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Panel urges Ontario to overhaul rules governing how companies work

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada’s largest institutional investors, said Tuesday that his group has been lobbying for a decade for changes to business laws to make voting truly democratic.

jennifer roberts The Globe and Mail

Ontario should allow shareholders to vote No in director elections to make it easier for investors to reject unwanted board members, an expert panel has recommended in a new report.

A government-appointed panel of legal experts has tabled a series of reform proposals to modernize Ontario's business legislation, including a recommendation to remove the province's requirement to have at least 25 per cent Canadian residents on boards.

The recommendations will help Ontario to remain an attractive choice for companies looking for a jurisdiction to incorporate their operations, said committee member Carol Hansell, who is a member of the group's steering committee. She said companies need a reason to incorporate in Ontario instead of the Yukon or other regions with modernized business laws.

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"We're trying to make Ontario a jurisdiction of choice on the basis of the legal framework that's available here," she said.

Ontario Government and Consumer Services Minister David Orazietti appointed the 13-member panel in February to recommend reform priorities to over 20 pieces of legislation involving corporate and commercial matters, including the centrepiece Ontario Business Corporations Act, which lays out many of the basic rules about how companies and their boards must operate.

The committee's recommendations have been made available for public comment until Oct. 16, when the government will then review the issues and decide how to proceed with legislative reforms.

The proposed voting amendment would mark a significant change for Canada, where shareholders in all jurisdictions currently have only the right to vote for a director or withhold their votes, which means they are not counted in the vote tally. Shareholder advocates have asked for legal changes to allow investors to vote against director candidates, arguing the current system is undemocratic because directors are always elected even if there is widespread protest and a majority of shareholders withheld votes.

The federal government is also in the midst of reviewing the Canada Business Corporations Act, which governs companies that are federally incorporated in industries such as banking and telecommunications, and has asked for comments about whether it should change director voting rules.

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, said Tuesday that his group has been lobbying for a decade for changes to business laws to make voting truly democratic.

He said the CCGG has recommended changing the federal legislation, and has also written to all ministers responsible for provincial business acts to urge them to also adopt a new voting system with the right to vote against directors. He said it is encouraging that Ontario is considering the change.

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"We're happy to see it," he said.

Mr. Erlichman said the CCGG also supports removing the requirements for Canadian residents on boards because the rule is inflexible and the composition of boards does not need to be enshrined in legislation.

Five other jurisdictions – British Columbia, Yukon, Quebec, Nova Scotia and New Brunswick – already have no requirement for Canadian directors on boards, while only one U.S. state requires U.S. residents and most European countries have no residency requirements for directors.

Mr. Erlichman said the Toronto Stock Exchange already vets and approves directors proposed for election to boards of public companies, and it is in a better position to ensure boards have directors with knowledge of Canadian culture, laws and the business environment.

Ms. Hansell said the Ontario rule also requires 25 per cent Canadian residents to be present to transact business at board meetings, which can sometimes pose problems for small boards. She said residency rules have been politically hard to change, but are no longer needed.

The panel's Business Law Agenda report also recommends amending the Ontario act to give so-called "beneficial" shareholders the same rights as registered shareholders.

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The vast majority of people buy and hold shares they own through an agent, such as a bank or brokerage firm, and do not go through the cumbersome process of registering themselves as owners. But certain rights of shareholders currently apply only to registered owners, including the right to requisition a shareholder meeting.

Ms. Hansell said everyone who owns shares should have the same rights, regardless of the legal way the shares are held.

The panel also recommended changes to partnership rules – including the current restriction in Ontario that allows only lawyers and accountants to operate through limited liability partnerships (LLPs) – saying they are out of step with rules in other provinces. Manitoba, for example, has become "a jurisdiction of choice" for structuring limited partnerships because of its attractive liability laws, the report says.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More


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