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Entrepreneurs are people who identify and capitalize on economic opportunities. They innovate, take risks, and develop new goods and services. They are responsible for the creation and expansion of businesses, and fuel overall economic expansion.
Small and medium-sized enterprises (SMEs) are an important part of the Canadian economy. In the dynamic global economy characterized by the forces of creative destruction, SMEs with the desire and capacity to grow are a key source of Canada's future prosperity.
SMEs represent over 99 percent of all firms in Canada, 48 percent of the total labour force in the private sector, and over 30 percent of all new jobs.34 One study estimates that 22 percent of gross domestic product could be attributed to companies with fewer than 50 employees.35 While SMEs are defined as firms with 500 employees or fewer, most Canadian SMEs have fewer than four employees.36
Productivity growth is affected by the birth and death of small firms. Only a small number of new business start-ups will survive and grow, and an even smaller number have the potential to grow to become high-performance firms that will drive innovation and performance and become Canada's future large enterprises.
Survival is the main preoccupation of small business: only 54 percent of businesses with fewer than 99 employees survive for two years, and closer to 20 percent survive for 10 years.37 At the same time, not all small firms have the intention to grow. A survey conducted by the Business Development Bank of Canada confirms that not all business owners plan to expand their businesses.38
There is currently no overarching federal government policy covering SMEs or entrepreneurs, other than the 1994 declaration "Growing Small Businesses."39 At the federal level alone, the government offers support to SMEs through at least 13 different departments. Many more programs and services are offered by provincial governments. As a result, some businesses have found it difficult to identify and access programs meeting their particular requirements, even when they exist.
While the keys to success are diverse, our consultations and submissions identified the critical importance of accessing financing. The principal deficiencies identified were venture capital available at the "angel" and late stage.
Budget 2008 announced $75 million for the Business Development Bank of Canada to support the creation of a new privately run venture capital fund.40 Several provinces have also made similar commitments, such as the British Columbia Equity Capital programs and the Ontario Venture Capital Fund. The Panel acknowledges the governments' recognition of this issue. However, in our view, investors putting their own capital at risk should make capital allocation decisions, as market forces will better determine successful outcomes. The role of government is to enhance returns to the level necessary to attract sufficient capital to this activity through, for example, the tax system.
36. Federal and provincial governments' small and medium-sized enterprise policies should focus on those firms that demonstrate the desire and capacity to grow to become large enterprises. Small and medium-sized enterprise policies and programs should be subjected to regular review in order to assess and measure whether this objective is being met.
37. The Minister of Finance and the Minister of Industry should develop and release a public report on options, including tax incentives, to facilitate the provision of more private venture capital, particularly at the "angel" and late stage, by June 2009.
The details of the regulatory and legal frameworks governing the exercise by public company directors of their fiduciary duties are of narrow professional interest. However, the market for corporate control affects not only public shareholders but also the career opportunities and community benefits associated with large Canadian publicly traded enterprises and their head offices. This is why the "hollowing out" debate is of broad significance to Canadians.
The Panel received a number of submissions to the effect that an important factor contributing to the perceived imbalance between the acquisition of Canadian companies by foreigners and the acquisition of foreign companies by Canadians is the limited tools available to directors of Canadian public companies when exercising their fiduciary duties in regard to an acquisition proposal, relative to directors of US public companies.
In examining this issue, the Panel sought advice from lawyers and investment bankers with deep experience on both sides of the border. The position of directors of a federally incorporated Canadian company was compared with that of the directors of a US company incorporated in the State of Delaware, on the basis that these are the benchmark jurisdictions of incorporation for public companies in each country. We asked how differences in the legal and regulatory framework in which the directors function would impact their margin for manoeuvre. This involved looking at the applicable corporate law, securities law and enforcement mechanisms, and roles played by the courts and securities regulators.
Except in rare cases, directors' duties imposed by corporate law do not give rise to material differences in the responsibilities or actions of the directors of Canadian relative to Delaware companies in deciding whether to engage in a process to sell a company in response to an unsolicited acquisition proposal. The relevant statutes provide that directors of Canadian companies owe their fiduciary duties to the "corporation" while Delaware directors owe their duties to the shareholders. However, where the choice between selling the company and remaining independent to pursue the company's business plan materially impacts only the value of the shareholders' investment, this difference in terminology is of no practical effect. Once a company is "in play" directors on both sides of the border have an obligation to maximize the value of the company. However, where the decision materially impacts the value of the investments of other stakeholders such as creditors, as a fiduciary matter, while directors of a Delaware company may focus only on the interests of shareholders in maximizing the value of the company through a sale, directors of Canadian companies are required to consider those other interests as well.41
Stock exchange rules in the two countries have very little impact on director response to an acquisition proposal. In fact, Toronto Stock Exchange policy (which the Panel has been advised is under review) with respect to the issuance of shares to facilitate acquisitions without shareholder approval is an important advantage for Canadian companies pursuing acquisitions.
The key difference in regulation on the leeway available to directors arises from the greater role played by Canadian securities regulators with respect to takeover defences. In the US, the securities regulator (the US Securities and Exchange Commission) has a very limited role respecting conduct of takeover defence. In Canada, the policies of Canadian provincial regulators and the active role they play in enforcing them place a "thumb on the scale." This arises from the way Canadian securities regulators deal with defensive tactics and, in particular, shareholder rights plans ("poison pills").
Unlike the US Securities and Exchange Commission, which leaves to the US courts the regulation of substantive decision making by directors, Canadian securities regulators are prepared to actively supervise the exercise by directors of their fiduciary duties in relation to change of control proposals. Established policy is reflected in National Policy 62-202 (Defensive Tactics). The policy essentially relegates the directors of a company in receipt of a credible acquisition proposal to the role of auctioneer. In keeping with this orientation, Canadian securities regulators have a well-established policy of requiring, in almost all cases, the termination of poison pills within 40 to 70 days from the commencement of a bid. Acquirers have come to rely on this time frame. This relatively short period, predictable outcome and policy stance provide almost no leverage to a board seeking to negotiate with a potential acquirer.
The posture of Canadian securities regulators was developed approximately 20 years ago in a market environment where there were no hedge funds and institutional shareholders were by and large passive investors. Corporate governance practices and the focus on directors' and management conduct were also very different from those of today. The regulator filled a void left by deferential Canadian courts. Since then, our courts have demonstrated a willingness and capacity to deal with directors' duties in a timely manner, and standards of corporate governance have improved in response to investor activism and the "Enron affair." Today's institutional shareholder routinely pursues and protects its interests in a more active and aggressive manner than when these policies and practices were developed.
In fact, the outcome of public acquisition proposals, whether hostile or not, is determined today by an efficient market in which shareholders of the target company can, and often do, sell immediately into a liquid market, which enables them to monetize the proposal at a discount even before the board of the target company has pronounced on it. Every share that moves into the hands of these arbitrageurs is a vote for the proposal and increases the likelihood that the target company will be sold. However, the tools available to the directors can affect the price and, in rare cases, lead to an unbridgeable price gap that causes the acquisition proposal to fail. The Panel concludes that the market for corporate control has matured to the point where it no longer requires the regulator's compensating "thumb on the scale" to achieve a competitive result.
The Panel concludes that the new global context in which mergers and acquisitions (M&As) occur requires that Canada update its regulatory framework to place the directors of Canadian companies on the same footing as their counterparts at Delaware companies. The changes required are straightforward.
Ontario is generally recognized as the leading jurisdiction in securities regulation of M&A. This is due to the fact that Toronto is home to more public company head offices than any other city, and that head office location is the basis for provincial securities commission jurisdiction in M&A matters.
38. Securities commissions should repeal National Policy 62-202 (Defensive Tactics).
39. Securities commissions should cease to regulate conduct by boards in relation to shareholder rights plans ("poison pills").
40. Substantive oversight of directors' duties in mergers and acquisitions matters should be provided by the courts.
41. The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.
One of Canada's defining characteristics is its regional diversity, as reflected in the Canadian federal system, with individual provinces and municipalities setting their own policies based on local priorities.
The division of powers in the Canadian constitution was developed in the context of an agrarian economy in which the speed and distance that goods could be moved was limited by the capacity of the "iron horse." This framework has not evolved to keep pace with Canada's changing economic context. The result is a misalignment of revenue sources with program responsibilities. More importantly in terms of Canada's competitiveness, powers and responsibilities are misaligned with the national challenges of a global knowledge-based economy.
The resulting internal barriers to the free movement of goods, services and people drive up costs and weaken Canada's competitiveness for talent and capital because of the resulting complexity and market fragmentation. Canada is a small market and, as a study by SECOR rightly concludes, "Country fragmentation makes a small economy smaller, and translates into a loss of business opportunities and additional costs for domestic players."42
The submissions received by the Panel and research conducted for the Panel make it clear that this failure to evolve our governance at a sufficient pace may be laid at the feet of all levels of government and the courts. While it is difficult to place a credible dollar cost to this issue, the Panel concludes that the negative impact justifies dramatic and immediate action.
Canadian governments need to work better together if we are to achieve our competitiveness objectives. Our courts need to take account of contemporary realities in defining the powers of the various levels of government under the existing constitutional arrangements. The various levels of government must cooperate in the national interest. Because the national interest is in play, the Panel calls on the federal government to show leadership by taking the initiative and employing all legal and financial tools available to it. We are encouraged by the federal government's signal in the most recent Throne Speech that it is prepared to do so.
To illustrate the problem, we discuss below three specific situations selected from the many that were brought to our attention in submissions and consultations.
In 1994, federal and provincial governments signed the Agreement on Internal Trade (AIT). It was intended to reduce or eliminate barriers to the free movement of persons, goods, services and investments within Canada and to establish an open, efficient and stable domestic Canadian market.43 In the 14 years since the AIT was put in place, progress has been far too slow.
Anyone can be an accountant in Canada, but not anyone can provide independent audits. Since provinces individually regulate public accounting services, whichever professional body is recognized in a province gets to decide who can provide independent audits. Panels convened under the AIT in 2001 and 2005 found that Ontario and Quebec regulations were inconsistent with the AIT and impeded internal trade and labour mobility. Nevertheless, progress has been slow, since the AIT dispute resolution process has no mechanism to ensure rulings are implemented.44
The AIT suffers from many weaknesses. In particular, its scope is limited to specified sectors. It has an ineffective dispute settlement mechanism that is slow and unresponsive to the private sector. It relies wholly on moral suasion and good faith. While governments appear committed to strengthening the AIT, there has been more input than output.
The bilateral approach negotiated by British Columbia and Alberta in the Trade, Investment and Labour Mobility Agreement is promising but restricted to two jurisdictions, and its effects are not yet known. Bilateral discussions between Ontario and Quebec may also yield results, but a national effort is clearly preferable to bilateral progress.
Other federations find ways to address this. Australia, a federation not unlike Canada, enacted the Mutual Recognition (Commonwealth) Act 1992. The essence of this statute is that goods produced in one jurisdiction, which may be lawfully sold in that jurisdiction, may also lawfully be sold in other jurisdictions. They have also taken this step for the mutual recognition of occupational credentials. The European Union has in place a common market policy based on the free movement of goods, services, people and capital, and has achieved much progress.45
On April 1, 2008, a national coalition of ten business, industry and professional associations urged the federal and provincial governments to cooperate in finding ways to strengthen the economic union. The coalition called on Ottawa to take the lead in improving trade across Canada by legislating a set of open trade principles and establishing a standing internal trade tribunal to ensure that all parties adhere to those principles:
"Across the country, governments have awakened to the fact that internal trade barriers hurt consumers, discourage investment and damage Canada's international reputation as a place to do business. The time has come for a bold new approach that strengthens the economic union and enhances Canada's prosperity and competitiveness."46
In particular, we encourage the Forum of Labour Market Ministers to achieve their stated goal of enabling any worker qualified for an occupation in one part of Canada to have access to employment opportunities within that occupation in any other province or territory by the April 1, 2009 deadline established under the AIT47. Other internal barriers to interprovincial movement of goods and services would benefit from a corresponding objective and a similar deadline.
42. The federal government should provide leadership in the elimination of all internal barriers between the provinces and territories that inhibit the free flow of goods, services and people by June 2011.
43. Federal and provincial governments should establish by June 2009 a work plan to achieve this goal and provide interim reports on progress every six months.
Canada is the only OECD country that has not adopted an integrated national approach to securities regulation. Despite past and present efforts to harmonize, we currently have 13 securities regulators, with 13 sets of laws and 13 sets of fees.48 The inefficiencies are obvious.
Canada clearly would benefit from a streamlined regulatory approach. The International Monetary Fund asserted earlier this year that more streamlined securities regulation would: allow Canada to respond more quickly to local and global developments, reduce costs for market participants, eliminate the inefficiencies created by the limited authority of individual provinces, and help simplify coordination with other enforcement agencies.49
The Panel is encouraged by the continued focus that is being dedicated to the issue of securities regulation in Canada. In February 2008, the federal government named an Expert Panel, chaired by Tom Hockin, to provide advice and recommendations by year end on securities regulation in Canada. We are particularly encouraged that that Panel has been asked to examine how Canadian regulations can minimize impediments to cross-border capital flows.50
44. The federal government should show leadership regarding national securities regulation and resolve this matter expeditiously.
Canadians place great value on ensuring a healthy and sustainable environment for current and future generations. Responsible environmental stewardship will continue to be important to both our quality of life and the competitiveness of our economy.
At the federal level, environmental assessment is undertaken by departments, agencies, boards, commissions and Crown corporations. The Canadian Environmental Assessment Agency, which reports to the Minister of the Environment, provides coordination, advice and policy guidance. In 2005, the federal government issued a Cabinet Directive to all departments that indicated that it will conduct environmental assessments under the Canadian Environmental Assessment Act in such a way that "places a priority on the delivery of high-quality environmental assessments in a predictable, certain and timely manner."51
The Panel has heard that improving certainty and timeliness and reducing duplication between the federal and provincial processes for environmental assessment is key. Often a major project proposal will be subject to both provincial and federal environmental review. The difficulties lie in the differing timelines and potential duplication of efforts, which directly affect important investment decisions. The more complex assessments, including large-scale natural resource projects, have been lengthy, often extending up to several years at the federal level.
The British Columbia government has a good model of applying timelines to key parts of the process. Once a completed application is accepted, the British Columbia government commits to complete the review, prepare the assessment report and refer the application to ministers for a decision on the issuance of an environmental assessment certificate within a set 180-day time frame. Ministers are then obliged to make a decision within 45 days.52
The federal Major Projects Management Office is intended to bring a greater degree of oversight, transparency and predictability to the review of major natural resource projects, including developing and reporting on project agreements and time frames for regulatory review.53 It is too early to evaluate its impact.
While the Canadian Environmental Assessment Agency has assumed new responsibilities for managing major resource projects, addressing many of the underlying issues related to diffuse accountability under the current Canadian Environmental Assessment Act will require legislative change. The Act will be reviewed by Parliament in 2010, and issues of accountability, cooperation and timeliness should be examined. We believe that the federal government should commit to establishing meaningful deadlines for completing its environmental assessments and respect the timelines of the relevant provincial jurisdiction.
45. The federal government should more fully harmonize federal environmental assessment procedures with provincial processes.
46. Beginning January 2009, the federal government should abide by timelines that are not longer than the environmental assessment timelines set by the relevant provincial jurisdiction for a proposed project subject to assessment and incorporate such timelines as part of the broader national review required for 2010.