1. For the each of the following types of investors, identify the approximate percentage of participation in your market, in terms of equity market capitalization:

Most business enterprises in Canada that seek public investment are corporations incorporated under federal, provincial or territorial corporate legislation. Provincial and territorial legislation is largely consistent with the federal Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the "CBCA").

Corporate legislation and common law impose on directors the duty to manage the business and affairs of the corporation. Corporate legislation further provides that in exercising the duty to manage the business and affairs of the corporation, the directors are under a fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation. In carrying out these duties, directors are obligated to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Investors can apply to a court for compensation in the event of "oppressive" action by their corporation.

Legislation governing the formation and operation of other forms of business enterprise, such as partnerships and trusts, is less extensive. Trustees have fiduciary responsibilities to trust beneficiaries. Most other aspects of the corporate governance of a non-corporate enterprise will be governed by the agreement or indenture under which the enterprise was established.

In this response, a reference to an "issuer" means an enterprise that issues securities, whether it is a corporation or takes another form.

ii) Securities Regulators

Capital markets in Canada are regulated by the 13 provinces and territories. Each province and territory has its own securities legislation and its own securities regulatory authority. The 13 securities regulatory authorities cooperate as the "Canadian Securities Administrators" (the "CSA"). Corporate governance measures of securities law and regulation include:

a) an initial distribution of securities to the public will not be permitted if the regulator determines that a proposed director is not suitable, either because of past conduct or lack of knowledge and expertise. The following passage from Alberta Securities Commission Policy 4.10 is illustrative of the regulators’ position:

Section 96(2) of the Act requires the Director to direct the Registrar not to issue a receipt for a prospectus where it appears to the Director that the proceeds from the sale of securities to be paid to the treasury of the issuer, together with other resources of the issuer, will be insufficient to accomplish the purpose stated in the prospectus. One major resource is people. A sufficient number of directors, officers and promoters of the issuer should have knowledge and experience in the business for which funding is sought so that the Director will not conclude that the human and other resources are insufficient to accomplish the purpose stated in the prospectus. Where such knowledge and ability is not apparent in the directors, officers and promoters, the Director may be satisfied where it is shown that the issuer has contracted for such services.

b) the board of directors must endorse their approval on annual corporate financial statements provided to the regulator;

c) directors are "insiders" and as such obliged to report transactions in securities of their corporation and prohibited from trading in securities while in possession of undisclosed material information concerning the issuer; and

d) directors are liable to a fine or imprisonment for breaches of securities legislation.

iii) Exchanges

Canada’s exchanges take an active role in promoting effective corporate governance. Their approval of directors is a condition of listing an issuer.

The Canadian Venture Exchange ("CDNX") specifies two essential criteria that a board of directors must meet: at least one director must have expertise in the issuer's proposed business; and at least one director must have satisfactory experience in operating and managing a public issuer.

The Toronto Stock Exchange (the "TSE"), which lists larger Canadian issuers, encourages its listed companies to follow 14 corporate governance guidelines (annexed as Appendix A to this Response). Although these guidelines are not mandatory, the TSE requires listed companies to disclose and explain any differences between their corporate governance practices and the guidelines.

In June, 1999, the TSE and the Institute of Corporate Directors ( the "ICD"), released the results of a joint study of corporate adherence to the TSE guidelines, which found broad but uneven progress. The highest levels of compliance were in limiting board size, board participation in strategic planning for the corporation and installing a majority of unrelated directors. The lowest levels of compliance were in formalizing the roles of the board, measuring board performance and training new directors. The report observed that senior issuers are most likely to comply with the guidelines.  

iv) Institute of Corporate Directors (the "ICD")

The ICD is a voluntary organization with membership including directors of corporations ranging from very large public issuers to small private firms. It promotes effective governance practices by providing its members with information and education. It also advocates its members' views to governments and regulators in connection, for example, with proposed changes in laws and regulatory practices.

3. Are there special governance rules pertaining to particular types of companies, e.g. state owned companies, banks or investment funds?

i) Banks: Federal banking legislation sets out governance rules specifically applicable to chartered banks. At least one-third of the directors of a bank must not be affiliated directly or indirectly with the bank.

ii) Mutual funds: The CSA are developing specific governance rules for mutual funds.

4. Describe the basic rights afforded to shareholders of public companies in your jurisdiction.

Corporate legislation recognizes three basic shareholder rights: the right to vote, the right to participate in the assets of the corporation upon dissolution, and the right to receive dividends when declared. If the corporation has only one class of shares, each shareholder has each of these rights. If, however, the corporation has more than one class of shares, each of the three rights must be attached to at least one class of shares, but all of the rights are not required to be attached to any one class.

Corporate legislation also prescribes detailed financial and other information to be presented annually or more frequently to shareholders. Securities legislation further expands on the requirements for corporate disclosures to shareholders of public issuers.

5. Ownership, Registration and Transfer of Shares:

a) How are shares registered and transferred?

b) How are shares registered in your jurisdiction? Focus on the transparency and reliability of the registration’s mechanisms?

Shares of public companies are registered with The Canadian Depository for Securities Limited ("CDS"). CDS has agreements in place with the Stock Clearing Corporation of Philadelphia and the Philadelphia Depository Trust Company, and an electronic clearing and settlement link with the London Stock Exchange, giving CDS access to the United States securities system and the ability to provide clearing, settlement and depository services for securities transactions involving the United Kingdom, Australia and South Africa.

The share registration system is considered reliable but is not entirely transparent. Shares are typically registered with CDS in the name of an investment dealer rather than in the name of the dealer's client who beneficially owns the shares. Transfers of securities by beneficial owners may not appear on CDS records if the registered ownership (for example, an investment dealer) is unchanged. Dealers’ own records will provide more detail concerning beneficial share ownership and transfers of beneficial ownership.

c) Are there any restrictions on the ability of shareholders to transfer shares? If so, what are they?

A public corporation does not generally restrict the ability of its shareholders to transfer shares. Legislation governing issuers in certain sectors such as banking and transport can indirectly affect transferability through limits on aggregate ownership of voting securities by a single investor or by foreign investors. Securities legislation in most provinces restricts the resale of securities originally acquired in a private placement or other transaction for which no prospectus was filed or no registered dealer or broker participated. These resale restrictions generally prevent transferability, without either a prospectus or a prospectus and/or registration exemption, for a fixed (6- to 18-month) or indefinite period, depending on the status of the issuer (fixed restricted resale periods often commence on the date the issuer becomes a "reporting issuer" that furnishes prescribed publicly-available information to securities regulators). Share trades by a "control person" (a person or corporation that, alone or in conjunction with other people or corporations, owns 20% or more of the corporation’s shares or a lesser percentage that is sufficient to materially affect control of the corporation) are subject to similar resale restrictions and notification requirements.

A private corporation must restrict the number of shareholders and restrict transferability of its shares.

6. Participation and Voting in General Shareholder Meetings:

(a) Are all shareholders furnished with information concerning the date, location, and agenda of the meeting, as well as information regarding the issues to be decided at the meeting? If so, how far in advance of the meeting is the information to be provided to shareholders? Also, how much information is provided?

Both corporate and securities legislation require that shareholders be provided with notice of each meeting (which includes the date, location and agenda) together with an information circular (which provides information regarding the issues to be decided at the meeting). Corporate legislation requires that these two documents be sent to shareholders a minimum of 21 days and a maximum of 50 days prior to the meeting. The CSA have modified these requirements to require earlier delivery and to ensure that delivery is made to non-registered shareholders, pursuant to National Policy Statement No. 41 Shareholder Communication ("NP 41"). Public issuers must ensure that meeting information will be mailed to shareholders at least 25 days before the meeting date.

Corporate and securities legislation also require that an information circular which sets out background information to the matters to be voted on at the meeting must sent at the same time as the notice. Both types of legislation specify in some detail the required contents of the information circular, including:

1) information regarding each person nominated for election to the board of directors;

2) information regarding the auditor including the name of each auditor from the past five years;

3) information regarding self-dealing by directors or management or proposed directors or management must be disclosed, together with information about compensation including bonuses for directors and management;

4) disclosure of the names and percentage of shares held by directors and those who hold more than 10% of the voting shares;

5) information regarding the solicitation process, including who was hired to prepare the materials and the cost of the materials, together with the names of directors who informed management that they oppose the action to be taken by management and the action they intend to take in opposition;

6) the substance of any matters of special business in sufficient detail to permit shareholders to form a reasoned judgment.

Corporate and securities laws require that particulars of matters to be acted on must be provided "in sufficient detail to permit [security holders] to form a reasoned judgment concerning the matter".

(b) Do all shareholders have the right to ask questions of the board and to propose the inclusion of items in the agenda to a shareholder meeting? If so, under what circumstances?

Corporate legislation generally allows a holder of voting shares to submit proposals for consideration at an annual meeting, which the corporation is obliged to present to shareholders, provided that

(i) the proposal was submitted least 90 days before the anniversary date of the last shareholders meeting;

(ii) the proposal was not submitted for the primary purpose of enforcing a personal claim or for the purpose of promoting general economic, political, racial, religious, social or similar causes;

(iii) the shareholder has not made the same proposal within the last two years but failed to present it at a meeting; and

(iv) substantially the same proposal was not submitted unsuccessfully to the shareholders by management or by a dissident proxy within the last two years; and

(v) the proposal is not a mere attempt to attract publicity.

Shareholders also have the right to ask questions of the board at shareholders’ meetings.

(c) Please describe how shareholder voting works, both in person and in absentia. Are telephone and electronic voting permitted?

Shareholders can vote by proxy if they are not present at the meeting. The proxy form must accompany the information circular. To vote by proxy, the shareholder appoints a proxyholder who must attend in person at the meeting and vote the shares in accordance with the instructions of the person who appointed him or her. Non-compliance with a shareholder’s instructions by a proxyholder is an offence.

Proxyholders have the same right to speak at the meeting as the shareholder in respect of any matter. Proxyholders can vote by show of hands unless they have conflicting instructions from more than one shareholder in which case they must request that the vote take place by ballot.

Corporate and securities legislation do not permit telephone and electronic voting yet, but

securities regulators have granted waivers from the requirement of NP 41 for intermediaries serving as proxies to receive written instructions from shareholders so as to allow the intermediaries to receive their instructions via telephone.

7. Fundamental Corporate Changes:

(a) Fundamental corporate changes may include: amendments to statutes or governing documents of the corporation; the authorization of additional shares; and extraordinary transactions that in effect result in the sale of the corporation. Please describe any other corporate activities that would be considered fundamental corporate changes in your jurisdiction.

Corporate legislation generally treats the following as fundamental changes that require shareholder approval by "special resolution", which the CBCA defines as a resolution approved by "a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution".

i) dispensing with appointment of an auditor;

ii) amalgamation;

iii) change of the corporation’s governing jurisdiction;

iv) amendment of the corporation’s constitution;

v) a significant sale of assets;

vi) liquidation / dissolution.

(b) Are shareholders sufficiently informed of fundamental corporate changes? If so, how? Before the change or after?

Yes. A meeting must be called at which all shareholders are entitled to vote, even if they own non-voting shares. For public issuers the proxy information requirements are discussed above.

(c) Can shareholders participate in decisions with respect to fundamental corporate changes?

(i) How do shareholders get involved in decisions involving fundamental corporate changes?

Shareholders have the opportunity to speak to the matter and to vote on it at the annual or special meeting at which the decision is considered.

ii) Are special shareholder meetings held? If so, are special majorities required for shareholder approval of these fundamental corporate changes? If so, please indicate the types of special majorities that are required to approve the various fundamental corporate changes.

Fundamental changes must be approved by "special resolution". In the absence of a meeting, a written special resolution approving a fundamental change must be unanimous, consented to in writing by each shareholder entitled to vote on the resolution.

In addition, certain fundamental changes must be approved by each class and series of shares by not less than two thirds of the shares of each class and series even if a class and series is ordinarily non-voting. The following fundamental changes trigger class and series voting:

8. Acquisition of Corporate Control:

(a) Are there any rules and procedures for shareholder involvement in the acquisition of corporate control or any extraordinary transactions, such as mergers and sales of substantial portions of corporate assets?

The information regarding shareholder involvement in extraordinary transactions is provided in the response to question 7, above.

Both securities legislation and most corporate legislation contain detailed rules that must be adhered to by parties to a proposal (a "take-over bid") to acquire significant holdings of voting securities of an issuer (referred to as an "offeree" issuer). Under the CBCA, a bid that, if successful, would result in the offeror holding 10% or more of the outstanding securities triggers the take-over bid requirements, while securities legislation provides that a bid which triggers the take-over requirements is one that is made to security holders in the province which would result in the offeror holding 20% or more of the outstanding voting or equity securities of any class. There is overlap between the securities and corporate law requirements, but the former are much more detailed. For that reason, the remainder of this response will focus on the securities law provisions.

The two principal objectives of the take-over bid requirements are 1) to ensure that offeree shareholders have timely and sufficient information to decide whether to tender to the bid; and 2) to ensure that all offeree shareholders are placed on equal footing.

Securities law requirements designed to achieve the first objective include:

The following requirements are designed to place all target shareholders on equal footing:

(b) Are those rules and procedures, as well as any available recourse, disclosed to investors? How?

The requirement to provide a take-over bid circular and directors' circular ensures, to a large extent, that shareholders are apprised of their rights.

(c) Are there any rules and procedures to provide assurance that these transactions occur at transparent prices and under fair conditions that protect the rights of shareholders according to their class?

See the response to question 8(a), above.

(d) Are anti-takeover devices permitted, and are these devices ever used to shield management from accountability?

Anti-takeover defences are not prohibited on the basis that an outright prohibition could impede the target company’s board of directors in discharging their fiduciary obligations to shareholders to maximize shareholder value. However, securities regulators or courts will in individual cases act to prevent or terminate the application of take-over defences that are, or whose continued existence has become, inappropriate. Regulators have intervened where a defensive tactic prevents shareholders from responding to a bid or would result in the unequal treatment of shareholders. CSA views on certain defensive tactics are set out in CSA National Policy Statement No. 62-202 (copy attached as Appendix B). Corporate legislation also permits applications to court for relief or compensation on the grounds that an anti-take-over measure "oppresses" shareholders.

9. Are there any arrangements that might enable certain shareholders to obtain a level of control not proportionate to their equity ownership? Must these arrangements be disclosed?

Multiple voting shares (shares which carry more than one vote) and non-voting shares are allowed in Canada. Material terms of shares must be disclosed in the prospectus under which they are offered. Where one class of shares provides greater voting rights than another, the relatively restricted voting rights of the latter must be apparent from the name given to the class of shares.

Insider reporting requirements of securities legislation require disclosure of both ownership and any other form of control or direction over securities (for example, control given to one person pursuant to a voting trust or agreement among several shareholders) that in the aggregate represent 10% or more of all outstanding voting rights.

10. Voting Rights:

a) Is more than one outstanding class of voting capital stock permitted?

Yes.

b) If voting preferred stock is permitted, do holders of this stock vote as a separate class and under what circumstances and on what matters?

As noted above, the three fundamental rights (voting, dividends, participation in assets remaining upon dissolution) must be allocated among classes of shares, but issuers are given wide latitude in making this allocation. Corporate legislation does not formally distinguish between "common" and "preference" or "preferred" shares, but does require approval by shareholders of each class, separately, for fundamental changes or other changes that could adversely affect the rights of a particular class.

c) If more than one class of voting common stock is permitted, do the voting rights differ among classes and, if so, under what circumstances and on what matters?

Different voting rights for shares of different classes are permitted. For example, a corporation could provide in its articles that each share of one class carries five votes, while each share of another class carries only one vote. Neither corporate nor securities law limits the circumstances or matters in which voting rights can vary among classes. However, public issuers must make known the fact of unequal voting rights in the names given to their share classes.

Legislation overrides corporate articles to require approval by holders of all affected classes of shares, even if they are ordinarily non-voting shares, to certain fundamental changes. Additionally, stock exchange rules generally require that the holders of listed non-voting or subordinate voting equity shares be entitled to convert them into the class of shares having a superior vote in the event of a take-over bid.

d) Within any given class, do all shareholders have the same voting rights?

Yes.

e) Are all investors able to obtain information about the voting rights corresponding to all classes of shares before they purchase them? If so, how?

If the investor is purchasing the shares through an initial public offering, the prospectus must contain this information. If the investor is purchasing in the secondary market, this information should be implied from the name given to the share class and/or from the trading symbol assigned by an exchange, and will in any event be available from publicly-filed information concerning the issuer.

f) Are changes in the voting rights corresponding to a class of shares subject to the approval of shareholders? If so, are these changes subject to the approval of all shareholders or only to those holding shares of that particular class?

Yes. Such changes are subject to the approval of all shareholders and each class is entitled to vote separately.

g) Describe the manner in which votes can be cast by custodians or nominees. Is approval by the beneficial owner of the shares required?

A custodian or nominee who a shareholder has appointed as his or her proxyholder may vote on behalf of the shareholder but must do so in accordance with the shareholder’s instructions.

11. Shareholder Meetings:

a) Describe the processes and procedures for public companies’ shareholder meetings. Please indicate the applicable rules, regulations and local practices.

and

b) What are the formal requirements for calling and conducting shareholder meetings? Are there different kinds of shareholder meetings?

The CBCA requires directors to call the first meeting of shareholders not later than 18 months after incorporation. The second and subsequent meetings must be called within 15 months of the last meeting. Securities legislation contains very similar requirements: a reporting issuer must call a meeting within 15 months of becoming a reporting issuer and in each calendar year thereafter.

The mechanics of calling a meeting are set out in detail in the CBCA. The process begins with the directors fixing a record date that is between 21 and 50 days before the meeting to determine who is entitled to receive notice of the meeting. Persons entitled to receive notice are also entitled to vote unless it can be proven that they transferred their securities in the period between the record date and the meeting.

If a record date is set, it must be advertised at least seven days in advance in a newspaper distributed in the location of the corporation’s registered office and wherever its transfer agents are located. Setting a record date is optional, and many corporations choose not to do so because of the advertising requirement. Notice also has to be given to each stock exchange on which the corporation’s shares are listed. These requirements may only be waived by the written consent of all affected shareholders on or before the fixed record date.

If there is no fixed record date, the record date for determination of shareholders entitled to notice is deemed to be either the close of business on the day preceding the day on which notice is given or, if notice is not given, the day of the meeting.

Notice of a meeting must be in writing and must state the time and place of the meeting. The timing of the notice was discussed in the response to question 6(a) and (c). Under corporate law, four items of business are mandatory at the required annual meeting: approval of minutes of previous meeting, election of directors if their term of office has expired, appointment of auditors, approval of financial statements and auditor’s report. Any other agenda items are "special business." Special business can be transacted in the annual meeting or can be dealt with separately in a "special meeting."

The notice must be accompanied by

The CSA's NP41, discussed above, governs the distribution of meeting information for public corporations.

c) Are companies permitted to require personal attendance or to charge fees to vote at a shareholder meeting?

No.

d) Are shareholders able to request that the company or another body, such as the court, call a shareholder meeting in case the board of directors does not do it?

i) Shareholders: The holders of 5% of more of the voting shares can requisition a meeting.

ii) Courts: Corporate legislation enables a court to call a meeting of shareholders on the application of a director, a voting shareholder, or registrar of companies of the corporation’s jurisdiction of incorporation if "for any reason it is impracticable to call a meeting of shareholders of a corporation in the manner in which meetings of those shareholders may be called, or to conduct the meeting in the manner prescribed by the by-laws and this Act, or if for any other reason a court thinks fit" (CBCA s. 144(1)).

e) Under what circumstances, if any, is it possible for shareholders to take binding action without a meeting? Are other shareholders informed of such actions?

Shareholders of private corporations can enter into a binding unanimous shareholders' agreement or act by written resolution signed by all shareholders.

12. Dispute Resolution:

a) What legal recourse is available to shareholders if their rights are violated?

Corporate legislation gives shareholders rights to seek redress before a court on several grounds:

b) Are there non-adversarial mechanisms to solve disputes between shareholders and the company or between themselves, e.g., commercial arbitration panels, stock exchange mediation, etc. or is civil litigation the only alternative?

Arbitration and mediation and other forms of alternative dispute resolution are becoming increasingly popular in Canada and are widely available to disputants who wish to proceed that way. Additionally, many jurisdictions in Canada require that the parties to a lawsuit engage in mandatory mediation at an early stage in the proceedings, usually after the close of pleadings, before the lawsuit will be allowed to progress.

13. Insider Trading:

a) Is insider trading prohibited? If so, are the prohibitions contained in the securities law or under other types of statutes.

Yes. The prohibitions are contained in securities and corporate law and hence apply to all issuers.

b) What are the key provisions of the insider trading prohibitions?

Within 10 days of becoming an insider of a public issuer, the insider must report the fact to the securities commission of each jurisdiction in which the company is a reporting issuer. The report must disclose any direct or indirect beneficial ownership of or control over securities of the issuer. The insider must then disclose, on a continuous basis, each change in their direct or indirect beneficial ownership of the issuer’s securities by filing an insider report with the commission within 10 days of the change. It is unlawful to purchase or sell securities while in possession of material information which has not generally been disclosed to the public. The filing of a report is not curative: if the insider has traded on undisclosed material information, an offence has occurred regardless of the fact that the insider complied with the filing requirement.

It is also unlawful for anyone in special relationship to an issuer (which includes insiders but also those in a professional relationship such as the issuer’s lawyers, underwriters, etc.) to trade while in possession of, or to disclose to others, material information that has not been publicly disclosed, ie., to give someone a "tip". However, these persons are not required to file an insider report (unless they are also insiders).

c) Who is subject to insider trading prohibitions?

The definition of "insider" is similar in securities and corporate law. In securities legislation, an "insider" is defined as:

i) every director or senior officer of a reporting issuer;

ii) any person or company who owns, directly or indirectly, or exercises control or direction over 10% or more of the voting securities of the reporting issuer;

iii) every director or senior officer of a company which is itself an insider of the reporting issuer;

iv) the issuer itself if it has purchased, redeemed or otherwise acquired its own securities, for as long as it continues to hold those securities.

As discussed in b) above, those in a special relationship with the issuer are also prohibited from trading on undisclosed material information.

d) How are these insider trading prohibitions enforced? Can actions be brought by civil, administrative and criminal authorities?

There are four types of sanctions:

14. Conflicts of Interest:

a) Is self-dealing by the board and executives prohibited or subject to certain legal safeguards? Please explain.

Response:

Yes. Officers and directors are under a common law and statutory fiduciary duty to act honestly, in good faith and in the best interests of the corporation. In addition to the statutory fiduciary duty, the CBCA contains a specific provision respecting self-dealing by directors who are voting on contracts in which they have an interest. The provision states that a director may vote in favour of the corporation entering into a contract from which the director will benefit so long as a the director discloses in writing the extent of his or her interest.

The securities regulators in two provinces have detailed requirements governing transactions involving an issuer and "related parties". A related party is defined as a person who owns shares in an amount sufficient to control the issuer, a person who owns 10% or more of the voting shares of the issuer, a director, senior officer, or interested party of the issuer, or an affiliate of any of the foregoing. The requirements and recommendations include specified disclosure to shareholder, independent valuations, independent advice and director involvement, and approval by a majority of disinterested shareholders.

Securities regulators also have policies governing the involvement in securities offerings of underwriters that are related to the issuer, generally requiring disclosure of the relationship in the prospectus and, in certain cases, involvement by other, independent underwriters.

Directors and officers who engage in self-dealing may face civil liability under Canadian common law for breach of fiduciary duty. In a court decision , officers of a corporation who formed a second company that won a contract in competition with the first corporation were held to have breached their fiduciary duty to the first corporation and were ordered to pay it compensation tied to the profit they made under the contract.

b) Are members of the board and executives required to disclose any material interests in transactions of matters affecting the company? If so, please discuss how and when this information is made available to shareholders.

Is the remuneration of directors and executives disclosed to investors?

Is the relationship between any of the directors and a controlling shareholder disclosed to investors?

Are officers, directors and owners of a certain amount or percentage of shares required to disclose their holdings and trading activities?

The question posed in example iii) is answered in the discussion of insider trading requirements, above.

Directors and officers are required to disclose their interests in material contracts, indebtedness to the issuer, and interests in special matters to be transacted at the meeting in the management information circular that accompanies the notice of meeting. Remuneration of directors and executives and a director’s relationship to a controlling shareholder is also disclosed to investors in the information circular.

15. Can a stakeholder (employees, creditors and suppliers) participate in corporate governance, e.g., employee representation on boards, employee stock ownership plans, creditor involvement via insolvency proceedings?

Yes, but other than in the context of bankruptcy and insolvency proceedings, non-shareholder involvement is not obligatory. In some cases, employees (usually through a labour union) obtain representation on the board of directors. Insolvency law entitles certain categories of creditors to vote, as a class, on restructuring proposals and to be involved in selecting a receiver.

16. Where stakeholder interests are protected by law (e.g. labor law, contract law, insolvency law) do stakeholders have the opportunity to obtain effective redress for violation of their rights?

The interests of creditors are protected by insolvency law. The interests of employees are protected by employment laws, insolvency law (unpaid wages are given priority to most other debts) and corporate law (directors are personally liable for unpaid wages). These measures give stakeholders reasonably effective redress.

17. Indicate which of the following items is subject to disclosure, as well as to whom the disclosure is made. Please discuss how and when this information is made available to shareholders.

a) The financial and operating results of the company;

Response:

The corporation must provide the shareholders with audited annual financial statements and unaudited quarterly financial statements. These items must also be filed with securities regulators, thus becoming available to the public, and with any exchange on which the company is listed.

b) Company objectives

Company objectives are to be disclosed to prospective investors in a prospectus prepared for an initial public offering. Stock exchanges also require detailed information about the company and its objectives as a condition of listing and continued listing approval.

c) Major share ownership and voting rights

and

d) Members of the board and key executives, and their remuneration

These items must be disclosed in the management information circular which is part of the annual meeting materials sent to shareholders and filed with securities regulators.

e) Material foreseeable risk factors;

f) Material issues regarding employees and other stakeholders; and

and

g) Governance structures and policies

Disclosure is required to be made to shareholders and securities regulators in prospectuses filed in support of a securities offering. If a change has occurred in any of these items that would likely affect the value of traded securities, except in a case where a securities regulator agrees to a request for confidentiality, a news release must be issued and a "material change" report must be filed with the securities regulators which becomes publicly available.

18. Financial Statements and Audits:

a) Are financial statements prepared, audited and presented in accordance with high quality, internationally acceptable standards of accounting and auditing? Are comparable high quality, internationally acceptable standards applicable to non-financial disclosures?

Financial statements must conform to the "generally accepted accounting principles" ("GAAP") of the Canadian Institute of Chartered Accountants (the "CICA"). Financial statements prepared in accordance with foreign accounting standards may also be acceptable in certain circumstances (depending on the particular foreign GAAP in question) and generally only if accompanied by a "reconciliation" to Canadian GAAP.

Annual financial statements of a public issuer must be audited by a member of a recognized Canadian professional accountancy organization, applying the CICA's "generally accepted auditing standards".  

Non-financial disclosure is required to meet standards that are consistent with the Objectives and Principles of Regulation of the International Organization of Securities Commissions ("IOSCO").

b) Is the audit conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented?

i) How are external auditors appointed and removed?

ii) Are there any regulations that establish auditing standards and ensure auditors’ independence and responsible professional conduct?

iii) How is "auditors’ independence" defined?

Auditors are appointed (or removed) by vote of the shareholders.

i) Securities commissions require, as a condition of auditor acceptability, membership in good standing of a specified professional accounting body. The bodies recognized for that purpose prescribe standards of professional conduct.

ii) As noted above, audits must be conducted in conformity to the CICA's generally accepted auditing standards.

iii) "Auditors’ independence" is defined in the CSA's National Policy Statement No. 3, which provides that the auditor of a corporation cannot be a director, officer or employee of the company being reported upon or of an affiliate of the company or a partner, employer or employee of any such director, officer or employee or an associate of any director or officer of the company or any of its affiliates, nor can the auditor or any partner, employer, or associate of the auditor beneficially own securities of the company or its subsidiaries.

19. Describe the channels through which relevant information is disseminated to users, eg., filing of reports via electronic filing and data retrieval systems, disclosure of material information via the internet?

20. Comment on aspects in your current disclosure regime that you would like to see reformed, indicating whether there is any support for such reforms internally and the main barriers that you see for implementing change.

The CSA are concerned that the traditional focus on prospectus disclosure does not adequately serve investors, particularly investors in the "secondary" (resale) market, or capital markets as a whole. The CSA are developing a proposal for a new system of "integrated disclosure" that would shift the regulatory focus to upgraded continuous disclosure that would largely serve the needs of both secondary and primary market investors and facilitate access to capital markets for qualifying issuers. A concept proposal for this system will be published for comment in early 2000.

21. Structure of the Board:

a) Who nominates, elects and removes the members of the board?

The first directors of a company are named in a notice of directors that is filed with its articles. The first directors hold office until the first meeting of shareholders which must be held within18 months of incorporation. Subsequent directors are generally nominated by the existing directors and are then elected by the shareholders at the annual meeting by ordinary resolution, but shareholders who hold 5% of a corporation’s voting securities can make a proposal for the election of directors which must then be considered at the next annual meeting. The maximum term of office is three years. Directors may hold office for staggered terms subject to the three year maximum. If no directors are elected, the incumbents continue to hold office until their successors are elected.

i) Do shareholders have cumulative voting rights? If so, please describe.

Corporate law permits cumulative voting at the option of the corporation. An issuer that chooses cumulative voting must so provide in its articles of incorporation (the corporate constitution), which must also specify the number of directors. Under cumulative voting:

Each shareholder has the right to cast a number of votes equal to the number of votes attached to the shares held by him multiplied by the number of directors to be elected, and he may cast all such votes in favour of one candidate or distribute them among the candidates in any manner;

A separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two or more persons to be elected by a single resolution;

If a shareholder has voted for more than one candidate without specifying the distribution of his votes among the candidates, he is deemed to have distributed his votes equally among the candidates for whom he voted;

If the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled;

Each director ceases to hold office at the close of the first annual meeting of shareholders following his election;

A director may not be removed from office if the votes cast against his removal would be sufficient to elect him;

The number of directors required by the articles may not be decreased if the votes cast against the motion to decrease would be sufficient to elect a director.

ii) How are vacancies on the board filled?

A quorum of directors may fill a vacancy unless the vacancy results from an increase in the number or minimum number of directors or from a failure to elect the number or minimum number of directors required by the articles in which case the remaining directors must call a special meeting to fill the vacancy. If the remaining directors fail to call a special meeting, any shareholder may call a special meeting to fill the vacancy.

iii) Are the election and identity of the members of the board disclosed to the securities regulator and the stock exchange, and is this information publicly available? If so, how?

The identity of the board of directors is disclosed to both the securities commission and the stock exchange. In the case of directors of a public corporation elected at a meeting of shareholders, the information becomes public immediately. The appointment of a public company director to fill a vacancy is often the subject of a news release and may constitute a "material change" for which a public filing is required. Senior appointments are also often the subject of media reports.

b) What are the requirements for serving as a member of the board?

i) Can foreigners or non-residents be board members?

ii) What are the prohibitions on being a board member?

iii) What is the maximum term of office for members of the board? Are classes of board members permitted? If so, describe the circumstances and rights of each class.

iv) Are there any legal provisions requiring independent members of the board? If so, how is "independent" defined?

At a minimum, a board member must be a natural person of at least 18 years of age who is of sound mind and not bankrupt. Foreigners and non-residents can be board members provided that the majority of directors are resident Canadians unless the corporation has less than three directors, in which case they must all be resident Canadians. The maximum term of office is three years. Staggered terms are allowed, subject to the maximum term, but there is no provision in corporate legislation for classes of directors.

Corporate legislation does not require that directors be independent. However, the TSE has recommended that the majority of every board consist of individuals "independent of management and ... free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding". The TSE also asks its listed issuers to disclose annually to shareholders any deviation from this recommendation.

c) Are members of the board compensated? If so, how and subject to what approvals?

Yes. Directors are compensated, often by a combination of payment and share options. Corporate law provides that the board of directors fixes the remuneration of directors and officers unless otherwise provided in the corporate constitution or by unanimous shareholder agreement. Public corporations must provide annual disclosure to shareholders of the remuneration of directors and the most senior, or most highly-remunerated, senior officers. Specific shareholder approval is not necessarily required but such disclosure can prompt shareholder proposals to alter compensation schemes. Exchanges have policies governing the permissible terms of share compensation schemes.

d) Describe the typical structure and functioning of the board, e.g., calling of meetings, quorum, majorities, other formal requirements.

Response:

The directors act by passing resolutions. Resolutions may be passed at meetings of directors or unanimously in writing without a meeting.

If a meeting is held, a quorum must be present and a majority of the directors present must be resident Canadians. A majority of the number of directors or the minimum number of directors required by the articles constitutes a quorum at any meeting of directors.

Generally a notice of meeting will be sent to the directors setting out the time and place of the meeting and the agenda. Background information is often provided as well. The by-laws of the corporation typically set out the notice requirements.

A director may participate in a meeting by telephone or other audible communications facilities if the by-laws so allow, and a director who participates in this manner is deemed to be present.

22. Functioning of the Board:

a) Describe the key functions of the board. In particular, please indicate whether the board is responsible for the following functions:

i) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestitures.

ii) Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

iii) Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.

iv) Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

v) Ensuring integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

vi) Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.

vii) Overseeing the process of disclosure and communications.

The TSE has recommended that boards assume all of these functions, which are consistent within the 14 recommendations of its report set out in Appendix A to this Response. A 1999 published follow-up to that report studied 635 listed companies and found that:

Strategic planning: Progress on strategic plan accountability is relatively high. In about 80% of cases, the board formally approves a strategic plan for the corporation, and in two-thirds of the cases, the board provides input to the plan.

Risk management: Only 34% of the respondents indicated any board involvement of risk management policies beyond granting approval to a policy that has been drafted by management.

Succession planning: Most boards are involved in succession planning for senior management, but to a limited extent. While over 80% of the respondents indicated that the board approves the CEO and officers, only 20% indicated that the board has identified potential successors. Boards are more likely to plan for the succession of executives reporting directly to the CEO than for the CEO himself or herself.

Communications Policy: There is a high level of ad hoc participation, but very few respondents indicated that their boards are systematically involved in process and policy.

Selection of new board members: In 40% of cases, nominees are selected by the CEO and approved by the board. In 26% of cases, the board as a whole nominates new members. In 33% of cases, the board has a separate nominating committee.

Assessing board and director effectiveness: Most of the respondent companies have ad hoc measures for assessing board effectiveness, but only 20% have a formal process.

Orientation for new board members: Only 12% of the respondent companies have a formal orientation system.

Position descriptions for board members: Only one in five boards draft position descriptions for board members, but approximately two thirds set or approve objectives for the CEO.

Explicit attention to governance: In 41% of cases, corporate governance issues are tabled as items for discussion and analysis by the whole board. In 46% of cases, there is little separate discussion of corporate governance as a topic unto itself. In 7% of cases, there is a corporate governance committee.

Independence from management: Boards take few measures to demonstrate their independence from management. Only 39% of respondents indicated that their company allows directors to engage outside advisors at the corporation’s expense, and only 21% of boards meet at least twice a year without management present. However, in 57% of cases, the chair of the board is not the CEO.

Audit committees: 94% of the respondent directors indicated that their companies have an audit committee that is separate from the board as a whole, and in 69% of cases, only outside directors are allowed to sit on the audit committee.

What standards must the board follow when it makes decisions on corporate issues? What duties do board members owe to the company and its shareholders, e.g., loyalty, due care, foregoing corporate opportunities?

Are there any sanctions applicable to the members of the board for a breach in the performance of their duties? If so, please enumerate them, indicating the remedies for violations.

ii) Do shareholders have any legal recourse available to them to make members of the board accountable for any breach of their duties?

Please see the response to question 12 a), above.

iii) Is the board permitted to obtain and rely upon disinterested professional advice - from accountants, investment advisers, appraisers - in order to determine whether a transaction is proper and fair to the company and shareholders?

This is permitted but not obligatory. The study referred to above found that only 39% of companies allow their board members to obtain outside advice at the company’s expense.

iv) Are decisions by the board entitled to a presumption of "business judgment," which shields the decisions from shareholder challenge? If so, under what circumstances and conditions?

Canadian legislation does not incorporate the American "business judgment rule" but Canadian courts have established a very similar approach. In Brant v. KeepRite Investments (1991), 3 O.R.(3d) 289 (C.A.), an action alleging "oppression" of shareholders in connection with the corporation's proposal to acquire the assets of a subsidiary, an appeal court held that in such an action the court must consider the impugned conduct but should not substitute its own business judgment for that of the directors involved in assessing the transaction; "business decisions honestly made should not be subjected to . . . microscopic examination".

What duties does the board owe to shareholders where it makes a decision that may affect different shareholder groups differently?

Under corporate law, the board’s principal duty is to act honestly and in good faith with a view to the best interests of the corporation and its shareholders. In so doing, the board must have regard to the interests of shareholders as a whole and consider differing impacts on differing categories of shareholders. It must deal fairly with all shareholders and must not give disproportionate attention to the interests of any one shareholder. A board is not, however, precluded from reaching a decision that affects shareholders in different ways. Even if a board decision has a detrimental impact on one group of shareholders, the board will have discharged its duties so long as the board was made the decision honestly, in good faith and with a view to the best interests of the corporation and its shareholder as a whole.

The board’s principal duty is to act honestly and in good faith with a view to the best interests of the corporation. Even though a decision may be have a detrimental impact on one group of shareholders, so long as the board made the decision honestly, in good faith, and in the best interests of the corporation, it has discharged this duty. Brant v. KeepRite Investments, supra, stands for this proposition.

Board Independence:

Are there any requirements that the board assign non-executive board members capable of exercising independent judgment to tasks where there is a potential conflict of interest? If so, under what circumstances?

There are no such requirements, but this practice is common. For example, a corporation that is the target of a take-over bid will often strike an independent committee of directors to consider the bid.

Can specific committees be created within the board? If so, describe their composition and responsibilities. Are there any requirements that some committees be composed solely, or at least primarily, of independent board members?

Yes. Specific committees are struck for a variety of purposes. There are no legislative requirements that some committees be composed of independent board members, but by way of example, the TSE Report’s guidelines suggests that members of the audit committee be independent.

Are there any limitations on the number of board positions that an individual can hold?

No, but the TSE Report recognized that there should be some limit to the number of board positions that an individual can hold and recommended that the nominating committee take into account a prospective director’s other commitments before making a nomination.

Describe how and when board members can gain access to relevant information necessary to make decisions on corporate issues.

Mechanisms for board access to, and consideration of, information is the responsibility of the particular board. In most instances, of course, boards obtain information from corporate managers.

In view of their responsibilities to their shareholders, however, boards often seek information and advice from any source they deem appropriate. Boards, or audit committees comprised of board members, consult directly with their corporation's auditors. Securities regulators, exchanges and courts encourage boards or board committees to obtain information and advice from independent sources when considering "related party" and other transactions to ensure fairness to shareholders. However, as noted above, only a minority of surveyed issuers indicated that they made provision to enable boards to pay outside advisers.

Such arrangements are extremely rare in Canada. Corporate law neither requires nor contemplates a supervisory role outside that of the board of directors, and the legislative responsibilities of directors would likely take precedence in a dispute over respective responsibilities.

Two-tier or supervisory boards are also not contemplated in corporate legislation and although not prohibited they would have to be structured in a manner consistent with existing provisions governing directors' responsibilities. A unanimous shareholders' agreement can govern certain aspects of the role of individual directors and could serve as the basis for a more general two-tier board.

Canadian company law does not address these matters.

CURRENT TSE GUIDELINES

1.1 Defensive Tactics

(1) The Canadian securities regulatory authorities recognize that take-over bids play an important role in the economy by acting as a discipline on corporate management and as a means of reallocating economic resources to their best uses. In considering the merits of a take-over bid, there is a possibility that the interests of management of the target company will differ from those of its shareholders. Management of a target company may take one or more of the following actions in response to a bid that it opposes:

1. Attempt to persuade shareholders to reject the bid.

3. Take other defensive measures to defeat the bid.

(3) The Canadian securities regulatory authorities have determined that it is inappropriate to specify a code of conduct for directors of a target company, in addition to the fiduciary standard required by corporate law. Any fixed code of conduct runs the risk of containing provisions that might be insufficient in some cases and excessive in others. However, the Canadian securities regulatory authorities wish to advise participants in the capital markets that they are prepared to examine target company tactics in specific cases to determine whether they are abusive of shareholder rights. Prior shareholder approval of corporate action would, in appropriate cases, allay such concerns.

(4) Without limiting the foregoing, defensive tactics that may come under scrutiny if undertaken during the course of a bid, or immediately before a bid, if the board of directors has reason to believe that a bid might be imminent, include

(a) the issuance, or the granting of an option on, or the purchase of, securities

representing a significant percentage of the outstanding securities of the target company,

(b) the sale or acquisition, or granting of an option on, or agreeing to sell or acquire, assets of a material amount, and

(c) entering into a contract other than in the normal course of business or taking corporate action other than in the normal course of business.

(5) The Canadian securities regulatory authorities consider that unrestricted auctions produce the most desirable results in take-over bids and they are reluctant to intervene in contested bids. However, they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-over bid or to a competing bid.

(6) The Canadian securities regulatory authorities appreciate that defensive tactics, including those that may consist of some of the actions listed in subsection (4), may be taken by a board of directors of a target company in a genuine attempt to obtain a better bid. Tactics that are likely to deny or limit severely the ability of the shareholders to respond to a take-over bid or a competing bid may result in action by the Canadian securities regulatory authorities.

(7) As a general rule, the Canadian securities regulatory authorities will not advise parties as to the propriety of proposed action in a particular case except in the context of a meeting or proceeding of which interested parties have been given notice.

PART 2 EFFECTIVE DATE

2.1 Effective Date - This National Policy comes into force on August 4, 1997.