Ontario's removal of residency rules for directors are small changes with a big impact

It may be trite to observe that small changes can have significant consequences. That is the very premise of the butterfly effect, a common theme of time travel stories in which a small change during a period in history has profound repercussions in subsequent periods. That, in turn, is how I concluded that my time spent last weekend watching sports on the couch was, in reality, seriously impactful to the future of humanity. For some reason my wife did not see it that way, and so, I will have to wait for the future to prove it to her.

Other small changes recently implemented will have more apparent and immediate impacts. In this regard, I’m referring to the recent changes to the Ontario Business Corporations Act, which to a non-corporate practitioner would likely appear to be minor: the removal of the residency requirement for corporate directors and lowering the approval threshold for written resolutions.

Those changes will likely change the way many private companies are organized and function. Until the revisions received royal assent this summer (between this and the Oprah interview, it was a busy summer for the royal family), the Act required that at least 25 per cent of the directors of an Ontario corporation be “resident Canadians” — or, for a board with fewer than four members, that there be at least one “resident Canadian.”

There were many likely reasons for the residency requirement, including local access to accountable stewards of a domestic corporation, or creation of roles for local residents. But it put Ontario out of step with other Canadian jurisdictions (such as British Columbia, Alberta, Quebec, the Maritime provinces and the territories), was impossible for parties to contract around and imposed a hurdle for foreign businesses seeking to operate here.

The requirement led to anomalies of local residents joining boards only to have all responsibilities stripped through a unanimous shareholder agreement or declaration. It prioritized residency over other criteria that might be assumed of greater importance in board qualifications, such as expertise and experience. Notably, and perhaps consistent with the principle of favouring disclosure over mandatory requirements, Ontario corporations remain required to include information as to the Canadian (or non-Canadian) residency of their directors in their articles and corporate information filings.

The second change concerned the approval threshold for written resolutions. As amended, the law will permit a written resolution to be effective if signed by shareholders holding a majority of the votes (or a higher threshold prescribed in the articles or a shareholder agreement), where it used to require written resolutions to be signed by all shareholders of a corporation. For private corporations, particularly those that are widely held, obtaining a signature from 100 per cent of shareholders could be impracticable, and often left boards with no alternative but to convene a shareholder meeting even if the substance of the resolution did not warrant the additional expense and process.

Here again, I can only speculate as to the mischief of the historical requirement; the thinking may have been that for matters coming before shareholders there should be a forum for discussion when there is no unanimity. Modern corporations, however — which typically have concentrations of ownership or, if not, elaborate constructs to facilitate voting processes — have rendered the statutory requirement of unanimity an anachronism (as well as a confusing surprise to many non-Canadians doing business here).

The revised legislation hints at this issue in that it applies only to ordinary resolutions, requiring simple majority approval; special resolutions remain subject to a unanimity requirement when in writing, suggesting a compromise with unanimity retained for more fundamental matters. The new law will require corporations to give notice of any written resolution signed without unanimity to all shareholders who did not sign it within 10 days of the resolution being passed.

As with many corporate changes of the nature described, in order to take advantage of these liberalizing changes, many corporations will need to review dusty old volumes of corporate records (or deeply archived subfiles, in the spirit of modernization).

In view of these changes, given that my services as a token Canadian on client boards is no longer required for Ontario corporations, I can now pass a written resolution authorizing my return to the couch, in the best interests of future humanity.