1. Introductory
1.1 Forms of Corporate/Business Organisations
The principal form of business organisation in Canada is the business corporation which affords shareholders limited liability protection, and Canada has 14 different business corporations statutes under which these can be incorporated. The Canada Business Corporations Act or "CBCA" is Canada's federal business corporations statute. Each of Canada's 13 provinces and three territories also has its own business corporations statute. However, these are generally modelled on the CBCA such that, in most cases and subject to limited exceptions (such as director residency requirements), there is generally little substantive difference among them practically speaking. Several provincial business corporations statutes in Canada provide for unlimited liability corporations, which may be advantageous as part of cross-border tax planning (but which do not necessarily provide shareholders the extent of limited liability protections that business corporations do).
1.2 Sources of Corporate Governance Requirements
The principal sources of corporate governance requirements in Canada are the business corporations statute under which the company is incorporated and, if the company is publicly listed in Canada, Canadian securities laws. Also, while not technically binding or obligatory, corporate governance practices in Canada can be significantly impacted by various non-legal sources such as proxy advisory firm recommendations and contemporary industry best practices.
A particularly notable non-legal source of corporate governance practice in Canada is the potential influence of Canadian institutional investors such as pension funds. Many of these investors have distinct expectations regarding various corporate governance matters, including as relates to such issues as diversity, equity and inclusion (DEI) and sustainability, and they often proactively exert pressure on their portfolio companies towards these ends. Moreover, this pressure can at times be significant, including where institutional investors together hold a sizeable shareholding and because many Canadian public companies are not as widely-held as more often occurs in certain other jurisdictions.
Overall, corporate governance in Canada continues to evolve and is an area of acute interest among companies, investors, regulators, and other market participants.
1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares
Publicly traded companies in Canada are subject to various corporate governance rules and guidelines of both mandatory and voluntary application. Mandatory requirements are imposed principally by the company's governing corporate statute (see 1.1 Forms of Corporate/Business Organisations) or by applicable securities laws. Voluntary requirements result principally from non-legal sources such as the expectations of institutional investors (eg, pension funds; see 1.2 Sources of Corporate Governance Requirements), proxy advisory firm recommendations, and contemporary industry best practices.
Notwithstanding the 14 different corporations statutes (federal, provincial and territorial; see 1.1 Forms of Corporate/Business Organisations) available in Canada, the majority of Canadian public companies are incorporated under the CBCA. This makes the CBCA the most relevant Canadian corporations statute when discussing the corporate governance of Canadian public companies. Regarding securities laws, Canada does not have a national securities regulator similar to the Securities and Exchange Commission (SEC) in the United States. Instead, each province and territory generally has its own securities statutes and securities regulators. That said, there is significant harmonisation among these various securities laws, including further to the work of the Canadian Securities Administrators (CSA), which is an umbrella organisation of Canada's provincial and territorial securities regulators whose mandate is to improve, co-ordinate and synchronise the regulation of Canadian capital markets.
The two principal Canadian stock exchanges are the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV) and each of these have listing rules. However, these rules do not factor prominently as relates to corporate governance matters, which are generally left to Canadian corporate law and securities law.
2. Corporate Governance Context
2.1 Hot Topics in Corporate Governance
There are several current "hot topics" in corporate governance in Canada. These include (i) climate change disclosure, (ii) diversity, equity and inclusion (DEI) matters, (iii) new legislation addressing forced labour and child labour in supply chains, and (iv) new legislation imposing corporate transparency and disclosure obligations.
While climate change disclosure is not yet mandated in Canada, the majority of TSX and TSXV companies have been proactively reporting climate-related information for several years. The CSA (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares) is (as of mid-2024) preparing Canada's first mandatory climate-related disclosure rules. These are being modelled on the sustainability disclosure standards of the ISSB (International Sustainability Standards Board) but will also feature such amendments deemed appropriate for Canadian capital markets. However, the finalisation of the CSA's rules is expected to be contingent on developments in the United States. Delays related to the SEC's rules could therefore result in similar delays in Canada. In the meantime, "say-on-climate" shareholder proposals are increasingly common Canadian public company AGMs.
DEI is another area of current focus for the CSA (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares). In early 2023, it published for comment a proposed rule that would require enhanced disclosure from non-venture issuers regarding how the issuers identify and evaluate new candidates for nomination to a company's board and how diversity is incorporated into those considerations. In particular, the CSA sought input on whether the enhanced regime should require specific disclosure with respect to Indigenous peoples, LGBTQ2SI+ persons, racialised persons, persons with disabilities, or women, or whether the specific disclosure should be limited to women on a company's board and allow for voluntary disclosure with respect to other under-represented groups. The comment period for the proposed rule ended in September 2023 but (as of mid-2024) the CSA has yet to issue any decision.
Regarding forced or child labour in supply chains, Canada's new Fighting Against Forced Labour and Child Labour in Supply Chains Act (FCLA) entered force in January 2024. The FCLA requires covered entities to file annual reports addressing the risk of forced or child labour in their supply chains, both in Canada and internationally. The reports must also address the company's related due diligence processes and employee training, if any. Covered entities include companies listed on a Canadian stock exchange or doing business in Canada that meet at least two of the following three thresholds for at least one of the last two financial years: at least (i) CAD20 million in assets, (ii) CAD40 million in revenue, and/or (iii) 250 employees.
Regarding corporate transparency, several Canadian corporate statutes (see 1.1 Forms of Corporate/Business Organisations) now require the disclosure of information regarding individuals with significant control over privately owned companies. For example, the CBCA requires the identification of any person owning or controlling 25% or more of the company's shares, whether individually or together with related persons. This has been the case since 2019. However, in 2024 the CBCA was amended to add a federal register of individuals with such significant control, parts of which register will be publicly available. The aim of the disclosure is to assist authorities in fighting money laundering, tax evasion and similar illegal activities, and the legislation includes whistle-blower protections. Penalties for non-compliance include a maximum fine of CAD1 million.
For further discussion, including recent developments in "ESG" or "sustainability" reporting, see 2.2 Environmental, Social and Governance (ESG) Considerations.
Originally Published by Chambers And Partners
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