Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 1 - Evidence of March 1, 2001
OTTAWA, Thursday, March 1, 2001
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-11, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence, met this day at 11:00 a.m. to give consideration to the bill.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, I see a quorum. The subject of this morning's meeting is Bill S-11, to amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other acts in consequence.
The witnesses are from Industry Canada and the Department of Justice. Mr. Gill has a presentation to make. Following that, senators will ask questions that they deem to be appropriate.
Please proceed, Mr. Gill.
Mr. Lee Gill, Director, Corporate Law Policy, Corporate Governance Branch, Industry and Science Policy Sector, Industry Canada: Honourable senators, thank you for inviting us to assist the committee in its deliberations today.
With your permission, I will provide a general overview of the major elements of Bill S-11, starting with its four key themes, and then move on to differences between the bill and its predecessor, Bill S-19.
I will keep my presentation short, in order to allow for the maximum time for questions and answers, as well as for an opportunity to provide whatever clarification committee members might require on various clauses of the bill.
[Translation]
I will not review at this time in detail all of the consultations that led up to this bill. Most committee members are well aware of the extensive consultations with interested parties prior to the drafting of the proposed amendments to the Canada Business Corporations Act and the Canada Cooperatives Act.
Bill S-19 died on the Order Paper when Parliament was dissolved last fall. Compared to the earlier version, the bill now before you contains a number of changes, most of a technical nature, as well as a number of substantive amendments that I will focus on in a moment.
The changes culminating in Bill S-11 reflect the comments and suggestions made by witnesses who testified before your committee in late spring and early summer of the year 2000, not to mention the timely observations of committee members.
[English]
The Canada Business Corporations Act is the principal federal corporate law in Canada. It sets out the legal regulatory framework for the governance of more than 155,000 businesses, including one-half of the largest corporations in Canada and tens of thousands of smaller businesses.
The Canada Cooperatives Act is also an important framework law, one that governs federally established cooperatives. The proposed amendments to this act are intended to make its provisions consistent with the changes that are being proposed for the Canada Business Corporations Act.
The objective of amending both these acts is to maintain a marketplace framework law that promotes sound corporate governance and decision making, while at the same time providing the flexibility that corporations need to be responsive to the realities of the evolving marketplace and to new technologies.
The amendments have been considered under four themes. The first theme is participation. Under the amendments, the right of shareholders to communicate amongst themselves without undue regulatory interference is improved. Also, the proposed amendments will increase the ability of corporations to use new and emerging technologies to communicate with shareholders. Furthermore, the amendments before you will increase the rights of shareholders to make proposals.
A second thrust of this initiative is competitiveness. It is crucial that both the Canada Business Corporations Act and the Canada Cooperatives Act meet the needs of expanding domestic and globally oriented Canadian corporations. To do this, these acts need to facilitate innovation and appropriate risk taking. The bill before you does this through changes to the residency requirements of directors, the liability provisions affecting directors and the rules affecting the acquisition of shares of a parent company by a foreign subsidiary.
With respect to the residency provisions, the bill proposes to reduce the Canadian residency requirement for the board from a majority to 25 per cent, except for sectors or corporations that are subject to ownership restrictions.
In the area of directors' liability, the amendments would now provide directors with a due diligence defence.
The bill also proposes to allow a subsidiary to use the shares of a parent corporation in order to facilitate its acquisition of a foreign business.
[Translation]
A third thrust of this initiative is clarification of liability. This objective will be attained by amending provisions respecting the liability of persons involved in the preparation of financial information required under the Act.
Following up on the committee's recommendations, the bill proposes a regime of modified proportional liability for persons involved in the preparation of financial information required under the Canada Business Corporations Act or the Canada Cooperatives Act.
The bill also includes measures to clarify the transfer of powers under a unanimous shareholder agreement.
The fourth theme is efficiency. The changes proposed in the bill will eliminate overlap and reduce costs.
This objective will be attained by repealing the provisions of the Canada Business Corporations Act relating to take-over bids and insider transactions and by making them subject to securities legislation. The proposed amendments also expressly authorize a distributing corporation to carry out going-private transactions, provided these comply with relevant provincial securities legislation.
[English]
I will now turn to the differences between the former bill, S-19, and Bill S-11.
Bill S-11 incorporates many of the suggestions made by the witnesses this committee heard from last spring and early last summer with the very helpful comments of committee members themselves. These amendments are all important to the success of this reform process. For brevity, I will focus on three of these amendments.
The first is the inclusion in the Canada Cooperatives Act of the right of cooperatives members to use electronic communications in the same manner proposed for shareholders in corporations. The regime provided in Bill S-19 for the Canada Business Corporations Act had not originally been duplicated for the Canada Cooperatives Act. That is because some provisions in this area had already been made in the Canada Cooperatives Act when it was passed by Parliament in 1998. However, witnesses from the cooperatives sector noted their strong preference for the new regime provided for in Bill S-19. These changes have, therefore, been introduced.
A second amendment deals with the rules regarding shareholder proposals. During consideration of Bill S-19 by this committee, a number of witnesses raised objections to two aspects of the shareholder proposal provisions as they were then drafted. The bill proposed to allow corporations to reject a shareholder proposal if its primary purpose was to promote general economic, political, racial, religious, social or similar causes, unless the person who submitted the proposal demonstrated that it related in a significant way to the business or affairs of the corporation.
Stakeholders objected to the continued ability of corporations to reject proposals based on social, religious and other similar causes. They also objected to the fact that the onus was on the person making the proposal to demonstrate that the proposal related in a significant way to the business or affairs of the corporation.
In this new bill, in response to the position of many witnesses, the general causes for rejection have been removed. The corporation can now reject a proposal only if it does not relate in a significant way to the business or the affairs of the corporation. Further, the burden of proof for the rejection of the proposal is now on the corporation instead of the shareholder making the proposal. Shareholders would still have to bring a motion before the court if the corporation refuses the proposal; however, the onus would now be on the corporation to justify its refusal.
A third change allows a foreign subsidiary of a Canadian corporation to temporarily acquire shares of its Canadian parent corporation in limited and clearly defined circumstances. The subsidiary will be allowed to use these shares as currency in order to facilitate the acquisition of a foreign business by merger, takeover or other business combination. This establishes a more level playing field for federally incorporated companies.
[Translation]
Finally, regulations pertaining to a wide range of matters will be brought in. Among other things, they will touch on the following: the harmonization of the Canada Business Corporations Act and of the relevant provisions of provincial acts; detailed rules for the submission of shareholder proposals; the investment threshold that defines a small investor for the purposes of the application of the modified proportional liability regime; detailed rules governing electronic communications between corporations and their shareholders; additional exceptions relating to the rules for proxy solicitation; and rules setting out the circumstances in which subsidiaries may acquire shares of the parent corporation.
[English]
Mr. Chairman, for the convenience of senators, we have circulated a chart that offers a side-by-side comparison of the differences between the former bill and this one. If you wish, we are prepared to take members of the committee through this comparison.
I thank you for your attention. We will be pleased to respond to any questions you might have on Bill S-11.
The Chairman: Perhaps you could highlight what you consider to be contentious issues.
Mr. Gill: I hope that not too many of them are contentious. I will highlight the major ones.
On the first page of the summary of differences, the first three items are wording changes -- which represent issues that were brought before us. They are all significant wording changes in the interpretation of the bill, but the fourth one, dealing with clause 18(2), is to permit a subsidiary to acquire shares in the parent corporation. I mentioned that in my presentation. The reason for the amendment is to level the playing field for Canadian corporations when they want to acquire shares in a corporation elsewhere. For example, if you want to acquire a corporation in the United States, one option is to have your subsidiary acquire the corporation -- to present the shares of the parent corporation through the subsidiary to the shareholders of the corporation you are acquiring. In doing that, there are certain tax benefits for the people to whom you are giving the shares of the parent corporation. Therefore, there is a certain reduction in cost of acquiring a firm. That is standard procedure in the United States we are told. We are told that it is already allowed under the Ontario Business Corporations Act and we have received requests to level the playing field to provide CBCA corporations with that opportunity also, which is why this is here.
The Chairman: I assume that a subsidiary can acquire shares of the parent without necessarily having to depend on somebody else to acquire something.
Mr. Gill: No, under the CBCA a subsidiary is currently not allowed to acquire the shares.
The Chairman: If they acquire the shares, they must use them?
Mr. Gill: There are some exemptions, but in this case they must use them. It is a kind of a flow-through. They use them as a currency for the purchase of a foreign subsidiary. A subsidiary is currently not allowed to hold the shares of a parent.
The Chairman: Why would they not just use the cash?
Mr. Gill: If you pay it in cash, the shareholder of the foreign subsidiary faces a capital gains tax.
The Chairman: This would be a tax-free exchange?
Mr. Gill: Yes.
The Chairman: Now it makes sense.
Senator Tkachuk: My questions are relevant to the rights of shareholders to present a proposal to the agenda of the corporation for an annual meeting.
How will a reverse onus actually work? It previously had to do with the direct business of the corporation.
Now it seems that you are saying that the corporation has to be able to prove that it has nothing to do with the direct business of the corporation. Does that mean that a shareholder can present something to management that is of no value to the corporation and then take it all the way to court and that there would always be a reverse onus on the corporation to prove otherwise? Is that is what you are saying here?
Mr. Gill: My understanding is that that is what reversing the onus would amount to.
Senator Tkachuk: So it can be political?
Mr. Gill: Yes.
Senator Tkachuk: If shareholders did not like a forest company's tree-cutting policies, even though it was following the law, and they then bought shares to become politically involved in the corporation, they would be able to file the right to bring this issue to the annual meeting and the corporation would have to prove the issue had nothing to do with business, even though such was self-evident?
Mr. Gill: It would have to show that it does not have a significant relationship with the business or affairs of the corporation. If it does have a significant relationship -- and anyone can jump in if I make an error here -- then the shareholder has to show that he or she held a certain number of shares for a certain period of time to prove that they are a serious shareholder. You cannot just buy the day before.
Senator Tkachuk: What would be the time period -- six months?
Mr. Gill: I believe it is six months, $2,000, or 1 per cent of the corporation.
The Chairman: I do not think that was the question.
Mr. Gill: No. I am getting to the question. They have to be significant shareholders.If they go before the court and it is shown that it relates significantly to the business or the affairs of the corporation, they have the ability to submit this proposal.
The issue also is that in the act there are restrictions on how often you can resubmit the same proposal. There is a protection there for the corporations.
Ms Veronica Wessels, Acting Senior Project Leader, Corporate Law Policy, Corporate Governance Branch, Industry Canada: Another point that should be made is that the onus in the current legislation is on the corporation to prove that it does not relate in a significant way to the business or the affairs of the corporation. In Bill S-11, we are eliminating the grounds that the stakeholders were objecting to, but the onus on the corporation is there right now. In Bill S-19, the onus had been shifted to the shareholders, and the stakeholders objected to that. It is status quo in terms of the onus.
Senator Oliver: My question is also around the shareholder proposals. You say that detailed rules for submission of shareholder proposals will come later on in a set of regulations. Will there be guidelines in addition to regulations, or will there just be regulations?
Mr. Robert Weist, Director, Compliance Branch, Corporations Directorate, Industry Canada: Right now there will just be regulations. Regulations do set out guidelines, what one must do to get one's proposal forward. What Mr. Gill was talking about was when your proposal has been submitted before and voted on by the company.
Senator Oliver: I understand that. I read about that. I wanted to know if there was one thing called the legislation, another thing called the regulations, and another thing called guidelines?
Mr. Weist: Yes. We do not plan to issue guidelines on that point right now. If there is shown to be confusion, we can certainly issue guidelines as that confusion shows it is necessary.
Senator Oliver: Have you done guidelines for other sectors?
Mr. Weist: Yes, we have.
Senator Oliver: The new words you use, since you got rid of such words as "economic", "racial", and so on, are "business" and "affairs". Will you attempt to define those two words in the regulations or in the guidelines?
Mr. Weist: They are not defined in the regulations right now. If it is shown that people have difficulty understanding what "business" and "affairs" are, then we will issue guidelines.
Senator Oliver: Are you able to state for the record now what things will be expressly included or excluded in your definition of "business" or "affairs"?
Mr. Weist: We are not. This bill says that it has to be related in a significant way to the business or affairs of the corporation. That is what this bill states.
Senator Oliver: Can you think of anything more general? It does not give much assistance to a shareholder that wants to make a proposal, does it?
Mr. Irving Miller, Senior Counsel, Commercial Law Division, Industry Canada and Justice Canada: I believe there is a definition of "affairs" in the act, in the definition section, although not of "business". "Affairs" is defined as:
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...the relationships among a corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate.
There is a general definition that may offer some assistance, basically saying that it is the relationship between the corporation and the shareholders, and officers and directors.
Senator Oliver: In terms of that, I presume that it does not include economic, political, racial, religious, social or similar causes. It would not be broad enough to encompass that; is that correct?
Mr. Gill: I am not sure of that. As soon as this bill goes before the courts in terms of a challenge, much of this will come to be defined. It could well include economic things. It will be seen as to how the court defines the business of the corporation and the significant relationship, in particular, to the business of corporation.
The Chairman: I am a little confused here. I thought that you had now taken political and religious out?
Mr. Gill: We have taken out the specific references to those, yes.
The Chairman: Taking it out does not mean eliminating it?
Senator Oliver: That is what we are saying.
Mr. Weist: The question was about whether something that has religious, social or economic overtones could be seen to be related to the business or affairs of the corporation. This will have to be settled on a case-by-case basis.
The Chairman: Can you think of an example of anything religious that would affect a corporation?
Senator Meighen: I would suggest cutting trees on Sunday.
The Chairman: Ms Wessels said that with respect to the onus of proof it was the status quo, but Mr. Gill said that in the former law the onus was on the shareholder and now it is on the corporation.
Mr. Gill: In Bill S-19, the onus had been placed on the shareholder.
The Chairman: In this one, it is on the corporation?
Mr. Gill: In this one, it is on the corporation, which is where it is in the act right now.
The Chairman: Where was it?
Mr. Gill: In the CBC right now, it is on the corporation. We had moved it to being on the shareholder in Bill S-19.
Senator Oliver: In the bill before us last year, it changed the onus. A lot of witnesses appeared and said it was wrong.
The Chairman: You are putting it back to the way it was?
Mr. Gill: We are putting it back the way it was, yes.
The Chairman: That is what you meant by "status quo"?
Mr. Gill: Yes.
Senator Meighen: Perhaps this is for Mr. Martel. I have not been practising enough law and my mind is not devious enough to figure out how to use the courts either for or against, but I think this is a heaven-sent opportunity to tie things up. Can we just follow through what would happen?
The corporation, before its annual meeting, must send out a notice of the annual meeting to incorporate any of the proposals of the corporation. First, it would have to state which ones it rejected or not. When will it have to say which ones are rejected in terms of the date of the annual meeting?
The legislative summary from the Library of Parliament specifies that there are 21 days that the corporation has to consider a proposal made by a shareholder. How much time does the statute require that the proposal be filed before the date of the annual meeting or after receipt of the notice of the annual meeting? Or is there any such requirement?
Mr. Weist: As you said, senator, the corporation has to give notice of the meeting 21 to 50 days prior to it. Before that, the shareholder who wishes to make a proposal has 90 days within that timeframe to make his or her proposal.
Senator Meighen: You have now lost me completely.
Mr. Weist: For example, let us say the company will hold its meeting on June 30.
Senator Meighen: If I were a shareholder, how would I know that; and when would I know that?
Mr. Weist: The act provides that the corporation must hold an annual meeting.
Senator Meighen: Exactly, but there is a fair degree of latitude as to when, is that not right?
Mr. Weist: Right.
Senator Meighen: Under the CBCA, it has to hold its annual meeting within six months of its year end, is that not right, Mr. Martel?
Mr. Paul Martel, partner, Fasken Martineau DuMoulin: That is right.
Senator Meighen: It is a six-month period. Let us say its year end is December 31. Thus, it has until June 30. Let us say that I am a shareholder. I do not know when it will hold its annual meeting. When will I find out? How much notice must I be given or is there any requirement to set out the date of the annual meeting?
Mr. Weist: You must be given 21 to 50 days' notice of that meeting.
Mr. Martel: The bill states that the proposal must be submitted at least the prescribed number of days, which will be 90 days, before the anniversary date of the notice of the meeting that was sent to the shareholders in connection with the previous annual meeting. Therefore, you know the date of the previous annual meeting.
Ms Wessels: If I could add to that, the information circular will have disclosure of the drop-dead date for submission of a proposal the next year. In the information circular, there is a change to the regulations that will require the corporation to disclose that drop-dead date for submitting a proposal for the following year. Thus, the deadline for the submission of a proposal for the following year will be clear.
Senator Meighen: Are you referring to the information circular preceding the annual meeting for, let us say, this year?
Ms Wessels: Yes.
Senator Meighen: As a shareholder, I would then know when next year's annual meeting would be.
Ms Wessels: You will not know when next year's annual meeting will be. However, you will know what the deadline for submitting your proposal will be. That is something for which stakeholders asked, and we have done it.
Senator Meighen: Roughly speaking, the deadline would be how many days before the annual meeting? Did you say 90 days?
Mr. Martel: It is 90 days before the date of the notice of the previous annual meeting, which was at least 21 days before the year was up. Thus, it is even earlier than the date of the meeting itself. It is at least the date of the notice that the shareholders receive for that meeting.
Senator Meighen: Let me go at it from a different angle. I wish to go at this from the perspective of either someone who is trying to get their proposal heard and the corporation is refusing or vice versa. I am trying to figure out whether this legislation is fair to both sides.
Let us say that I submit my proposal. The corporation has 21 days to consider it; is that right?
Mr. Gill: Yes.
Senator Meighen: I have read in the bill that section 47 of the draft regulations would give the corporation 21 days instead of the current 10 days to consider; is that right?
Ms Wessels: Yes.
Senator Meighen: They have 21 days to consider it. Let us say they reject it. How close to the annual meeting date could that be?
Mr. Weist: If you are asking about the corporation rejecting the proposal, it depends on when the proposal was filed.
Senator Meighen: Let us say the proposal was filed the last legal day on which it could be filed.
Mr. Weist: You are supposing that it is filed on the 51st day or the 22nd, for example?
Senator Meighen: Right. Let us say it is the shortest delay, then. That is to say that it is at the last possible moment to submit, which is 21 days before. We now have 21 days to consider and then we have the annual meeting. Am I confused?
Mr. Martel: Clause 7 states that the corporation has within the prescribed period, which will be 21 days, from the day it received the proposal to notify the person of its refusal.
Senator Meighen: I understand that. Take a corporation, give any day you want for the annual meeting and let us work backward.
Mr. Martel: Let us say July 1.
Senator Meighen: When would the notice have to have been given?
Mr. Martel: At least 21 days before that.
Senator Meighen: Are you referring to the notice of the annual meeting?
Mr. Martel: Yes.
Senator Meighen: Let us say that I am a devious corporation and I give notice 22 days before.
Mr. Martel: All right.
Senator Meighen: Therefore, I will give notice on June 8. Let us say my friend the shareholder, who is Senator Tkachuk, will get the notice on June 22 and he wants to file a proposal.
Mr. Martel: He already knows that the date by which he would have to send the proposal is the one we set out before, which was the anniversary date of the notice of the previous meeting. We have to look at that one, too. Let us say that in the previous year the meeting was held on June 1 and that the notice for that one was at least 21 days before, that is, May 10.
Senator Meighen: All right.
Mr. Martel: He knows that he has to have had his proposal in by May 10.
Ms Wessels: It has to be 90 days before May 10.
Mr. Martel: Yes, 90 days before that. If it is not in, it does not change anything. If he does not receive the notice, it is far too late to submit the proposal for that year.
Senator Meighen: We have demonstrated, I think, that it is not an easy concept to grasp. Do I understand that in the previous year's notice shareholders will be advised in clear language as to when any proposal would have to be submitted for the next year's meeting?
Ms Wessels: Yes.
Mr. Weist: Senator Meighen, it is my fault for misleading you. Regulation 43 of the draft says that the prescribed number of days for submitting a proposal to the corporation is at least 90 days before the anniversary date.
The Chairman: The anniversary of what?
Senator Meighen: Is it the anniversary date of the previous year's notice of the annual meeting?
Mr. Weist: That is right. If you have 21 days before the meeting, then add 90 days on to that. If they submit their proposal 90 days before that, then their proposal is fine. It is 90 days or three months.
To use your example, if we go back to May 10, then add on three months before that. That takes us to February. Therefore, it would be before February 10 that the shareholder submits the proposal.
Senator Meighen: Are you telling me that it would have to be in by February 10?
Mr. Weist: That is right.
Senator Meighen: Let us say that I learn about this at the last minute and I get in my proposal on February 10. The corporation now has 21 days to consider; is that right?
Mr. Weist: That is right.
Senator Meighen: That brings us to March 3, and the corporation says, "Sorry, but we are rejecting it." When is the annual meeting?
Mr. Weist: I believe the annual meeting is June 30 or July 1.
Senator Meighen: That takes us to March, April, May. We are talking about a minimum of four months. In the alternative, you could play with the 90 days in terms of changing the annual meeting within that six-month parameter from one year to the next.
Mr. Weist: The board will have to decide the best time for its annual meeting.
Senator Tkachuk: The way it works now is that you have six months after your year end. If your year-end is January 31, you have one meeting in July. The following year, the shareholder submits an application on February 10, which is the deadline date, after the 90 days, and the corporation which had its year-end on January 31 calls the annual meeting within 21 days.
Senator Tkachuk: The corporation can call its annual meeting. It must give notice, and what is its minimum notice?
Mr. Weist: Twenty-one days.
Senator Tkachuk: If this is a contentious application, they call the annual meeting in 21 days, from February 10, when they arrived. One must remember that the year-end was the 31st. They say they will have their information ready, they know what is going on, they have the impending audit report, but we know the financial statements are completed and they will call the annual meeting.
All they need to do is reject it at the end of 21 days. The annual meeting has taken place by the time they go to court. It is over until the following year, right? Is that possible to do? I am not saying that that is what they will do; I am saying that that will be possible to do. I think that is what I would do.
Senator Banks: If you did that, you would pre-empt any such report.
Senator Tkachuk: That would pre-empt any such proposal.
Senator Banks: However, you could only do that for one year.
Senator Maheu: The next year they would get you.
Senator Meighen: I think we should work through a number of scenarios.
Mr. Wayne Lennon, Policy Analyst, Industry Canada: Honourable senators, if that were the case, it would be clear that the corporation was trying to avoid something. A shareholder could, if he wished, possibly apply to the court to get an injunction on the meeting to stop the meeting until the matter was considered. Is that not right, Mr. Martel?
Mr. Martel: The proposed legislation stipulates that the person who claims to be aggrieved by a refusal may seek an order from the court preventing the meeting from being held at which the proposal is to be sought. There is no way that they will let the meeting happen and then say it is too late.
Senator Meighen: Is it your judgment, Mr. Martel, that there would be adequate time under any scenario to get the matter before a court to receive a hearing on an expedited basis or to get an injunction?
Mr. Martel: Yes, that is the case. Normally, if they did not try to do what you just described, the meeting should be about a year after the first one. A period of four months is allotted in order to do that. That is plenty of time. However, in the alternative, a court would simply postpone or stop the meeting.
Senator Banks: Before we leave this issue, I have some difficulty with someone telling us what a court will do.
Senator Meighen: No, that is his opinion.
Senator Banks: I am uncomfortable with leaving so much interpretation in the onus question for the corporation to determine.
I can see a thousand ways -- it is almost like counting angels on the heads of pins -- in which a proposal by a shareholder relates to the affairs as described and the business, which I presume does include the business operations of a corporation.
An environmentalist, in the example given, could argue that it is in the corporation's best interest to be a publicly responsible corporation not to log that particular valley. That is hard to argue. I do not see how we could presume what a court would say as to whether that has to do with the business of the corporation.
I am not comfortable with leaving that much unsaid in proposed legislation and relying to that extent right off the bat and saying, "We will see what this act actually means when a court decides what it means." Are you convinced that it is a good idea? Are we comfortable with that?
Mr. Miller: There is some uncertainty, no matter which way you word it. The present act provides that the corporation is not required to comply if it appears that the proposal relates to subjects such as economics, politics, race, religion, social factors or similar causes. That is not an overwhelming burden on the corporation. If a proposal has several aspects, which normally they will, the corporation must only show that one of those aspects relates to politics, race or some other such cause, and that is sufficient to refuse the proposal.
In this bill, the onus is on the corporation to show that it does not relate to the business or affairs of the corporation. That seems to be a much greater onus for the corporation to meet. I grant you that business affairs can be interpreted in different ways, but generally the courts have looked at them in a consistent manner. However, I am not confident that applications will be consistent.
Senator Banks: Notwithstanding that there are many shareholders' proposals that are good, valuable and substantive, are you satisfied that there is sufficient protection for corporations here against vexatious and frivolous proposals?
Mr. Miller: If a matter does not relate at all to the business or affairs of the corporation, if you are saying it is vexatious, to me a vexatious claim would not relate in any significant way to the business or affairs of the corporation that could be refused by the corporation. There is something of a balance here in terms of where will you lean in terms of providing the onus. It is a fair test now. A purely vexatious proposal will be able to be refused.
You do not want to get into too much detail on what is business or affairs. Affairs are defined in a general way, but if that is limited too much you will restrict it and not allow courts the flexibility they need to look at each case distinctively.
It is always dangerous to try to be too specific with some of these terms. That is why we refer to them generally.
The Chairman: On the question of modified proportionate liability, what kinds of plaintiffs are exempted from the application of modified proportionate liability regime and how did you arrive at the investment threshold of $20,000?
Mr. Gill: Exemptions are provided for charitable organizations for unsecured trade creditors and the government. For those groups, we felt that they were not in the sense of other major investors that could influence the corporation. It could be ensured that the financial situation and the audit of the corporation were carried out appropriately.
For the small investors, we took the figure this committee had come up with, and originally it was a net worth test of $100,000, excluding certain assets such as your house and other things, or $500,000. We examined this and we were informed that this could raise a potential issue with respect to the Charter, or a constitutional issue with respect to privacy because we were requiring groups to divulge their assets.
We examined that. If you had $100,000 to $500,000 worth of net assets, what is the most you would likely have invested in a given corporation?If you were reasonably diversified, you would probably have a maximum of $20,000 in one company.
Senator Oliver: You said up to $500,000.
Mr. Gill: The amount of $500,000 would include your house.
The Chairman: You are not referring to assets but to net worth, are you not?
Mr. Gill: Yes, net worth.
It was our understanding that this committee had discussed that issue and agreed that $20,000 would be an appropriate number and would probably represent an investor with net worth of the amounts this committee was considering. These are not exactly equivalent figures, but they are reasonable figures given what we are trying to do.
Senator Oliver: I wish to refer the witnesses to a letter that was sent to our chairman by an investment representative. Much of the shareholder proposal discussion that we have had arises from what I call the Talisman case. Last year, this provision permitted corporate management at Talisman Energy to reject a legitimate shareholders' resolution raising human rights risks facing the company because of its Sudan operations.
An amendment that you have proposed states that management can exclude such proposals unless the shareholder demonstrates that the proposal relates significantly to the business affairs of the corporation.
A letter sent to our chairman says:
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This does not improve this provision. It still means that management has the arbitrary authority to exclude bona fide proposals. What's more, shareholders need to show in court how their proposals relate to the company's business or affairs. The need to appear in court can be a costly and time consuming to exercise...
Once again, individual shareholders have major concerns with the position you are now in. Before you proposed the changes that are in this bill in the sections we have been discussing, did you consult with any of the people who appeared before this committee and made these complaints? If so, why are they now writing letters to our chairman complaining about the language in this bill?
Mr. Gill: We have consulted with these groups. We have proposed a number of changes that they have requested. With respect to one of your points, the onus is on the corporation to prove that it is not related significantly to the business or the affairs of the corporation. That is a significant change. It certainly reduces the cost to the shareholder of providing proof to the court.
We acknowledge that some witnesses wanted a scheme whereby they would not have to go to court, and that was not provided. There are large numbers of issues in the act that would require court action by dissatisfied shareholders, and this is one of them.
As was pointed out by some witnesses, in the United States the Securities and Exchange Commission does a preliminary review of the situation.
Given the number of shareholder proposals that would be made, and, therefore, refusals, it did not seem economic to set up a group within the federal government to review shareholder proposals just for CBC corporations, as would be the case. If there were a national body covering securities commissions, other acts and ourselves, that might be feasible. It would be difficult to set up, as you can well imagine. We have analyzed that and are currently evaluating whether that can be done in the future. In fact, we have let a contract on this. It is not yet completed. We are working on that issue, but it is not something that we or anyone else who has studied it consider an easy thing to do given the situation in Canada with respect to different laws and different national securities bodies.
Senator Oliver: In your introductory remarks you said that you did do consulting. Can you be specific? Did you simply phone people? Did you actually meet with groups? What form did the consultations take?
Mr. Gill: We met with the Task Force on Churches, we met with Mr. Yaron, and we also met with Democracy Watch to discuss these issues.
The Chairman: In our hearings to be held the week after next, we will hear from people on making applications to corporations for changes in whatever. It would be helpful if you could send a chart to each member of the committee outlining what Senator Meighen was referring to, that being time lines, et cetera, and walking us through one or two typical scenarios. If we have that, we will be more conversant with the matter when we hear from those witnesses.
Mr. Gill: We can do that.
Senator Banks: You said that almost half of the large corporations in Canada are incorporated under this act. Under what act are the others incorporated?
Mr. Gill: They are incorporated under various provincial acts, a large number of which are here in Ontario.
Senator Banks: However, all large federal publicly traded corporations are incorporated under this act?
Mr. Gill: Yes.
The Chairman: Thank you very much for informing us. We look for forward to receiving that chart.
The committee adjourned.