not a quorum of directors or if there has been a failure to elect the number or minimum number of directors provided for in the articles, the directors then in office shall without delay call a special meeting of shareholders to fill the vacancy and, if they fail to call a meeting or if there are no directors then in office, the meeting may be called by any shareholder.

(3) If the holders of any class or series of shares of a corporation have an exclusive right to elect one or more directors and a vacancy occurs among those directors,

(a) subject to subsection (4), the remaining directors elected by the holders of that class or series of shares may fill the vacancy except a vacancy resulting from an increase in the number the minimum or maximum number of directors for that class or series or from a failure to elect the number or minimum number of directors provided for in the articles for that class or series; or

(b) if there are no remaining directors any holder of shares of that class or series may call a meeting of the holders of shares of that class or series for the purpose of filling the vacancy.

Bill Clause No. 42
CBCA Section No. 113(1)and new (1.1)
Topic : Directors and Officers (Government Administration)

Sources of Proposed Law 

Changes From Present Law 
Amend s. 113 to place an obligation on directors to provide notice of a change of address within fifteen days of the event. 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.

Purpose of Change 
The CBCA reform effort addresses in many substantive ways the changing landscape affecting directors -- residency, liability, USAs, and directorless corporations. Given that there are many statutory requirements for notices sent to directors, it is important to know who they are and where they can be reached. This provision was amended at the Senate Committee stage at the suggestion of the Coalition for CBCA Reform.

Similar Provincial Laws 

Current Wording 
113. (1) Within fifteen days after a change is made among its directors, a corporation shall send to the Director a notice in prescribed form setting out the change and the Director shall file the notice.

Proposed Wording 
113. (1) A corporation shall, within fifteen days after

(a) a change is made among its directors, or

(b) it receives a notice of change of address of a director referred to in subsection (1.1),

send to the Director a notice, in the form that the Director fixes, setting out the change, and the Director shall file the notice.

(1.1) A director shall, within fifteen days after changing his or her address, send the corporation a notice of that change.

Bill Clause No. 43
CBCA Section No. 114(3), (4) and (9)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law 

Changes From Present Law 
Subsections 114(3) and (4) are amended to reflect changes made to the directors' residency requirements.

Subsection 114(9) is amended to provide that directors may participate in a meeting of directors or of a committee of directors by means of a telephonic, electronic or other communication facility to the extent that such means permit all participants to communicate adequately with each other, in accordance with the regulations, if any.

Purpose of Change 
These consequential amendments are needed following the changes made to the directors' residency requirements in s. 105 (see clause 37).

To provide directors with the flexibility in conducting their meetings.

Similar Provincial Laws 

Current Wording 
114. (3) Directors, other than directors of a corporation referred to in subsection 105(4), shall not transact business at a meeting of directors unless a majority of directors present are resident Canadians.

(9) Subject to the by_laws, a director may, if all the directors of the corporation consent, participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed for the purposes of this Act to be present at that meeting.

Proposed Wording 
114. (3) Directors, other than directors of a corporation referred to in subsection 105(4), shall not transact business at a meeting of directors unless,

(a) if the corporation is subject to subsection 105(3), at least twenty-five per cent of the directors present are resident Canadians or, if the corporation has less than four directors, at least one of the directors present is a resident Canadian; or

(b) if the corporation is subject to subsection 105(3.1), a majority of directors present are resident Canadians or if the corporation has only two directors, at least one of the directors present is a resident Canadian.

(4) Despite subsection (3), directors may transact business at a meeting of directors where the number of resident Canadian directors, required under that subsection, is not present if

(a) a resident Canadian director who is unable to be present approves in writing, or by telephonic, electronic or other communication facility, the business transacted at the meeting; (b) the required number of resident Canadian directors would have been present had that director been present at the meeting.

(9) Subject to the by-laws, a director may, in accordance with the regulations, if any, and if all the directors of the corporation consent, participate in a meeting of directors or of a committee of directors by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting. A director participating in such a meeting by such means is deemed for the purposes of this Act to be present at that meeting.

Bill Clause No. 44(1)
CBCA Section No. 115(2)
Topic : Directors and Officers (Directors' Residency)

Sources of Proposed Law 
Standing Senate Committee on Banking, Trade and Commerce, Corporate Governance, 1996, Recommendation no. 16.

Changes From Present Law 
Repeal the director's residency requirement for committees of boards of directors.

Purpose of Change
Eliminating the residency requirement would provide corporations with the flexibility to appoint directors to committees on the basis of their qualifications and their ability to improve the corporation's performance. The board remains responsible for final decisions.

Similar Provincial Laws 

Current Wording 
115. (2) If the directors of a corporation, other than a corporation referred to in subsection 105(4), appoint a committee of directors, a majority of the members of the committee must be resident Canadians.

Proposed Wording 
N/A

Bill Clause No.  44(2) and (3)
CBCA Section No. 115(3)(b), (c), new c.1 and (f)
Topic :  Directors and Officers (Directors' Liability)

Sources of Proposed Law 

Changes From Present Law 
Concerning s. 115:

(A) prohibit in par. 115(3)(b) delegation of the power to appoint additional directors,

(B) replace in par. 115(3)(c) the words "in the manner and on the terms" with more flexible words such as "as",

(C) add in par. 115(3)(f) words such as "except in the manner and within the limits authorized by the directors",

(D) amend subs. 115(3) to preclude delegation of the directors' authority in subs. 27(4) to (6) [to designate a series of shares to be issued and amend the articles] except in the manner and within the limits authorized by the directors.

Purpose of Change 
The general thrust of subs. 115(3) is to prohibit delegation of matters core to the directors authority and for which liability will arise. These amendments clarify the limits on the power of the full board of directors to delegate their powers.

(A) Subsection 115(3)(b) prohibits the delegation of the power to fill a vacancy among the directors. Subsection 106(8) provides that the articles of a corporation may allow directors to appoint a limited number of additional directors between meetings. As drafted, s. 115(3) may be interpreted not to prohibit the delegation of this appointment power, even though this power is analogous to the power to fill vacancies. This amendment would prohibit the delegation of authority to appoint additional directors.

(B) Paragraph 115(3)(c) prohibits delegation of the power to "issue securities except in a manner and on the terms authorized by the directors". Lawyers are often called upon to make judgments as to whether or not the board of directors has properly set the "terms" of the issue in accordance with par. 115(3)(c). This amendment would increase flexibility by allowing directors to set limits within which the delegated authority can be exercised rather than having to explicitly state how the delegated authority is to be used.

(C) Directors can be liable under subs. 118(2) for paying a commission contrary to s. 41. However, it has been pointed out that par. 115(3)(f) does not permit the same limited delegation permitted under par. 115(3)(c), namely "except in the manner and on the terms authorized by the directors". While a corporation may delegate to a committee or to a managing director the authority to issue shares within the parameters (manner and terms) set by directors, any commission paid in connection with the issue cannot be delegated. This amendment would allow the delegation of authority relating to commissions.

(D) The proposed amendment would ensure that, in keeping with the restraints on delegation in s. 115(3), the authority in CBCA s. 27(4)-(6) to designate a series of shares to be issued and amend the articles would only be exercised by the full board.

Similar Provincial Laws 

Current Wording 
115.(3) Notwithstanding subsection (1), no managing director and no committee of directors has authority to

…

(b) fill a vacancy among the directors or in the office of auditor;

(c) issue securities except in the manner and on the terms authorized by the directors;

…

(f) pay a commission referred to in section 41;

Proposed Wording
115. (3)(b) fill a vacancy among the directors or in the office of auditor, or appoint additional directors;

(c) issue securities except as authorized by the directors;

(c.1) issue shares of a series under section 27 except as authorized by the directors;

(f) pay a commission referred to in section 41 except as authorized by the directors;