Board of Directors: Is Gender Diversity Sufficient?

A few weeks ago, a newspaper article caught my eye as I was working on a matter involving compliance with the various diversity requirements for a client’s companies’ boards of directors. The newspaper article spoke of the failure of German companies to add more women to their management boards of directors and quoted a government minister suggesting that quotas could be imposed.

The client was not concerned about whether diversity would be good for its business; the “positives” were well acknowledged. The issue was the crafting of the diversity policy(s) including defining diversity and then creating compliance strategies. One question under consideration was – is gender diversity sufficient?

Under German law, commencing in 2016, some 100 of the largest publicly traded companies are required to have 30% of their supervisory board of directors comprised of women. The newspaper article was somewhat incomplete as it did not fully describe and distinguish the concepts in German law of a supervisory board and a management board; perhaps a “minor” detail to some observers.

A study from the Hans Bockler Foundation determined that earlier this year (2017) women held about 22% of those supervisory seats, which, although more than double the percentage from a few years ago, was well below the 30% threshold.

This 30% quota applies to the supervisory board; i.e. the entity in Germany that approves major business decisions and consists of “outside” or “independent” directors elected by the shareholders and the employees. In turn, the supervisory board elects the management board which runs the day-to-day business.

There is no quota requirement at the management board level under German law; at least not yet. The newspaper article quoted the German government minister warning industry that legislative action would occur if the situation (only some 6% of management boards are women) was not remedied within the year.

Other countries, France and Norway for example, impose fines if the quota isn’t met, but in Germany if the quota isn’t met, the company must keep the supervisory board seat vacant.

Meanwhile in Canada, since 2015, TSX listed issuers have been required to disclose information as to the composition of women on their board of directors and in executive officer positions. The so-called “comply or explain” requirements are set out in National Instrument 58-101- Disclosure of Corporate Governance Practices.

In September 2016, the Canadian Securities Administrators compiled the disclosed information and concluded that, generally speaking, the number of women on boards in all size categories of issuers had increased, with the larger issuers leading the way. For example, of the 215 TSX listed issuers with a market capitalization of more than $1 billion, women held 18% of the board seats in 2016 compared to 16% in 2015. Of the 42 largest issuers (market cap of at least $10 billion), the increase was from 21% in 2015 to 23% in 2016. Also issuers that have a written policy regarding women on their board averaged 18% women representation compared to issuers with no such policy of 10% women representation.

Opinions vary on whether the “comply or explain” requirement, by itself, will be sufficient to remedy, on a timely basis, the lack of female representation on boards but the concept has been used in the past by Canadian securities regulators including in their response to the SOX initiatives in the United States that began in 2002. Back then, while “SOX” included revised listing standards for the New York and other U.S. Stock Exchanges plus “bright line” tests and “safe harbours”, in Canada, on the other hand, the regulatory response (e.g. National Instrument 51-102- Continuous Disclosure Obligations; CEO/CFO certifications, Multilateral Instrument 52-110- Audit Committees, etc.) used the “comply or explain” approach.

“Smaller” public companies (e.g. those listed on the Venture Exchange) are exempted from a number of regulatory requirements applicable to TSX listed companies including board and executive officer diversity disclosure.

In addition to developments in the Canadian public company markets, there are other Canadian provincial and federal government initiatives.

For instance, in June 2016 the Ontario provincial government announced gender diversity targets after accepting 11 recommendations in the Catalyst Canada report entitled “Gender Diversity on Boards in Canada: Recommendations for Accelerating Progress”. Ontario set a target that, by 2019, women would make up at least 40% of all appointments to each provincial board and agency. Also the private sector was “encouraged” to, by the end of 2017, set a target of appointing 30% women to their board of directors and, once set, to aim to achieve the target within 3 to 5 years.

Interestingly, while the CSA and Ontario are focused on gender diversity, the federal government’s recently proposed changes to the Canada Business Corporations Act will extend the “comply or explain” model to all “distributing corporations” (i.e. public companies) beyond just gender. Instead, information respecting diversity other than just gender will be required to be disclosed annually. It is not yet clear whether this disclosure will be limited to just TSX listed companies.

Regardless, the proposed CBCA legislation does not prescribe categories of diversity, but typically included are race, religion, ethnicity and sexual orientation; i.e. not just gender diversity. Consequently, the relevant CBCA company which has a policy focused (only) on gender diversity will have to extend the policy beyond just gender or explain why not.

Contrast all of the foregoing with the results being achieved by what is known as the “30% club” initially formed in Great Britain in 2010/11 by executives when women on boards hovered around 12%. The founders picked 30% as an “aspirational goal” with the belief that it would create a critical mass on any board. The club expects the 30% threshold to be reached in Great Britain in the next year or so. Interestingly, it used the “peer pressure” approach to first engage with men and women executives who were committed to the concept of increased women’s board membership and created a wave to extend and convince others; i.e. “selling the vision”. The movement has spread to the United States, South Africa, Australia and elsewhere and is also now extending down into the enterprises and focusing on increasing the role and stature of women in the organization. All of this makes sense of course, given that the majority of university/college graduates are women; albeit the percentage is not consistent across all disciplines.

The foregoing reflect an increased awareness that even if these gender quotas for board composition are reached, there is still significant progress needed regarding inclusion; (i.e. diversity generally not just gender) in management and other senior roles, pay equity and discrimination.

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Cryptocurrencies

Cryptocurrencies have been in the news recently.  By one estimate, over US$1.2 billion has been raised worldwide in initial coin offerings (“ICOs”) and initial token offerings (“ITOs”).  This increase in activity has also captured the attention of Canadian securities regulators.

ICOs/ITOs are generally used by start-up businesses to raise capital from investors through the internet.  In an ICO/ITO investors can visit a website to purchase crypto coins/tokens in exchange for fiat currency or another cryptocurrency such as bitcoin or ether.  An ICO/ITO can be very similar to a traditional initial public offering (“IPO”) of shares by a business, because the value of the coins/tokens may increase or decrease depending on how successfully the business executes its business plan.

The Canadian Securities Administrators (the “CSA”) are concerned about ICOs and ITOs because they raise investor protection concerns, due to issues around volatility, transparency, valuation, custody and liquidity, as well as the use of unregulated cryptocurrency exchanges.

Is a Crypto Coin or Token a Security?

To date, most organizations have either taken the position that securities laws do not apply to their ICO/ITO or have ignored the issue.  CSA Staff have confirmed that crypto coins and tokens may be securities, and may be subject to the same securities laws that apply to an IPO of shares.

If a crypto coin or token is deemed to be a security, then:

  • an ICO or ITO would be subject to Canadian prospectus requirements, unless a prospectus exemption is available for the ICO or ITO;
  • businesses and individuals in the business of trading in or advising on crypto coins or tokens would need to be properly registered or rely on an exemption from registration; and
  • A platform that facilitates trades in crypto coins or tokens may be a marketplace and would need to comply with marketplace requirements or obtain an exemption from those requirements.

The CSA acknowledge that each ICO/ITO is unique and will be assessed on its own characteristics.  For instance if an individual purchases coins/tokens that allow him to play video games on a platform, then those coins/tokens would likely not be securities.  On the other hand, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, they will likely be considered securities.

To determine whether the coins/tokens being sold in an ICO/ITO are securities, the CSA will consider whether the ICO/ITO involves:

  • an investment of money;
  • a common enterprise;
  • the expectation of profit; and
  • if the profit would come significantly from the efforts of others (i.e., not the efforts of the investors).

Compliance with Prospectus Requirements and Ongoing Disclosure Requirements

If a business and its advisors conclude that its coins/tokens are securities, then they must either comply with the prospectus requirements of Canadian securities laws or rely on an exemption from the prospectus requirements, such as the accredited investor exemption or the offering memorandum exemption.

The CSA noted that some fintech businesses publish whitepapers for their ICOs/ITOs, which describe things like their fundraising goals, their business, the project for which they are raising funds, how many coins/tokens management will keep and how long the ICO/ITO will remain open.  These whitepapers do not contain all of the information required by a prospectus or offering memorandum and do not comply with securities laws.

Even if a prospectus exemption is available for an ICO/ITO, the business would still be subject to the requirements of securities laws, such as providing audited annual financial statements and other ongoing disclosure to investors.  Some prospectus exemptions, such as the offering memorandum exemption contain restrictions on the amount that each investor can invest.  In addition, ICO/ITO coins/tokens would be subject to resale restrictions, so that investors would not be allowed to resell them unless they could rely on a prospectus exemption.

Failure to comply with securities law requirements could result in the persons involved in an ICO/ITO being liable to the investors for damages or to refund their investment.

Trading in Securities and Registration as a Dealer

In addition to complying with the prospectus requirements, businesses doing an ICO/ITO may also be trading in securities for a business purpose.  If that is the case, then they will need to either be registered as a dealer or be able to rely on an exemption from registration.

If the sale of coins/tokens by a business is considered trading in securities, then the business will need to comply with certain fundamental obligations to its investors, such as know-your client and investment suitability.  This would require these businesses to verify each investor’s identity and collect sufficient information to ensure that the purchase of coins/tokens are suitable for the investor, taking into account his or her investment needs, objectives, financial circumstances and risk tolerance.  The CSA acknowledge that it is possible that a business could fulfil these obligations through a robust, automated, online process that incorporates investor protections. These investor protections could include limits on investment amounts and concentration, as well as risk warnings.

Cryptocurrency Exchange

Cryptocurrency exchanges are online exchanges that allow investors to buy and sell cryptocurrencies, such as s bitcoin and ether, and they may also offer coins/tokens that have been sold pursuant to ICOs/ITOs.  A cryptocurrency exchange that offers coins/tokens that are securities will be deemed to be a marketplace under Canadian securities laws.  Marketplaces are required to comply with the rules governing exchanges, such as those applicable to the TSX, or alternative trading systems.  If an exchange is doing business in Canada, it must apply to its local securities commission for recognition or an exemption from recognition. To date, no cryptocurrency exchange has been recognized in any jurisdiction of Canada or exempted from recognition.

CSA Regulatory Sandbox

The CSA have set up an initiative that it calls the Regulatory Sandbox, to support fintech businesses seeking to offer innovative products, services and applications in Canada. It allows firms to register and/or obtain exemptive relief from securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market on a time-limited basis.

The CSA want to encourage financial market innovation and facilitate capital raising by fintech businesses, while at the same time ensuring fair and efficient capital markets and investor protection.  To avoid costly regulatory surprises, businesses considering doing an ICO/ITO should first consult legal counsel and then approach their local securities commission to discuss how they can comply with securities laws.

New Canadian Anti-Spam Legislation (CASL) Rules in Effect as of July 1, 2017

If you work in electronic marketing in Canada, you are probably aware of and abide by Canadian Anti-Spam Legislation (CASL). If CASL has been relevant to how you carry on business, be advised that July 1, 2017 marks the end of a transition period by which you may have to make some changes to your electronic marketing operations.

When CASL was first implemented, the legislation provided a transition period from July 1, 2014 – July 1, 2017. During the transition period, marketing and communications organizations were permitted to send “commercial electronic messages” (CEMs) to recipients from whom they had obtained “implied consent” to receive them. This implied consent to receive was assumed, unless the recipients unsubscribed/opted-out of them (i.e. clicked unsubscribe in an email). After July 1, 2017, CEMs can only be sent to recipients that have expressly consented/opted-in to receiving them, OR whose “implied consent” is now valid as per the new meaning of implied consent under CASL.

To obtain express consent to send CEMs, you must set out clearly the following:

  1. The purpose or purposes for which the consent is being sought;
  2. Information that identifies the person seeking consent, and if the person is seeking consent on behalf of another person, prescribed information that identifies that other person; and
  3. Any other prescribed information set out in the regulations of the legislation.

For implied consent to now be valid under CASL, you generally have to send your CEMs to customers within either of:

  1. 24 months of a purchase from the your organization; or
  2. 6 months of the last inquiry made by a customer to your organization.

Please note that failure to comply with the new consent requirements after July 1, 2017 may expose you to a new private right of action. Should a Court determine that a violation has occurred, you could be liable for damages ranging anywhere from $200 to $1,000,000 for each day on which a contravention occurred.  With the potential for such a serious penalty, it is advisable that you take the following steps:

  1. Send an express consent communication to all customers (likely by e-mail) on your customer lists asking them to confirm that they opt-in to receive your CEMs.
  2. Stop sending CEMs to any customers who have not responded to these emails with express consent. Relying on implied consent at this point could be risky. Since the rules are new, their meaning has not yet been interpreted (it would be unclear for example what kind of inquiry is sufficient). As such, acquiring express consent from your customers is your safest approach.
  3. Keep good records of all express consent customers.

GYM MEMBERSHIPS

In Ontario, most gym memberships or contracts are regulated by the Consumer Protection Act, 2002 (Act).  The Act applies to any gym or other physical activity membership if you have to pay $50 or more in advance.  These contracts as classified as “personal development services” agreements under the Act.  The rules in the Act apply to most gyms, sports clubs, dance classes, martial arts clubs and yoga studios.  They do not apply if the gym or fitness centre is a not for profit (such as a YMCA), is owned by its members or is run by a city or the Province of Ontario.

Recently, there have been some reports in the media that some gyms and other physical activity clubs have been reclassifying their contracts as “student tuition agreements” to avoid their obligations under the Act.

How a contract is classified can make a significant difference in your rights as a consumer.  Of course, although a gym may try to classify a contract as a student tuition agreement, there is no guarantee that a court would agree with that classification.  However, challenging this would require you to take legal action, which could take time and cost you money.

As mentioned, gyms and other physical activity clubs may try to classify their contacts as student tuition agreements, because there are strict rules for personal development contracts.  Under the Act, you have the following rights when you sign a personal development contract:

  • The contract must be in writing;
  • The gym must give you a copy of the contract, if you do not receive a copy, you can cancel the contract at any time within 1 year of signing;
  • After receiving the contract, you have a 10 day cooling off period, where you can cancel the contract, without any reason, and do not have to pay any penalty;
  • The contract cannot be for longer than 1 year;
  • Instead of being for 1 year, the contract can be on a month to month basis, but then you can cancel on 1 months’ notice;
  • If there is an initiation fee, it cannot be more than double the cost of the annual membership;
  • Gyms must offer an instalment plan that allows you to make equal monthly payments;
  • The total amount paid under the monthly instalments must not be more than 25% of the fee if the full amount was paid at the time of signing; and
  • There’s a minimum warranty on the quality of the gym services, which means that it must provide you with a reasonable use of its premises and equipment, the premises should be clean and there should be sufficient space and equipment.

If the contract is classified as a student tuition agreement, then none of these rights would apply. Sometimes gyms are trying to classify their contacts as student tuition agreements so that they can:

  • Automatically renew the contract for more than 1 year;
  • Not provide you with a copy of the contract; and
  • Bill you for 2 months within the first few weeks.

Some consumers have complained that they are invited to attend free trial classes at a gym or club and then are pressured into signing a student tuition agreement.  You should not sign any contract for a gym or a physical activity club until you have reviewed and made sure that it is a personal development contract that protects you rights under the Act.

ONTARIO SCALE UP VOUCHERS PROGRAM

The Ontario Government has adopted the Scale Up Vouchers Program.  This is a four-year, $32.4-million initiative funded by the Government of Ontario, and delivered through MaRS, Communitech and Invest Ottawa.  The program aims to accelerate the development of Ontario technology and innovation-based firms.

The program is available to Ontario based firms.  To be eligible, a firm must:

  • be privately held;
  • 50% or more of its full-time employees must be based in Ontario, 50% or more of its senior executives must have their principal residence in Ontario and at least 50% of its wages, salaries and fees must be paid to employees and contractors who spend a majority of their time working in Ontario;
  • be in technology and innovation intensive industries, such as:
    • information and communications technology;
    • advanced materials and manufacturing;
    • clean technology; or
    • life sciences;
  • earning $1 million to $50 million in annual revenue;
  • already experiencing a 20% annual growth rate in revenue, sales or employment; and
  • have secured private investment of at least $2 million in the previous two years.

To participate in the program, a firm must complete an application.  The applications are reviewed and the vouchers are awarded by a selection committee made up of senior technology and innovation leaders.  The committee scores applications based on criteria that are set out in the program’s web site at http://www.ontarioscaleupprogram.ca.

Firms with revenues between $1 million and $5 million can receive a voucher for up to $150,000, with an expectation for the firm to match 33% of the voucher value, or up to $49,500.

Firms with revenues over $5 million can receive a voucher for up to $250,000, with an expectation for the firm to match 50% of the voucher value, or up to $125,000.

A firm that is awarded a voucher will sign a contract outlining the specific terms of its voucher.  All vouchers expire after 24 months and a firm can only receive one voucher.  The vouchers can be used for a range of both direct and indirect expenses to help the firms execute on their growth strategy in the areas of:

  • hiring employees and contractors
  • accessing financing
  • developing products and intellectual property
  • international expansion.

Firms that participate in the program will also have access to growth coaches, who will acts as mentors, help them develop growth plans, introduce them to their networks and help them with the voucher application process.

Not-for-Profit Corporations: It May be Time for You to Transition!

If you are a federal not-for-profit corporation that was incorporated under the Canada Corporations Act, Part II (the “CCA Part II”) and you have not yet transitioned to the new federal not-for-profit legislation – the Canada Not-for-profit Corporations Act, S.C. 2009, c. 23 (the “NFP Act”) – it is now time to do so.

Corporations Canada has set a final deadline of July 31, 2017 for all existing federal not-for-profit corporations to transition to the NFP Act. It is important to remember that the NFP Act does not automatically apply to existing corporations. Therefore, if you are a not-for-profit corporation that incorporated prior to October 17, 2011 and you do not possess a Certificate of Continuance it means that you have yet to “continue” to the new legislation and must do so.

If a not-for-profit corporation does not transition by the deadline, the unfortunate result is that the corporation will be dissolved and will no longer exist as a legal entity. If the corporation is also a registered charity, this may lead to its registered status being revoked.

So what does your not-for-profit corporation have to do to transition? The letters patent of the corporation will have to be replaced by articles of continuance, an initial registered office and first board of directors form filled out and a name search report submitted. Once all documentation is submitted and approved by Corporations Canada, a Certificate of Continuance will be issued to the corporation. Further, the by-law requirements are different under the NFP Act, so it will be necessary for each corporation to review its by-laws and amend them accordingly. New by-laws compliant with the NFP Act and approved by members of the corporation can either be submitted with the continuance documents or filed with Corporations Canada within 12 months of member approval.

If your not-for-profit corporation has not yet transitioned, keep in mind that the corporation must receive its Certificate of Continuance on or before July 31, 2017. For this reason, it is important to start this process early and not wait until the last minute.

The foregoing is meant to be a summary of the requirements to continue under the NFP Act. If you have any questions, please contact us and we will be happy to assist.

Private Right Of Action Under Anti-Spam Law

Most of Canada’s anti-spam law (CASL) came into effect on July 1, 2014. However, not all of the provisions of CASL came into force at that time. On July 1, 2017, the provisions of CASL that provide for a private right of action for a breach of CASL are scheduled to come into force. This will represent a big change and a big risk for businesses.

Right now, CASL is enforced by the Canadian Radio-television and Telecommunications Commission, the Privacy Commissioner of Canada and the Competition Bureau. These regulators can, and have, enforced breaches of CASL.

Starting on July 1, 2017, individuals, or more likely class action lawyers, will be able to sue any company or other business that breaches certain provisions of CASL, such as:

  • Sending a commercial electronic message (such as an email) without consent of the recipient or that does not otherwise comply with CASL
  • Altering transmission data (hacking) so that the message is delivered to a different destination other than the one specified by the sender
  • Installing computer programs, such as cookies, malware or viruses, on someone’s computer without their consent
  • Aiding, inducing, procuring or causing any of the things listed above
  • Breaching the provisions of the Personal Information Protection and Electronic Documents Act (PIPEDA) against using computer programs to collect email addresses
  • Breaching PIPEDA by collecting personal information by illegally accessing someone’s computer system
  • Breaching the Competition Act by using email to send false or misleading information

Under CASL’s private right of action, not only would a corporation or business be liable for the breaches listed above, but its directors and officers would also be personally liable if they directed, authorized, assented to or acquiesced in the breach. Directors, officers and their corporation would be jointly and severally liable, which means that each would be liable for the entire amount of the damages. Businesses would also be liable for any actions of their employees if the breach was within the scope of their duties.

The private right of action will give complainants the right to receive compensatory damages for any losses that they have suffered. In addition, it also gives them the right to receive what are called statutory damages for the breaches described above. For instance, the statutory damages for sending non-compliant emails are $200 for each breach, up to a maximum of $1 million per day. The statutory damages for hacking transmission data, installing unauthorized computer programs, collecting email addresses and collecting personal information are a maximum of $1 million per day. A person who sues under these provisions can claim these amounts without having to show that he or she suffered any actual losses as a result of the breach. This is likely to provide a strong incentive for class action lawsuits for any of these types of breaches.

One important thing to note is that if a business enters into a voluntary settlement or undertaking with the applicable regulator, then it will not be subject to the statutory damages. This will provide a strong incentive for any business that learns of a breach to enter into a voluntary settlement with the regulator.

To protect themselves, business owners should review their email and other computer practices to make sure that they are in compliance with CASL and avoid any risk of either being sued in a class action or being prosecuted by the regulators.