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Coming Soon: Elimination of the Director Residency Requirement for OBCA Corporations

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Capital Perspectives - Newsletter

On Dec. 8, 2020, the Ontario Better for People, Smarter for Business Act, 2020 (Bill 213) received Royal Assent. This will, among other things, amend the Business Corporations Act (Ontario) (OBCA) by eliminating the current requirement that 25 per cent of directors be resident Canadians.

The amendment comes into force on a day to be named by a forthcoming proclamation and will apply to privately and publicly held Ontario corporations. The elimination of the director residency requirement is welcomed news for many corporations and foreign investors based outside of Canada who want to incorporate in the Province of Ontario but do not always have qualified directors who are resident Canadians.

The OBCA’s Director Residency Requirement

The OBCA currently imposes a residency requirement for directors. Subsection 118(3) of the OBCA stipulates that 25 per cent of the directors of an Ontario corporation must be “resident Canadians” unless there are fewer than four directors, in which case, at least one director must be a resident Canadian. However, “non-resident corporations” are exempt from this requirement.

The OBCA defines a “resident Canadian” as an individual who is either a:

  • Canadian citizen ordinarily resident in Canada
  • Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons
  • Permanent resident:
    • Within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act (Canada), which means a person who has acquired permanent resident status and has not subsequently lost that status; and
    • Ordinarily resident in Canada

The OBCA does not define “ordinarily resident,” but courts have interpreted it to mean the place where in the settled routine of such person’s life, such person regularly, normally or customarily lives.

Why Does the OBCA Have a Director Residency Requirement?

The requirement can be traced back to the 1970s when there were concerns about the amount of direct foreign investment in Canada. While the rationale for having the director residency requirement was never entirely clear, it was seemingly built upon the notion that corporations would be more responsive to Canada’s national interests with a Canadian presence on corporate boards.

Gradually, other rationales emerged in support of the requirement. For example, in addition to promoting Canada’s national interests, the requirement became viewed as a useful tool for promoting the enforcement of laws. The idea was that resident Canadian directors face potentially more significant risks and thus have a greater interest in seeing that a corporation follows the law.

Today, as more jurisdictions move away from residency requirements, it seems that these rationales have lost their persuasiveness. Corporate directors have a duty to act in the corporation’s best interests, whether or not those interests align with Canada’s national interests. Additionally, the residency requirements do not necessarily promote the enforcement of laws as director liability can be removed by the use of a unanimous shareholder agreement (USA).

Eliminating the Director Residency Requirement: Why Does it Matter?

The director residency requirement creates an obstacle for many foreign corporations and investors looking to incorporate in Ontario. These foreign corporations and investors must find and elect resident Canadians as directors who they would not otherwise choose but for the director residency requirement.

To avoid the extra hurdle of finding and electing resident Canadian directors, many foreign corporations or investors opt to incorporate in other jurisdictions where there is no director residency requirement. Alternatively, foreign corporations, if they can identify a resident Canadian director, will implement a USA, under which shareholders can restrict the director’s powers and transfer those powers to the shareholders.

Eliminating the director residency requirement will make the OBCA more attractive to foreign corporations and investors by reducing the cost, complication and delay associated with finding resident Canadian directors, incorporating in an alternative jurisdiction or restricting director’s powers through a USA. Existing Ontario corporations may consider revisiting and adjusting their board composition, and non-Ontario corporations may consider leaving their current jurisdiction and continuing under the OBCA.

Ontario is in the process of removing its director residency requirements and Alberta has now removed its Canadian residency requirements as of March 29, 2021. Then residency requirements will only remain under the federal Canada Business Corporations Act and the corporate statutes of Manitoba, Newfoundland and Labrador, and Saskatchewan.

Virginia Schweitzer is a partner in the Fasken Ottawa office. As a leading corporate and M&A lawyer, she has provided counsel to technology and mining clients across North America for IPOs, private placements, mergers and acquisitions, and to not-for-profit corporations on corporate governance issues.

MacNeal Darnley is an articling student in the Fasken Ottawa office and a graduate from Queen’s University Faculty of Law, where he earned a Juris Doctor degree. He is the recipient of several law school awards, including the Queen’s Law Prize in Advanced Torts. Prior to law school, he attained an Honours Bachelor of Arts with Distinction from the University of Toronto.