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Oct 13, 2020

Ontario Proposes Changes to its Business Corporations Statute to Enhance Flexibility

Removal of Director Residency Requirements and Reducing the Voting Threshold for Private Company Ordinary Written Resolutions

By Jeffrey K. Merk

On October 6, 2020, the Ontario government introduced a bill to amend, among other things, the Business Corporations Act (Ontario) (the “Act”) in an effort to remove certain long-standing constraints and allow Ontario corporations to operate with additional flexibility.

Bill 213, entitled the Better for People, Smarter for Business Act, 2020 (the “Bill”), provides for two key changes to the Act:

  • removing the requirement that a minimum of 25% of the directors of an Ontario corporation be Canadian residents; and
  • for privately-held corporations only, the approval threshold for a written resolution will be reduced from a unanimous signature requirement to a majority signature requirement.

The Bill is currently scheduled for a second reading in the Ontario legislative assembly at a date to be determined, with certain other actions being required before the Bill becomes law.

The Potential Impact of Bill 213

Removal of the Canadian Residency Requirement for Board of Directors

Removing the 25% Canadian residency requirement allows Ontario corporations to have the most qualified board members for their organization without having to worry about reserving spots on their board to fulfill a residency requirement. This should prove particularly liberating for foreign-owned or controlled organizations (and those considering expanding to Canada for access to Ontario as Canada’s most populous province), some of which may have chosen to incorporate their businesses in another Canadian province to avoid meeting the Ontario director residency requirement. If the Bill is passed into law, these organizations will be able to form their corporations in Ontario and calibrate their board composition to meet their business needs rather than a legal requirement. This amendment will apply to both public and private companies.

Reducing the Voting Threshold for Private Corporation Ordinary Written Resolutions

The Act currently allows corporations to obtain shareholder approval through written resolutions, but such written resolutions must be signed by all voting shareholders of the corporation. In theory, being able to have shareholders approve certain actions in writing should allow corporations to obtain shareholder approval in less time than holding a potentially time and resource consuming shareholders meeting.

Unfortunately, requiring unanimous written approval of shareholders has led to situations where a corporation is unable to obtain shareholder approval in a time-efficient manner because of logistical difficulties in gathering and collecting all the voting shareholders’ signatures for a resolution. Also, under the current requirements, corporations may be forced to hold a shareholders meeting to obtain shareholder approval if one or a small number of shareholders refuse to sign the applicable resolution even though the approval of the resolution at a shareholders meeting is a foregone conclusion.

The Bill addresses the above situations by allowing private corporations to pass a written resolution that has been signed by holders of at least a majority of the voting shares of the corporation for ordinary resolutions. This will allow private companies to more readily obtain shareholder approval for common corporate actions, such as the appointment of directors. This default approval threshold for the written resolution may be increased if the articles of the corporation or a unanimous shareholder agreement require a greater number of votes of shareholders to pass an ordinary resolution. Accordingly, existing Ontario corporations should consider reviewing their articles and/or unanimous shareholder agreements to determine if amendments are desired to meet this new minimum signature threshold.

The amendments to section 104(1) also include a notice requirement to all voting shareholders who did not sign the written resolution and provide that all voting shareholders are made aware of the approved resolutions within 10 days of the resolution being passed.

It is important to note that these changes will only apply to written resolutions that are carried out for decisions that require an ordinary resolution. The amendments in the Bill will not affect written resolutions that apply to decisions requiring special resolutions under the Act, such as creating a new class of shares. The Bill also does not address other actions that require the unanimous approval of shareholders, such as waiving the requirement for the appointment of an auditor.

This change to certain types of written shareholder resolutions will align shareholder approval mechanisms of Ontario private corporations on ordinary resolutions with the shareholder approval mechanisms under certain U.S. corporate statutes, including Delaware. The Act will still require unanimous written consent for the approval of special resolutions by way of written consent and for certain other activities, but simplifies the mechanics of obtaining shareholder approval for Ontario corporations for more ordinary course matters.

If you have questions about the Bill and how it could impact your business or plans for your business, please contact a member of our Capital Markets Group.

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