Amendments to the Ontario Business Corporations Act Take Effect Today

Ontario removes the Canadian residency requirement for directors and provides additional flexibility for Ontario corporations

Back in October of 2020 we described proposed amendments to the Business Corporations Act (Ontario) (the “OBCA”) that had just been announced, which included:

• a repeal of the requirement that at least 25% of directors be resident Canadians; and
• a change to the threshold required for shareholders of private corporations to pass ordinary resolutions in writing from unanimous to majority.

These amendments are contained in Bill 213, Better for People, Smarter for Business Act, 2020 which received royal assent on December 8, 2020. The schedule which provides for the OBCA updates, however, did not come into force on that day. Instead, the relevant schedule was to come into force on a day to be proclaimed by the Lieutenant Governor. That day has at last been announced and these amendments are effective today, July 5, 2021.

Below are some of the key details relating to these amendments which may be important for those with businesses incorporated in Ontario and those who are considering where they might like to incorporate their business.

Time for a Corporate Governance Review

OBCA corporations should consider reviewing their corporate governance practices to determine if these legislative changes can benefit them. Some considerations include the following:

• If the board includes a Canadian resident director engaged solely to meet the residency requirement, such as an employee located in Canada or an independent director hired for this purpose, the corporation could revisit its board composition. This applies to both public and private corporations.
• The corporation’s articles and by-laws and any unanimous shareholder agreement may need to be revised to allow the corporation to benefit from the amendments, for example where the Canadian residency requirement for directors from the OBCA was reproduced in one of these documents and it would continue to be in effect unless amended.
• OBCA corporations that are private should determine if the amendments will eliminate the need to hold certain shareholder meetings, including annual general meetings, subject to some of the considerations below. If any written shareholder resolution is approved with less than unanimous consent, the corporation must remember to send notice of the resolution to the other shareholders within 10 business days of its approval.
• The use of voting trust agreements with certain shareholders continues to be an effective way to pass resolutions, even with this lower threshold.
• Each OBCA corporation must still have a registered office address in Ontario.

Director Residency Requirement

From today forward, the board of directors of a corporation formed at any time under the OBCA need not include any resident Canadians. This amendment applies to both public and privately-held OBCA corporations.

Previously, at least 25% of the directors of an OBCA corporation needed to be “resident Canadians” (and if a corporation had less than four directors, at least one director needed to be a resident Canadian), a defined term which included only Canadian citizens and permanent residents who were ordinarily resident in Canada or who met certain other criteria.

As we wrote to the Government of Ontario this spring, the residency requirement was in our experience one of the most significant factors when determining where to incorporate and could give rise to administrative burdens, especially for foreign-controlled corporations looking to do business in Canada. Its repeal is a welcome event which should help make Ontario more attractive to foreign investment by providing incorporators with increased flexibility in selecting their board of directors.

The amendments do not change the requirement for an OBCA corporation to have a registered office address in Ontario where certain records are kept and where certain government correspondence is sent. Many OBCA corporations appoint their Ontario law firm to serve in this capacity. In addition, OBCA corporations will still be required to provide director residency information in their filings with the Ministry of Government and Consumer Services.

Reduced Approval Threshold for Certain Matters

For any private OBCA corporation, an ordinary resolution of shareholders may now be passed by either:

• holding a shareholder meeting; or
• having the holders of at least a majority of the voting shares sign the resolution (previously, a written resolution was only valid if it was signed by all of the voting shareholders).

The reality though is that very few shareholder resolutions are passed by ordinary resolution. Most of the time when shareholder approval is required it will be obtained by a “special resolution”. For example, a special resolution is required to approve all amendments to the corporation’s articles and any major transaction such as a plan of arrangement or amalgamation, a sale of substantially all of the property of a corporation, or winding up the corporation. Special resolutions must still be approved either by a unanimous written resolution or by 66²/₃% of the votes cast at a meeting of shareholders.

For annual general meetings (AGMs) that only include routine resolutions such as electing the directors and appointing the auditors, a written resolution signed by the holders of at least a majority of shares can now address all such business and avoid the need to call and hold a meeting. Similarly, directors may now also be removed by resolution in writing signed by a majority of the shareholders entitled to vote (a threshold which cannot be raised by the corporation’s articles).

Within 10 business days of the date the resolution is signed by the required shareholders, a corporation which relies on this reduced approval threshold must give notice to all of the shareholders which did not sign the resolution, including the text of the resolution and a description of, and the reasons for, the business dealt with by the resolution.

Practical Impact

In practice, this amendment to the consent threshold for ordinary resolutions may not change much for a few reasons:

• Corporations and their stakeholders may prefer to hold shareholder meetings as this allows for greater stakeholder engagement.
• For closely-held corporations, we often prefer to have 100% of the directors and 100% of the shareholders sign a joint resolution approving a transaction so that we can reduce the likelihood that someone will complain in the future. It is often better to know in advance if there is a dissenter instead of after the fact when the egg can’t be so easily unscrambled.
• Other than AGMs, it is rare for a private corporation to need to pass an ordinary resolution of shareholders since most often a special resolution is required which, as noted above, still must be by unanimous consent if done in writing.
• Since notice must be sent to all shareholders who did not sign the resolution, and there is no change to the requirement to send financial statements to the shareholders 10 days prior to each AGM, relying on the reduced threshold may not meaningfully simplify the administrative burden of passing resolutions. Often when written resolutions are done instead of an AGM we include a waiver of the right to receive the financial statements 10 days prior to the signing of the resolution, which would have to be signed by all shareholders to be effective.
• The requirement to obtain the written consent of all shareholders (including non-voting shareholders) to exempt a private corporation from the annual audit requirement is still in place.
• We often have voting trust agreements in place so that we do not need to chase minority shareholders each time their signature would be required in any event.

Key Take-Aways

If you’re considering relying on any of the OBCA amendments implemented today, keep the following in mind:

• First, confirm that your corporation is subject to the OBCA. Corporations incorporated under the Canada Business Corporations Act, for example, cannot rely on these changes and are still subject to the requirements of their own corporate statute, including a Canadian residency requirement for directors.
• For the repeal of the director residency requirement:
  • Regardless of whether you have any Canadian resident directors, your OBCA corporation will still require a registered office in Ontario where records are kept and mail can be received. This cannot be a P.O. box.
  • Consider if there are any tax or other reasons to have one or more Canadian directors on your board.
• For the reduced shareholder approval threshold:
  • This applies only to privately-held OBCA corporations.
  • This also applies only to “ordinary” resolutions. Generally, these will often be routine AGM business like electing the directors and re-appointing the auditors. Any matter that must be approved by special resolution still requires a shareholder meeting or a unanimous written resolution.
  • Consider whether there may be other reasons to continue holding an AGM. AGMs can be great opportunities to interact with your stakeholders, present the successes of the business, and gauge how supportive your shareholders may be of a future financing or other transaction. Shareholders whose corporations have regularly held AGMs may be disappointed by a change.
  • Review your corporation’s articles and by-laws and any unanimous shareholder agreement for any requirement for a higher shareholder approval threshold than that set out in the OBCA. Any such higher threshold in those documents will prevail (other than a higher threshold relating to the removal of directors).
  • Corporations that rely on an exemption from the audit requirement must still obtain the consent of all of the shareholders in writing in respect of each financial year in which the exemption is to apply.
  • There may be good reasons to still get the approval of all of the shareholders in writing to avoid any misunderstandings or future dispute.