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OP I N ION BY CHERYL SATIN BANKING ON CORPORATE Ditch director residency restrictions Saskatchewan, and Newfoundland and Labrador, still require at least 25 per cent of the directors of a corporation formed under their laws to be Canadian residents. A few decades ago, most Canadian jurisdictions had similar (or greater) requirements. Over time, vari- ous provinces and territories removed these restrictions to increase incorpo- rations in their jurisdictions and sim- plify board composition matters for businesses already operating there. Is it time for Canada and the remaining provinces to follow suit? Director residency requirements T were originally adopted in the 1970s in response to concerns over increased for- eign investment in Canada. Legislators wanted to ensure fundamental decisions of foreign-controlled entities factored in a Canadian perspective, and at least one individual was located in Canada who could be held accountable for corpo- rate actions and liabilities. It was also hoped the residency requirements would protect Canadian subsidiaries from the extraterritorial application of foreign laws, such as the American Trading with the Enemy Act, which prohibited some Canadian subsidiaries from trading with Cuba. With changes to the applicable U.S. legislation, the latter reason no longer carries any weight. And, from a practical perspective, residency requirements do little to further the other objectives. A business owner is free to incorpo- rate in any jurisdiction he chooses, as long as the resulting corporation extra- provincially registers in each province and territory in which it conducts busi- ness. Accordingly, businesses operating in Ontario that want to avoid the Ontario residency requirements can incorporate in New Brunswick and register in Ontario. he Canada Business Corporations Act, along with the analogous corpo- rate legislation in Alberta, Manitoba, Ontario, Global enterprises based outside Canada looking to establish a business in Canada often want to use senior execu- tives or directors of their parent company as directors of their new Canadian opera- tions. Historically, Canadian lawyers and accountants frequently helped interna- tional clients satisfy the residency require- ments by serving on the Canadian entity's board. However, with increased scrutiny and liability imposed on directors, fewer professionals are willing to assume the risk. Indemnification of directors is a partial and uncertain solution. Further, finding a trustworthy local person today whom an enterprise is willing to offer visibility into, and decision-making authority over material decisions, is difficult. As a result, "jurisdiction shopping" is on the rise. One recent example is High River Gold Mines Ltd., a Russian-controlled $1-billion market-capitalization mining company based in Toronto and listed on the Toronto Stock Exchange. It sought shareholder approval earlier this year to move its jurisdiction of incorporation to the Yukon to eliminate the application of federal residency restrictions. High River cited a need for increased flexibility to attract directors with more globalized expertise in light of the international scope of its business, and the fact its principal assets are located in Russia and Burkina Faso. With increased foreign investment in Canada's natural resource sector, such jurisdiction shopping will likely escalate. Similarly, as Canadian businesses continue to expand interna- tionally, their need to have directors with expertise and contacts in various inter- national markets, while still maintaining boards manageable in size, could increase movement between Canadian jurisdic- tions. A foreign owner may also negate the objective of having Canadian input in material decisions through a unanimous shareholders' agreement, that removes all decision-making authority from the direc- tors and transfers those powers to the shareholders. In those circumstances, the Canadian resident director(s) often serve no other purpose than to meet the resi- dency requirements. Having an individual located in Canada against whom provincial legislation impos- ing personal liability on directors can be enforced for such liabilities as unpaid wages, taxes, and environmental non-compliance is often cited as a reason for maintaining residency requirements. To date, there is no evidence of foreign-owned businesses being more likely to shirk their obligations than domestic ones. Furthermore, the leg- islation does not require the Canadian- resident director to meet any particular financial means test. Internationally, jurisdictions tend toward no residency requirements. Hawaii is the only U.S. state that still imposes such a restriction. Residency requirements are also generally not found in Asia, Mexico, or South America (other than Argentina). Similarly, the United Kingdom, France, and Germany (among other European Union member countries) do not require resident directors. However, certain EU countries do require some portion of the directors be EU residents. Australia, on the other hand, requires there be at least one resident director, primarily to ensure "accountability" by having one person with assets in the jurisdiction. It is time Canada and the remaining provincial jurisdictions eliminate their director residency restrictions. The pur- poses they presently serve are question- able. If anything, they hinder Canadian businesses looking to become more active in foreign markets and complicate foreign investment in Canada. Cheryl Satin is a partner at Blake Cassels & Graydon LLP in Toronto practising in the business group. She can be reached at cheryl.satin@blakes.com. The opinions expressed in this article are those of the author alone. www.CANADIAN Lawyermag.com A U GUST 2011 15