In many respects, Canada’s corporate and securities law systems lack the clarity needed to attract global investment.Nathan Denette/The Canadian Press
William Hourigan is a justice of the Court of Appeal for Ontario. Jordana Borzellino is a lawyer in Ontario. The following is adapted from a forthcoming article in the Supreme Court Law Review.
Canadian political and business leaders are engaged in an unprecedented rethink of the national economy. If we are to successfully adapt to the harsh realities of the current geopolitical moment, it will be necessary to force bold reform in a variety of economic domains, from interprovincial trade to resource extraction. To date, one major problem has escaped scrutiny: the ways in which Canadian corporate and securities laws act as a barrier to domestic and foreign investment in our economy.
Law has a vital role to play in ensuring economic health. When applicable rules and frameworks are clear, those subject to the law can effectively order their affairs. A primary purpose of corporate law is to create legal certainty, thereby spurring investment. Thus, healthy corporate and securities law regimes will not only address problematic behaviour, but will also set clear, predictable rules and allow businesses to make long-term investments in a jurisdiction.
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We argue that Canadian governments need to critically evaluate existing corporate and securities statutes. In many respects, Canada’s corporate and securities law systems lack the clarity needed to render this country an attractive jurisdiction for global investment. We highlight three doctrinal areas that would benefit from review and reform.
First, the law of directors’ and officers’ liability is unclear, which means that business leaders are often unsure of how to fulfill their fiduciary duties. The leading Supreme Court of Canada cases on the fiduciary duties of directors and officers hold that they must act in the best interests of the corporation. The court has held that in doing so, directors and officers must consider the impact of their decisions on shareholders as well as on stakeholders outside of the corporation, such as governments.
One issue that arises is that stakeholder interests often conflict. The interests of employees, for example, may clash with those of shareholders. But the jurisprudence remains unclear on how to resolve clashing stakeholder interests and how to fulfill the duties of what the court has coined the “good corporate citizen.” A failure to clearly define directors’ and officers’ liability can prevent bold corporate policy and effective business management.
Second, case law on the oppression remedy remains unclear. This statutory remedy allows stakeholders to obtain redress in response to corporate actions that are oppressive, unfairly prejudicial, or that unfairly disregard the interests of certain stakeholders. However, the case law demonstrates a paucity of clear rules to determine when oppressive conduct occurs. Again, Canadian business leaders may shy away from innovative action rather than face a potential oppression claim.
Finally, the Ontario Securities Commission’s public interest power under the Securities Act is poorly defined. Section 127 of the statute provides that the commission may make certain orders “if in its opinion it is in the public interest” to do so. This power permits the commission to impose administrative sanctions even when there has been no breach of the act, regulations or policies. This catch-all provision raises understandable concerns in the securities field, as it allows the commission to continually redefine the scope of unacceptable behaviour.
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These are just three illustrations of existing problems in Canadian law that may discourage investment. How can we ensure that Canadian corporate law is fit for purpose? One innovative solution would be to create provincial corporate law councils to undertake ongoing reviews of each province’s corporate and securities law regimes. Delaware, which has long been a global leader in attracting investment, has a regular review process, in which top lawyers from the state bar association thoroughly prune the state’s corporate law regime and ensure its continued responsiveness and agility.
Canadian provinces should adopt the Delaware model. The proposed corporate law councils would evaluate the degree to which a province’s corporate and securities laws drive out investment, recommend necessary changes to statutory law and oversee the implementation of reforms. They would keep an eye to comparative developments, not only across Canada, but also in the United States and further afield.
We have much to learn from other jurisdictions when it comes to sharpening and updating our corporate and securities laws. For these councils to succeed, Canada’s best corporate law thinkers will need to step up to the plate. Top litigators, transactional lawyers, business leaders and academics must come together and do their part to ensure that we expose this country’s corporate and securities law frameworks to the same merciless scrutiny that we are applying to other aspects of our economy.