Part 10 Directors and Officers (clauses 45-48)

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. 45
CBCA Section No. new 117(3)
Topic : Directors and Officers (Shareholder Communications)

Sources of Proposed Law

Changes From Present Law
Add new subsection following s. 117(2) specifying that an entry in the minutes of a meeting to the effect that the chairperson declared that a resolution is adopted or rejected is evidence of this decision, without it being necessary to prove the number of votes for or against the resolution. A similar amendment is made in clause 62.

Purpose of Change
The amendment is designed to increase flexibility and ease of record keeping.

Similar Provincial Laws
The Business Corporations Act (Saskatchewan)

Current Wording
N/A

Proposed Wording
117. (3) Unless a ballot is demanded, an entry in the minutes of a meeting to the effect that the chairperson of the meeting declared a resolution to be carried or defeated is, in the absence of evidence to the contrary, proof of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution.

Bill Clause No. 46
CBCA Section No. 118(1), (2), (4) and (5)(a)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law

Changes From Present Law
Amend s. 118(1) and (2) to add the words "or solidarily".

Amend s. 118(2), (4) and (5)(a) to remove the reference to s. 44.

Purpose of Change

(A) The addition of the words "or solidarily" updates the law to include the civil law concept of apportioning liability.

(B) Removes the reference to s. 44 which is repealed by clause 26.

Similar Provincial Laws

Current Wording
118. (1) Directors of a corporation who vote for or consent to a resolution authorizing the issue of a share under section 25 for a consideration other than money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution.

(2) Directors of a corporation who vote for or consent to a resolution authorizing

(a) a purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36,

(b) a commission contrary to section 41,

(d) financial assistance contrary to section 44,

(e) a payment of an indemnity contrary to section 124, or

(f) a payment to a shareholder contrary to section 190 or 241,are jointly and severally liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation.

(4) A director liable under subsection (2) is entitled to apply to a court for an order compelling a shareholder or other recipient to pay or deliver to the director any money or property that was paid or distributed to the shareholder or other recipient contrary to section 34, 35, 36, 41, 42, 44, 124, 190 or 241.

(5)(a) order a shareholder or other recipient to pay or deliver to a director any money or property that was paid or distributed to the shareholder or other recipient contrary to section 34, 35, 36, 41, 42, 44, 124, 190 or 241;

Proposed Wording
118. (1) Directors of a corporation who vote for or consent to a resolution authorizing the issue of a share under section 25 for a consideration other than money are jointly and severally, or solidarily, liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution.

(2) Directors of a corporation who vote for or consent to a resolution authorizing any of the following are jointly and severally, or solidarily, liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation:

(a) a purchase, redemption or other acquisition of shares contrary to section 34, 35 or 36;

(b) a commission contrary to section 41;

(d) a payment of an indemnity contrary to section 124; or

(e) a payment to a shareholder contrary to section 190 or 241.

Bill Clause No. 47
CBCA Section No. 119(1) and (5)
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law

Changes From Present Law -
Amend s. 119(1) to add the words "or solidarily" in the English version. Amend the French version of subs. 119(5) to replace "est subrogé aux titres de préférence de" with "a droit à toute priorité qu'aurait pu faire valoir".

Purpose of Change
Subs. (1): This change clarifies the wording of the section and reflects Canada's two legal systems, common law and civil law.

Subs. (5): This technical change clarifies the wording and application of the Act.

Similar Provincial Laws

Current Wording
119. (1) Directors of a corporation are jointly and severally liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.

(5) L'administrateur qui acquitte les dettes visées au paragraphe (1), dont l'existence est établie au cours d'une procédure soit de liquidation et de dissolution, soit de faillite, est subrogé aux titres de préférence de l'employé et, le cas échéant, aux droits constatés dans le jugement

Proposed Wording
119. (1) Directors of a corporation are jointly and severally, or solidarily, liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.

(5) L'administrateur qui acquitte les dettes visées au paragraphe (1), dont l'existence est établie au cours d'une procédure soit de liquidation et de dissolution, soit de faillite, a droit à toute priorité qu'aurait pu faire valoir l'employé et, le cas échéant, est subrogé aux droits constatés dans le jugement.

Bill Clause No. 48
CBCA Section No. 120
Topic : Directors and Occiers (Interested Directors' and Officers' contracts)

Sources of Proposed Law

Changes From Present Law
(A) Section 120(1) is amended to cover material contracts or transactions or proposed material contracts or transactions.

(B) Clarifies the timing in par. 120(2)(b) by replacing the word "then" with "at the time of the meeting referred to in paragraph (a)".

(C) Repeal par. 120(5)(a) concerning the interested director's ability to vote on contracts he/she has entered into for the benefit of the corporation.

(D) Amend subs. 120(6) to require that a "material change" in the nature of the interest of a director or officer in a contract or transaction shall be the object of a new declaration.

(E) Permit shareholders to access that part of the directors' meeting minutes, or other documents that disclose interested director or officer contracts or transactions.

(F) Specify that a director or officer is not accountable to the corporation for any profit or gain realized from an interested director or officer contract or transaction so long as the conditions set out in subs. 120(7) are met.

(G) Add a new provision providing for shareholder approval of interested director or officer contracts or transactions as an alternative method of rendering a contract non-voidable notwithstanding non-compliance with the avoidance standards in subs. 120(7), and remove the reference to shareholder approval in subs. 120(7).

(H) Broaden the grounds for a court application in subs. 120(8) to set aside an interested director or officer contract or transaction to include any failure to comply with s. 120 and give the courts the power to make an order directing that the director or officer account to the corporation for any profit or gain realized.
Purpose of Change
(A) Section 120(1): The policy behind s. 120 is to identify those situations in which a director or officer's ability to consider, fairly and effectively, the corporation's interests may be inhibited by self-interest. The addition of the terms "transaction" and "proposed transaction" broadens the coverage of s. 120 and clarifies the extent of the section's application by requiring identification of interests which extend beyond those resulting from material contracts. The additions will also bring the CBCA into line with other Canadian corporate laws.

(B) Par. 120(2)(b): The words "not then interested" do not clearly indicate the timing required for disclosure under the paragraph.

(C) Subsection 120(5): Paragraph 120(5)(a) seems to allow directors to vote on an arrangement for security for money lent to themselves or for obligations undertaken by them which could amount to endorsing a conflict of interest situation. However, the contract must be "for the benefit of the corporation or an affiliate."

S. 120(5)(a) could be interpreted to mean that a director to whom the corporation has lent money will not be precluded from voting on the approval of the arrangement provided the loan is undertaken "for the benefit of the corporation or an affiliate." One of the difficulties with this provision however, is determining when such a loan is made "for the benefit of the corporation" as opposed to for the benefit of the director.

Further, it can be argued that it is unlikely that the approval of a contract that does not offer any benefit to the corporation would withstand the fiduciary duty test set out in s. 122 which requires directors and officers to act with a "view to the best interests of the corporation." Therefore, in accordance with this fiduciary duty, directors should presumably only make loans which benefit the corporation. If all loans benefit the corporation, interested directors would always be entitled to vote on a loan made to them. If a director could always vote what is the necessity of a section which says the director may not vote unless the loan is made for the benefit of the corporation.

Repealing s. 120(5)(a) would disallow interested directors from voting on a contract in which they have a personal interest and therefore are in conflict of interest with the corporation. It would remove the uncertainty around determining whether a contract is in the best interests of the corporation. An interested director shall not vote.

(D) Subsection 120(6): This proposed change would require that the director bring material changes in his/her interest to the attention of the corporation. This information is necessary when a corporation is making decisions about future interested director contracts. The new declaration/information would fairly represent the true nature of the director's interest and would be in line with the fiduciary duties of the director to make disclosure.

(E) Subsection 120(6.1): This proposed change would give shareholders access to information that will help them make fully informed decisions.

(F) Subsection (7): At common law, directors and officers have a fiduciary duty to account to the corporation for any profit they gain from any interested contract or transaction. Furthermore, such contract or transaction would, at common law be void or voidable.

Current s. 120(7) provides that such contract or transaction is neither void nor voidable provided that the director or officer disclosed his interest, the contract or transaction was approved by the directors or shareholders and it was reasonable to the shareholders at the time it was approved. The current wording does not address whether the interested director or officer is accountable to the corporation even where these conditions have been fulfilled.

This amendment would clarify this issue and thereby harmonize the CBCA with other Canadian corporate laws.

(G) Subsection 120(7.1): Subsection 120(7) would provide for director approval and a new subsection would provide for shareholder approval. This change would add flexibility.

(H) Subsection 120(8): This change would clarify that an action may be brought for any breach of this section and would clarify that the courts have the power to order that the director is accountable for any profit. It would also clarify that the effect of a director voting when not allowed is that an action may be brought to void the contract. The CBCA would be brought into line with other Canadian corporate laws.

Similar Provincial Laws
Business Corporations Act (Ontario)
Company Act (British Columbia)
Code civil du Québec
Business Corporations Act (Alberta)
Company Act (New Brunswick)

Current Wording
120. (1) A director or officer of a corporation who

(a) is a party to a material contract or proposed material contract with the corporation, or

(b) is a director or an officer of or has a material interest in any person who is a party to a material contract or proposed material contract with the corporation,

shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of his interest.

(2) The disclosure required by subsection (1) shall be made, in the case of a director,

(a) at the meeting at which a proposed contract is first considered;

(b) if the director was not then interested in a proposed contract, at the first meeting after he becomes so interested;

(d) if a person who is interested in a contract later becomes a director, at the first meeting after he becomes a director.

(3) The disclosure required by subsection (1) shall be made, in the case of an officer who is not a director,

(a) forthwith after he becomes aware that the contract or proposed contract is to be considered or has been considered at a meeting of directors;

(b) if the officer becomes interested after a contract is made, forthwith after he becomes so interested; or

(4) If a material contract or proposed material contract is one that, in the ordinary course of the corporation's business, would not require approval by the directors or shareholders, a director or officer shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of his interest forthwith after the director or officer becomes aware of the contract or proposed contract.

(5) A director referred to in subsection (1) shall not vote on any resolution to approve the contract unless the contract is

(a) an arrangement by way of security for money lent to or obligations undertaken by him for the benefit of the corporation or an affiliate;

(b) one relating primarily to his remuneration as a director, officer, employee or agent of the corporation or an affiliate;

(d) one with an affiliate.

(6) For the purposes of this section, a general notice to the directors by a director or officer, declaring that he is a director or officer of or has a material interest in a person and is to be regarded as interested in any contract made with that person, is a sufficient declaration of interest in relation to any contract so made.

(7) A material contract between a corporation and one or more of its directors or officers, or between a corporation and another person of which a director or officer of the corporation is a director or officer or in which he has a material interest, is neither void nor voidable by reason only of that relationship or by reason only that a director with an interest in the contract is present at or is counted to determine the presence of a quorum at a meeting of directors or committee of directors that authorized the contract, if the director or officer disclosed his interest in accordance with subsection (2), (3), (4) or (6), as the case may be, and the contract was approved by the directors or the shareholders and it was reasonable and fair to the corporation at the time it was approved.

(8) Where a director or officer of a corporation fails to disclose his interest in a material contract in accordance with this section, a court may, on the application of the corporation or a shareholder of the corporation, set aside the contract on such terms as it thinks fit.

Proposed Wording
120. (1) A director or an officer of a corporation shall disclose to the corporation, in writing or by requesting to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the corporation, if the director or officer

(a) is a party to the contract or transaction;

(b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or transaction; or

(2) The disclosure required by subsection (1) shall be made, in the case of a director,

(a) at the meeting at which a proposed contract or transaction is first considered;

(b) if the director was not, at the time of the meeting referred to in paragraph (a), interested in a proposed contract or transaction, at the first meeting after he or she becomes so interested;

(c) if the director becomes interested after a contract or transaction is made, at the first meeting after he or she becomes so interested; or

(d) if an individual who is interested in a contract or transaction later becomes a director, at the first meeting after he or she becomes a director.

(3) The disclosure required by subsection (1) shall be made, in the case of an officer who is not a director,

(a) immediately after he or she becomes aware that the contract, transaction, proposed contract or proposed transaction is to be considered or has been considered at a meeting;

(b) if the officer becomes interested after a contract or transaction is made, immediately after he or she becomes so interested; or

(c) if an individual who is interested in a contract later becomes an officer, immediately after he or she becomes an officer.

(4) If a material contract or material transaction, whether entered into or proposed, is one that, in the ordinary course of the corporation's business, would not require approval by the directors or shareholders, a director or officer shall disclose, in writing to the corporation or request to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of his or her interest immediately after he or she becomes aware of the contract or transaction.

(5) A director required to make a disclosure under subsection (1) shall not vote on any resolution to approve the contract or transaction unless the contract or transaction

(a) relates primarily to his or her remuneration as a director, officer, employee or agent of the corporation or an affiliate;

(b) is for indemnity or insurance under section 124; or

(6) For the purposes of this section, a general notice to the directors declaring that a director or an officer is to be regarded as interested, for any of the following reasons, in a contract or transaction made with a party, is a sufficient declaration of interest in relation to the contract or transaction:

(a) the director or officer is a director or officer, or acting in a similar capacity, of a party referred to in paragraph (1)(b) or (c);

(b) the director or officer has a material interest in the party; or

(6.1) The shareholders of the corporation may examine the portions of any minutes of meetings of directors or of committees of directors that contain disclosures under this section, and any other documents that contain those disclosures, during the usual business hours of the corporation.

(7) A contract or transaction for which disclosure is required under subsection (1) is not invalid, and the director or officer is not accountable to the corporation or its shareholders for any profit realized from the contract or transaction because of the director's or officer's interest in it or, because the director was present or was counted to determine whether a quorum existed at the meeting of directors or committee of directors that considered the contract or transaction, if

(a) disclosure of the interest was made in accordance with subsections (1) to (6);

(b) the directors approved the contract or transaction; and

(7.1) Even if the conditions of subsection (7) are not met, a director or officer, acting honestly and in good faith, is not accountable to the corporation or to its shareholders for any profit realized from a contract or transaction for which disclosure is required under subsection (1), and the contract or transaction is not invalid by reason only of the interest of the director or officer in the contract or transaction, if

(a) the contract or transaction is approved or confirmed by special resolution at a meeting of the shareholders;

(b) disclosure of the interest was made to the shareholders in a manner sufficient to indicate its nature before the contract or transaction was approved or confirmed; and

(8) If a director or an officer of a corporation fails to comply with this section, a court may, on application of the corporation or any of its shareholders, set aside the contract or transaction on any terms that it thinks fit, or require the director or officer to account to the corporation for any profit or gain realized on it, or do both those things.

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Part 10 Directors and Officers (clauses 45-48)