Earlier this month, Tesla Inc.'s shareholders voted in favour of a re-domestication of the company from Delaware to Texas. The company announced that it had moved to Texas on the same day, meaning that is has ceased to be governed by Delaware corporate law and is now governed by Texas corporate law.1
The proposed move was a reaction to the shareholder protections in Delaware corporate law, especially in light of a uniquely large pay package for Elon Musk, Tesla's CEO, that a Delaware judge struck down earlier this year.2 The theory is presumably that fewer such protections would be better for companies with visionary CEOs with uniquely large pay packages – or at least for Tesla; and many minority shareholders appear to have agreed, with 63% of all outstanding shares voting in favour of the move. Every corporation is unique, and Tesla's shareholders were entitled to make this decision and in a good place to know what is best for them.
This type of "jurisdiction shopping" is not new for corporate law, nor is it necessarily harmful. While one could imagine a race to the bottom of among jurisdictions hoping to attract companies with visionary leaders, one could also see the opposite borne out in practice. Around two-thirds of S&P 500 companies are governed by Delaware corporate law.3
In Canada, there are 14 main business corporation statutes, one for each province and territory and one for the federal jurisdiction. While they each have their own character and structure, the basic corporate concepts in them largely align. As a result of this basic alignment, a body of law has developed over many decades that, while not as rich as in, for example, Delaware, can be applied not only in respect of each corporate statute, but on certain key principles, such as directors' duties, to business corporations across the country, creating a basic level of predictability for companies, directors, shareholders and other stakeholders. But as a result of there being numerous corporate statutes, there is plenty of opportunity for jurisdiction shopping if one of those statutes changes.
BILL S-285
In that context, Canada's senate has completed its first reading of a private member's bill, called the 21st Century Business Act, that proposes fundamental changes to the federal corporate statute, the Canada Business Corporations Act (the "CBCA"). The proposed amendments would impose an overarching, universal "purpose" on every CBCA corporation to pursue its best interests while operating in a manner that benefits, and minimizes harm to, the wider society and the environment. They would also expand the fiduciary duty and duty of care that apply to directors and officers to promote the pursuit of that purpose, expand the universe of complainants able to bring derivative claims against directors and officers and impose a disclosure obligation covering impacts on the environment and the wider society.
As debates as to how corporations should be legislated generally and governed specifically have intensified in recent years,4 it is notable that these key elements of Bill S-285 resemble some, though not all, of the hallmarks of the recently conceived class of corporations known as "benefit companies."
British Columbia is the only jurisdiction in Canada that has adopted benefit company legislation. A description of British Columbia benefit companies is set out in our June 2020 blog post here and, for comparative purposes, a table comparing the proposed elements of Bill S-285 with British Columbia's benefit company principles is set out as an exhibit below. It is likely not a coincidence that the hallmarks of a benefit company also relate to corporate purpose, a bifurcated fiduciary duty and disclosure of impacts.
A NEW FORM OF BENEFIT COMPANY
There are key distinctions between benefit companies, at least as governed by British Columbia law, and the altered CBCA corporation as envisioned by Bill S-285, some of which are troubling.
Foremost, benefit company status in British Columbia is an alternative to the standard corporate form, and converting to a benefit company is seen as a fundamental decision subject not only to a "special resolution", or super-majority approval by the shareholders, but a right to dissent. In other words, a change to the corporate constitution of that nature could be a fundamental change to the shareholders' investment, and the legislature believed the shareholders should therefore have a say in the matter.5
In contrast, a key element of Bill S-285 is that, if passed, its amendments would apply to every CBCA corporation. In other words, the proposed amendments would convert every CBCA corporation into a new sort of universal benefit company. But not only would shareholders not be given an opportunity to vote or dissent in respect of the change, this new class of "21st century business" corporation would lack some of the key features that were intended to keep benefit companies attractive to two key constituencies: shareholders and managers.
For example, a somewhat alarming element of Bill S-285 is its potential to increase claims against, and potentially exposure to liability for, the directors and officers of CBCA corporations. The bill proposes that a complainant in a derivative action would include any person that a court is satisfied is acting in pursuit of the interests of the wider society or the environment. That appears to be anybody, regardless of the remoteness of their connection to the corporation. What it would take to satisfy a court, and how likely any such action would be to succeed in the face of the business judgment rule, would have to wait to be seen, but it appears that the universe of potential claimants in relation to CBCA companies would be vastly expanded. The expansion of the duty of care, similarly, may create an additional new category of claims.
In contrast, benefit company laws were crafted to limit the availability of claims against directors and officers. Importantly, a claim to enforce the new element of the fiduciary duty – to act honestly and in good faith with a view to conducting the business in a responsible and sustainable manner and promoting the public benefits specified in the articles – may only be commenced by shareholders holding certain minimum thresholds, and only for non-monetary awards. Directors and officers are not exposed to the infinite universe of potential claims that could arise from "wider society."
IS CORPORATE PURPOSE UNIVERSAL OR BESPOKE?
The other key difference between the proposed amendments contained in Bill S-285 and benefit companies is the concept of "purpose" itself. Benefit companies must set out in their constating documents the public benefit(s) the company will promote. In other words, the company's purpose must be specific and tailored to that company. In contrast, Bill S-285 appears to impose a monolithic purpose on all CBCA corporations. It would legislate what the purpose of all corporations must be; benefit company legislation, recognizing that every corporation is unique, takes the lighter touch of legislating how a particular corporation should pursue a purpose that it has invented on its own.
Improvements in corporate law should always be aimed at increasing the benefits that corporations have created for our societies and reducing the costs they have imposed. Much of the corporate governance discourse has focused on doing that less by changing what corporations are and more on how they are governed. But the proposed amendments in Bill S-285 are less about improving corporate governance than they are about altering the nature of the corporate form itself. Rather than providing a means to improved governance – a means for which benefit companies were conceived – it appears to be using the corporate law as an instrument to implement a wider social policy.
Given the panoply of corporate statutes available to businesses in this country, and the relative ease of jurisdiction shopping, it is hard to see how it would be effective.
EXHIBIT
Footnotes
1. Tesla Inc. press release, June 13, 2024, available online at https://ir.tesla.com/press-release/tesla-releases-results-2024-annual-meeting-stockholders.
2. Theo Francis, "The Big Loser in Tesla's Shareholder Vote is Delaware", Wall Street Journal, June 16, 2024.
3. Ibid.
4. See, for example, Martin Lipton, Steven A. Rosenblum & Karessa L. Cain, Thoughts for Boards of Directors in 2020, Harvard Law School Forum on Corporate Governance (Dec. 10, 2019), discussing among other things the Statement on the Purpose of a Corporation issued by the Business Roundtable in August 2019, available online at: https://corpgov.law.harvard.edu/2019/12/10/thoughts-for-boards-of-directors-in-2020/; Bebchuk, Lucian A. and Tallarita, Roberto, The Illusory Promise of Stakeholder Governance (February 26, 2020). Cornell Law Review, Volume 106, 2020, pp. 91-178; Strine, Jr., Leo E., Good Corporate Citizenship We Can All Get Behind?: Toward A Principled, Non-Ideological Approach To Making Money The Right Way (December 7, 2022). 78 Bus. Law. (2023); Rock, Edward B., For Whom is the Corporation Managed in 2020?: The Debate over Corporate Purpose (May 1, 2020), NYU School of Law, Public Law Research Paper No. 20-16; Strine, Jr., Leo E., Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy - A Reply to Professor Rock (December 15, 2020) 76 Bus. Law (2021).
5. To be clear, becoming a benefit company does not necessarily mean that a company is committing to less profitability; but it could change the time horizon over which, and the means by which, profits accrue. See our June 2020 blog post here.
6. Conducting business in a "responsible and sustainable manner" means taking into account the well-being of persons affected by the operations of the benefit company and endeavoring to use a fair and proportionate share of available environmental, social and economic resources and capacities.
7. While the drafting is not perfectly clear, it appears that this is not intended to create new objects of the fiduciary duty, who would then have claims of their own, altering the principle that a director's and officer's duty is to the corporation itself, not to any particular group of stakeholders.
8. See, for example, Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 SCR 461.
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