The OBCA’s directors’ residency requirement is no more, but is it enough for Pubco’s?

On July 5, 2021, the Ontario government will be making significant amendments to the Business Corporations Act (“OBCA”) pursuant to Bill 213, Better for People, Smarter for Business Act, 2020 (“Bill 213”). Bill 213 amends the OBCA in two significant ways:

1. By repealing the requirement that at least 25 percent of a OBCA corporation’s board of directors be resident Canadians.
2. By enabling holders of a majority of the shares in a non-offering corporation (a non-public corporation) to pass ordinary resolutions in writing without the need for a meeting and without the consent of the minority shareholders.

This article will focus on the abolition of the directors’ residency requirement. This marks an important change to the OBCA, as many non-Canadian businesses have historically overlooked Ontario and incorporated in other jurisdictions in Canada where there are no director residency requirements. A report by the Ontario Business Law Advisory Council in the Fall of 2016 found that, “Ontario loses both income and influence when investors choose not to incorporate in Ontario or when they leave Ontario in favour of another jurisdiction.” Most notably, British Columbia has become the preferred jurisdiction in Canada to incorporate public parent corporations for non-Canadian businesses due, in part, to the fact that it eliminated its director residency requirement years ago. Many, including those in the current Ontario government responsible for repealing the directors’ residency requirement, are hopeful that non-Canadian businesses will now look to Ontario as a viable alternative.

While removing the director residency requirement under the OBCA will no-doubt increase the number of public corporations incorporated and continued into Ontario, there are several corporate governance and securities law matters that should be considered before deciding on that course of action. This article explores these considerations by outlining some of the key differences that continue to persist between the relevant corporate and securities laws in Ontario and British Columbia.

Shareholder approval required for name changes and consolidations

One significant difference between incorporating in British Columbia and Ontario are the methods in which a corporation can change its name and approve consolidations of shares or stock splits. Under the OBCA, a corporation seeking to change its name is required to obtain approval of two-thirds of its shareholders through a special resolution. It is only where an OBCA corporation has a number name and wants to change to an alphabetical name that it can be amended by way of a directors’ resolution. Under British Columbia’s Business Corporations Act (“BCBCA”), a corporation may specify the type of resolution required for a name change in its articles. It is not uncommon for BCBCA corporations to specify that a directors’ resolution will suffice in order to change the name of the corporation. While this difference between the OBCA and BCBCA may seem trivial, it can be increasingly burdensome and costly for corporations to seek shareholders’ approval each and every time a name change is proposed. This is especially true for businesses that envision future reorganizations or transactions that may require various name changes, including, and especially, for reporting issuer shell companies.

A similar difference exists between the OBCA and BCBCA with regard to the required approval for consolidation of shares. The consolidation of shares of a corporation involves reducing the total number of existing and outstanding shares by a specific ratio to ensure that the proportional holdings of each shareholder remains the same. This is an important tool relied on by reporting issuers to control the total number of issued and outstanding shares, as well as their respective per share value in the market and is commonly done by reporting issuer shell companies as part of reverse take-over transactions and TSX Venture Exchange Qualifying Transactions. It is also frequently used in consolidation “squeeze-outs” where a consolidation ratio is used to reduce some minority shareholders’ holdings to fewer than a whole number of shares (i.e. a fractional share). This allows the corporation to force the minority shareholders to sell their rights to a fractional share for a specific cash amount (typically its fair market value). These types of squeeze-out consolidations are particularly useful as a means of achieving a going private transaction.

Under the BCBCA, a corporation can specify the type of resolution required for the consolidation of shares in its articles, and most reporting issuers will typically stipulate that a directors’ resolution will suffice. Under the OBCA, however, consolidations of shares can only be achieved with the approval of two-thirds of its shareholders through a special resolution. This is a significant advantage of incorporating under the BCBCA over the OBCA, as directors’ resolutions are much more timely and cost-effective than special resolutions. A directors’ resolution can be achieved through the unanimous written consent of the directors and will not require a meeting or the preparation of lengthy information circulars or other disclosure documents that would typically be required under a special resolution. It should be noted, however, that BCBCA reporting issuers will still be required to follow any approval requirements imposed by the stock exchanges they are listed on. For instance, the TSX Venture Exchange requires shareholder approval for share consolidations “which, when combined with any other security consolidation conducted by the issuer within the previous 24 months that was not approved by its shareholders, would result in a cumulative consolidation ratio of greater than 10 to 1 over such 24 month period.” Reporting issuers, therefore, have to be mindful of any applicable stock exchange rules that may impose additional approval requirements.

Notably, the BCBCA allows for shareholder meetings to proceed with a simplified one-page notice of meeting (including with respect to special resolutions) on ten days‘ notice for non-reporting issuers.  Under the OBCA, a corporation must send to shareholders a management information circular in prescribed form and specific disclosure about the items of business to be dealt with at the meeting. This is an advantage of incorporating under the BCBCA to the extent that transactions are expected that require shareholder approval where the issuer is not a reporting issuer.

Late fees for SEDI

An additional consideration for non-Canadian businesses looking to become a reporting issuer in either Ontario or British Columbia is the reporting requirements and late filing fees imposed on insiders. An insider includes all of the directors and officers of the reporting issuer, as well as any individual that has a beneficial ownership or control over, either directly or indirectly, 10 percent or more of the reporting issuer’s outstanding voting rights. As insiders are potentially privy to information that others in the general public are not, they are required in both Ontario and British Columbia to file insider reports on Canada’s online browser-based service, the System for Electronic Disclosure by Insiders (“SEDI”). An initial report must be filed in both jurisdictions within 10 days of an individual becoming an insider, and subsequent reports outlining certain changes to the beneficial ownership or interest in the reporting issuer must be filed within 5 days of such changes.

Where Ontario and British Columbia differ is with regard to the late filing fees attached to the insider reports. For insiders of reporting issuers whose principal regulator is British Columbia, the late filing fee is $50 per transaction, per insider, per issuer, imposed by the British Columbia Securities Commission. For insiders of reporting issuers whose principal regulator is Ontario, the late filing fee is $50 per calendar day, per insider, per issuer, imposed by the Ontario Securities Commission. The late filing fees in Ontario are subject to a maximum of $1,000 per insider, per issuer, within any one year beginning on April 1^st and ending on March 31^st. It is not uncommon for insiders to be wholly unaware of the insider reporting requirements in Canada and, therefore, run the risk of accumulating late fees. As the late filing fees are computed on a per transaction basis in British Columbia, as opposed to the per calendar day basis in Ontario, the late filing fees in British Columbia tend to be significantly lower than in Ontario.

Potential offences and penalties under the applicable business corporations acts

Another factor that non-Canadian businesses should consider when deciding whether to incorporate in either British ‎Columbia or Ontario is the potential liability under the governing business ‎corporations acts. There are a number of offences under both the OBCA and BCBCA that impose varying penalties on both individuals and corporations found to be in contravention of certain sections of the acts. Some common examples of offences involve the failure to promptly amend and provide financial statements to the auditors, failure to provide necessary disclosure materials, such as information circulars, ahead of shareholder meetings, and knowingly authorizing, permitting, or acquiescing in the corporation making a false or misleading statement. Under the OBCA, the most common maximum monetary penalty for individuals is $2000, with the potential ‎of imprisonment for a period of no longer than one year. Under the BCBCA, the most common monetary penalty ‎for individuals is also $2,000, however, the Act does not prescribe any term of imprisonment. The OBCA and BCBCA ‎also contain differing maximum monetary penalties when a corporation is found guilty of an ‎offence. Under the BCBCA, the maximum monetary penalty for corporations is typically $5,000, while under the ‎OBCA, the maximum monetary penalty is typically $25,000.‎

It should be noted that in practice, Ontario prosecutors very rarely pursue imprisonment under ‎the OBCA, and only do so with regard to the most severe and egregious violations. Additionally, while the maximum penalty for corporations under the OBCA is typically higher than that of the BCBCA, there may be circumstances where the convenience of incorporating in Ontario may outweigh the risk of slightly higher penalties. This is something non-Canadian businesses should discuss with their Canadian counsel.

Conclusion

While Ontario’s recent abolition of the directors’ residency requirement will certainly make Ontario a more attractive jurisdiction for non-Canadian businesses looking to incorporate public companies, there are still a number of significant advantages to incorporating under the BCBCA. As discussed, some of the major advantages include no requirement under the BCBCA for shareholder approval for name changes and consolidations, smaller late filing fees for insiders under SEDI, and a less punitive regime for offences under the governing corporate statutes. It will be interesting to observe whether the above advantages will be enough to maintain British Columbia as the preeminent jurisdiction for the incorporation of public companies for non-Canadian businesses. 

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