Ontario business laws modernized: Shareholder approval thresholds, director residency requirements

6 minute read
07 October 2020

The Ontario Government is proposing to amend the Ontario Business Corporations Act in an effort to allow both public and private Ontario corporations to operate with more flexibility.

On October 6, 2020, the Government of Ontario introduced Bill 213, Better for People, Smarter for Business Act, 2020 that addresses certain issues affecting the business community in Ontario and seeks to make Ontario a more welcoming province for business. The Bill does so by amending the Ontario Business Corporations Act to:

  • Eliminate the long-standing requirement that at least 25% of the directors of an Ontario corporation be Canadian residents; and
  • Lower the approval threshold for written shareholder resolutions passed in lieu of a meeting, from unanimity to a majority, in the case of privately held corporations only.

These important changes are based on recommendations made to the Ontario Government by the Business Law Modernization and Burden Reduction Council, which is chaired by Gowling WLG partner, E. Patrick Shea, LSM. The Council continues to advise and support the government's commitment to reduce burden on business in Ontario.

Director residency requirement abolished for Ontario corporations

The Bill proposes to amend the Ontario Business Corporations Act to eliminate the requirement that at least 25% of the directors of an Ontario corporation be Canadian residents.

This is a welcome change as many foreign businesses will be able to elect to the board the best-qualified candidates for the business. Unfortunately, many foreign controlled businesses currently choose to incorporate in other Canadian jurisdictions solely (or in large part) to avoid the director residency requirements, even if operations, employees and facilities are or will be located principally in Ontario. This causes the corporation unnecessary administration and regulation.

The elimination of this requirement also provides an opportunity for foreign businesses with existing Ontario corporations to revisit and adjust their board composition, and for foreign businesses that incorporated in another jurisdiction solely because of the director residency requirement to repatriate the corporation to Ontario.

Following the proclamation of the Bill, Ontario would become the most recent province to abolish residency requirements for business corporations, following Alberta, which enacted the change in July and is now awaiting proclamation. Numerous other Canadian jurisdictions are free of these director residency requirements.

If passed, this amendment will come into force on proclamation and will apply to both privately and publicly held corporations in Ontario.

Reduced approval threshold for certain written shareholder resolutions

It is a widely used practice in Ontario for private corporations to obtain shareholder approval by written resolution as an alternative to holding cumbersome shareholders' meetings. While ordinary resolutions passed at a shareholders' meeting require quorum and the affirmative vote of holders of a majority of voting shares in attendance, resolutions passed in writing have long required the signature of each voting shareholder of a corporation. Under these rules, Ontario corporations often chase shareholders for signatures and, with as little as one disgruntled or unresponsive shareholder (no matter how small their holdings), are sometimes left with no option but to hold an unwanted shareholders' meeting (at the risk of great expense and lost time) in order to get on with business.

In another welcome move, the Government of Ontario proposes to amend the Ontario Business Corporations Act to reduce the approval threshold for a written shareholder resolution to more closely mimic existing approval requirements for resolutions passed at a shareholders' meeting. This change would only apply to privately held corporations and only to those decisions that currently require only an ordinary resolution (being routine matters, including the election of directors and confirmation of by-laws). This change would permit a written resolution to be effective if signed by shareholders holding a majority of the votes and will allow Ontario businesses to make decisions quickly when needed. To ensure all shareholders are made aware of approved resolutions, notice of any written resolution signed under the proposed rules must be provided by the corporation to all shareholders who did not sign it within 10 days of the resolution being passed.

The default approval threshold under the proposed rules is a majority of the shares, but this threshold may be increased (but not decreased) in the articles or any unanimous shareholders' agreement of a corporation.

Ontario corporations will need to review their articles and unanimous shareholders' agreements to determine whether their terms may result in unintended consequences under the new rules. This may be especially relevant for complex or highly negotiated governance regimes with requirements that ought to, but do not currently, apply to written shareholder resolutions.

It is significant to note that there is no change to the requirements for written resolutions relating to matters requiring a special resolution (typically for fundamental matters or changes, such as amalgamations, amendments to articles, winding-ups, etc.), which must still be signed by all shareholders. This will ensure all shareholders have advance notice of any fundamental changes to the business and will preserve a shareholder's right to exercise dissent rights with respect to fundamental changes with which they disagree.

Overall, these proposed changes come as an early fall surprise for privately held corporations in the province for which most decisions are made by written resolution. The reduction of the approval threshold for written resolutions is yet another measure that provides flexibility in the operation of an Ontario business corporation and will make Ontario an attractive jurisdiction for new businesses.

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