Evidence of meeting #43 for Industry, Science and Technology in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was shareholders.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Wayne Gray  Partner, McMillan LLP, As an Individual
Tim Draimin  Executive Director, Social Innovation Generation
Laura O'Neill  Director, Law and Policy, Shareholder Association for Research and Education
Judy Cotte  General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

5 p.m.

Conservative

The Chair Conservative Michael Chong

Thank you very much, Mr. Warkentin and Mr. Draimin.

Monsieur Bouchard.

5 p.m.

Bloc

Robert Bouchard Bloc Chicoutimi—Le Fjord, QC

Thank you, Mr. Chairman.

Ladies and gentlemen, I thank you for being with us this afternoon to answer our questions.

I would like to put my first question to Mr. Gray. In your presentation, you asked why have a board of directors when one is not necessary. I would like to know if there is an incorporation model in the Canadian Business Corporations Act where there is no board of directors. This implies that a person would have to be the owner or the agent.

I would like to know whether this model, where there would not be a board of directors, exists anywhere.

5 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

I believe Quebec will be the first jurisdiction that I'm aware of that will do such a thing. That's why I say it was innovative. I don't know whether it's a good idea or not; I think we'll just have to see. But I think there's a logic to it.

Certainly I know that around 2004 there were some discussion papers on the previous round of CBCA amendments mooting the idea of a director-less corporation in certain circumstances. This is a very narrow situation where you would have unanimous shareholder agreement, where the shareholders would take on the liability of the directors, so you're really getting rid of something that's a pure formality at that stage.

I don't know of a jurisdiction that actually has this exact model yet.

5 p.m.

Bloc

Robert Bouchard Bloc Chicoutimi—Le Fjord, QC

Thank you.

Mr. Gray, I'd like to put a second question to you. You said that seven provinces and territories no longer require directors or shareholders to provide their address or place of residence. I'd like to hear your comments on that. Do you mean it is no longer necessary that people know directors' addresses?

According to what I heard, you are in favour of the fact that company directors no longer be required to provide their residential address. Does this not lead to a lack of transparency and a lack of information? It would be useful for the public to know that address.

5:05 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

I'm sorry, but we're a little bit at cross purposes on this one, or maybe it's my use of terminology. When I refer to the residency issue of boards, it's to do with our Canadian residency. In other words, it's been a qualification requirement of certain corporate statutes, including in the CBCA. Really, the CBCA, from the beginning in 1975, required a majority of resident Canadian directors. That was lowered in 2001. That's really what I'm talking about. It's not so much their addresses.

Addresses have to be disclosed, at least to Industry Canada, for all directors; there's no distinction. But it's really a question of the directors' qualifications. I don't really agree that by giving the corporations the flexibility to choose directors based on merit, rather than citizenship and residency, you were actually.... I think you're expanding the pool, not contracting the pool.

5:05 p.m.

Bloc

Robert Bouchard Bloc Chicoutimi—Le Fjord, QC

Fine, thank you.

My next question is for Mr. Draimin. You referred to non-profit organizations and I believe I understood that you would like these organizations to be able to benefit from government assistance programs just as private companies do.

Is that correct? Do you want non-profit organizations and private companies to be on an equal footing in order to be able to benefit from government assistance?

5:05 p.m.

Executive Director, Social Innovation Generation

Tim Draimin

Thank you very much for the question.

The fundamental suggestion is that what is required is to fill this gap for there to be a hybrid corporate structure for the enterprising activities of non-profits. I wasn't referring to all of the non-profit activity, but just to that part of the activity that's within the kind of enterprising universe.

I didn't explicitly say they should get the same benefits, but I think it's an excellent suggestion that they do, because in fact if they are being social entrepreneurs, with a social business, and with a social mission, in a sense they would probably be a part of the SME community, the small and medium-sized enterprise community. If they are meeting a need and would be subject to taxes for profits they make, just like other businesses, I wouldn't see why they wouldn't also be eligible for the same types of programs that are available for SMEs.

5:05 p.m.

Bloc

Robert Bouchard Bloc Chicoutimi—Le Fjord, QC

Thank you.

Ms. O'Neill, currently there is a vote by a show of hands during votes. Secret ballots may be authorized but the law does not require that. I believe I understood that you were in favour of secret ballots.

Do you think that there is a democratic deficit when it comes to companies? Why demand that votes be held in secret or that a provision in the law authorize them to be held that way?

5:05 p.m.

Director, Law and Policy, Shareholder Association for Research and Education

Laura O'Neill

I certainly take the point, and here's our thinking around it. It would be okay with us if public companies--and that's the realm we're in--wanted to do it both ways. Everybody put their hands in the air and then everybody mark a ballot. What's crucial for us is to get the vote tallies. A lot of our senior investors indicate how they voted on their websites. Mutual funds have to do it and some of the large pension funds do it and even some foundations are getting into this, so there's a fair amount of transparency.

Just as transparency is something we want from corporations, transparency is something that's increasingly demanded of large institutional investors who are voting these shares, and that's an asset of their fund--a vote is worth something. They're voting the shares on behalf of their beneficiaries. We don't have a lot of difficulties getting both the companies and the investors themselves to come forth with the results on the votes and who voted which way. The retail investors are protected, and I'm okay with that. They can announce on their own blogs how they voted if they wish. So both can happen.

5:10 p.m.

Conservative

The Chair Conservative Michael Chong

Thank you, Mr. Bouchard.

Thank you, Ms. O'Neill.

Mr. Lake.

5:10 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Thank you, Mr. Chair, and thank you to the witnesses for coming today.

My first question I would first ask of Ms. Cotte. On the question of the staggered boards, you're saying that your organization is not in favour of that. Can you articulate some reasons why boards would choose a staggered board? What kinds of benefits are articulated among boards that do actually choose to have a staggered election versus a one-, two-, or three-year cycle?

5:10 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

The chief benefit for the directors is they can't lose their job for three years. That's really the sum of it. They aren't accountable except for every three years.

5:10 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Are there no other benefits, though, in terms of continuity on the boards or anything like that? It seems to me that I've seen situations where there are boards in not-for-profit organizations where there is some benefit to the continuity organization-wise, things like that.

5:10 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

There's no doubt that business continuity is important, and again I stress that all of our members are long-term shareholders, so long-term performance is really what they are getting at. It's not that shareholders would necessarily replace each and every member of a board annually, but the important point is that directors are accountable on a yearly basis, so if there is a problem, shareholders can take steps to direct it inside of three years. A lot of damage can be done to a business with an underperforming board or underperforming individual directors over a three-year period. And of course if the terms are staggered so that they're coming up at different times, it can take longer than three years to change an entire board because the three-year terms won't necessarily come up at the same time.

5:10 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

But every one of the positions would come up within three years.

5:10 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

Yes, but if a shareholder were looking to replace more than one member of the board, it may take a considerable amount of time.

5:10 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

It sounds, though, that the concern you raised is a problem of multiple concerns working together to actually create a much worse situation. Ultimately, if some of the other concerns that you raised were addressed, this wouldn't be as big an issue as it is. Is that accurate? Around the democratic issues?

5:10 p.m.

General Counsel and Director, Policy Development, Canadian Coalition for Good Governance

Judy Cotte

There's no doubt that each one of our suggested improvements is important in and of itself, so any one of them would definitely improve the accountability of directors. But we do think that the ability to elect directors yearly is important.

5:10 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Right. Okay.

Mr. Gray, I just wanted to come to you for a second on a question of insider trading. I understand that you're talking about the idea that a person buying a stock these days, buying through a discount brokerage online or whatever the case is, really has no interaction whatsoever with the person selling the stock, and that it's difficult to identify in terms of insider trading. I'm wondering what ideas for a solution you might have.

It seems like a very difficult situation, and without changing the entire rules around online trading and the way people trade it might be very difficult to solve with legislation. Can you shed some light on some ideas?

5:10 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

It is a solvable problem, I think. You can certainly identify through trading records whether entitlement holders have disposed of shares in a certain timeframe. That can be a question of evidence and proof. You can pick up people in the indirect market—that is, the people selling through brokers. There will be instruction orders that will be placed with those brokers, and they can be determined. You can define a class by the timeframe around which the insider has traded, and the people in a timeframe on the opposite side of the transaction can be part of the class. So it would be kind of a class concept that would be matched. Rather than an individual trading match, it would be a class match, and the damages would then go to be shared among all the members of the class, rather than just one individual who may not even be traceable through the indirect system.

5:15 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

So to understand this, let's say that you had a $50,000 transaction that was done, one seller selling 50,000 shares, but you had several buyers, obviously, around that same time. Would you be saying, then, that you could have buyers who might represent a million dollars of purchases who happened to buy in that same timeframe that the $50,000 would be distributed among? Is that how it would work?

5:15 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

Well, with those numbers, it wouldn't make any sense to prosecute a civil action, quite frankly. So it may not be possible to get access to enforce that in the civil system, but at a higher threshold, at some point it would make economic sense for somebody to pursue damages, particularly class action plaintiffs. I don't represent class action plaintiffs' bar, but there would be some interest at a certain appropriate level to go after insiders for sizeable trades, particularly if there's a treble damages component to it. In other words, the $50,000 would become $150,000, and that would be spread among the number of traders who were opposite that in that window.

You can come up with a model that might make some economic sense for somebody to pursue, but I don't think at $50,000 you would even be close.

5:15 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

To clarify, though, on the buying side of that equation, you wouldn't be tying the amount sold, specifically the dollar value, to the cumulative amount of the purchases that would qualify. It's kind of a confusing argument, but—

5:15 p.m.

Partner, McMillan LLP, As an Individual

Wayne Gray

Let me give you an example. If you had an insider who had made a $50,000 excess profit as a result of insider trading and you trebled damages, that's $150,000. If in that same timeframe there have been purchasers who traded a million dollars worth of securities opposite that—if it is a sale, they purchased a million dollars worth of securities in that time window—then each of them would be entitled to 15% of that loss. So it would be $150,000 that would go over to people with claims who traded a million dollars worth of stock in that period of time. So the proper amount of damages has been tripled and paid over to the plaintiffs in this hypothetical class action.

Now, as to whether that will make a significant difference, I think we'd have to look at the U.S. experience with this and perhaps the Australian experience with these types of models. It certainly is a model that's out there, but it just has never been pursued. The reason is that right now Canadian law requires a matching, both at the provincial and at the federal level. In other words, there has to be a matching of that, and that's very difficult to establish.

5:15 p.m.

Conservative

Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Thank you.