The Law Governing Related Party Transactions in Canada: Rules, Standards and Regulatory Scrutiny

Abstract

Canada is an interesting laboratory to study the law governing related party transactions because of the distinctive features of its capital markets and its regulatory landscape. The ownership structure of Canadian corporations resemble more closely those of continental Europe and South East Asia than those of the United States. Further, deviation from the one share/one vote rule is widespread. Thus, the primary corporate governance problem relates to the risk that dominant shareholders extract private benefits of control at the expense of the corporation and its public shareholders. As for regulation, publicly-traded corporations are subject to provincial corporation and securities laws, which are largely harmonized at the national level.

The paper reviews the law governing RPT in Canada, which is the product of corporate law and securities regulation. Although they are not prohibited, conflict of interest transactions are regulated by an intricate set of ex ante rules and ex post standards of review that impose procedural and substantive requirements. Specifically, the paper shows that the following fundamental questions lead to many answers: 1) Who is charged with the screening of RTP?; 2) How does the screening work?; 3) When does it operate?

Against this backdrop, the paper analyses the role of procedural safeguards and substantive review by looking at two conflicting cases regarding the impact of majority of the minority approval. It also presents data on the use of majority of the minority approval by reviewing 79 transactions between 2013 and 2018 where this procedural safeguard was mandated. The anecdotal and empirical discussion serves to put majority of the minority approval in perspective with respect to its protective function. The analysis closes with a discussion of a recent initiative on the part of Canadian securities regulators, which translates into a heightened involvement in the review and oversight of conflict of interest transactions. On the one hand, this initiative may buttress the effectiveness of majority of the minority approval by reinforcing the procedural safeguards. On the other hand, it may have unintended effects on the protection of minority shareholders.

Keywords: Governance, Related Party Transactions, Securities Regulation

JEL Classification: K22