Bringing Corporate Governance Online: Can Atlantic Canadian private issuers leverage tech solutions while complying with provincial corporate statutes? Part 2: Electronically-signed share certificates
Part 2: Electronically-Signed Share Certificates
The COVID-19 crisis, and federal, provincial and local government directives for individuals to continue complying with social distancing policies even as measures are gradually relaxing, have forced businesses to re-think traditional corporate governance practices. Questions arise as to whether the applicable corporate statutes—many of which have not significantly changed for decades—allow a shift to tech-driven solutions that many Atlantic Canadian businesses are now considering.
Our first instalment in this series looked at whether private corporations and companies may hold their shareholder meetings by videoconference. The current instalment asks whether share certificates may be signed by electronic means. The answer to this question lies in the applicable corporate legislation, each entity’s constitutional and governing documents, and the electronic commerce statutes in force in each Atlantic Province.
Subsection 47(4) New Brunswick’s Business Corporations Act (the “NBBCA”) and subsection 87(4) of Newfoundland and Labrador’s Corporations Act (the “NLCA”) both require that share certificates be “signed manually by at least one director or officer of the corporation” (or by or on behalf of a registrar or transfer agent). Both provisions go on to say that any additional required signatures may be “printed or otherwise mechanically reproduced” on the certificate. The terms “signed manually” and “mechanically reproduced” are undefined in the legislation and have not been clarified by the courts.
These provisions can be contrasted with subsection 53(4) of Prince Edward Island’s Business Corporations Act (the “PEBCA”), which expressly permits all required signatures to “be printed or otherwise mechanically reproduced on the certificate”. (This mirrors the language in subsection 49(4) of the Canada Business Corporations Act.)
In Nova Scotia, the Companies Act (the “NSCA”) is silent regarding the form and content of share certificates and whether they must be “signed manually” or whether signatures may be “mechanically reproduced”. That said, Nova Scotia companies have discretion over how they conduct their business affairs through their articles of association (“Articles”), and may either be subject to the Table “A” Regulations (the “NS Regs”) under the NSCA or adopt their own form of Articles.1
Constitutional and Governing Documents
The constitutional and governing documents (in Nova Scotia, the memorandum of association and the Articles;² in the other provinces, the articles and by-laws) will often echo subsection 47(4) of the NBBCA and subsection 87(4) of the NLCA, but may also expressly or implicitly allow for electronic signatures. It is common to see relevant provisions in the constitutional and governing documents (typically in the by-laws or (in Nova Scotia) in the Articles) take one of two forms:
- provide that, unless the directors of the corporation/company determine otherwise, share certificates will be “signed manually” by at least one director, officer or transfer agent, and any additional required signatures “may be printed or otherwise mechanically reproduced”—this language empowers the directors to authorize share certificates to be signed electronically; or
- provide that “all but one” required signature “may be printed or otherwise mechanically reproduced” on the share certificate—this language requires the share certificates to have at least one original signature.
As well, it is increasingly common to see provisions in constitutional and governing documents that expressly state that instruments may be signed electronically by the corporation or company’s signing officer(s). Depending on how such provisions are drafted, they may apply to share certificates.
In all four Atlantic Provinces, the constitutional and governing documents may be amended (usually by shareholder action or with shareholder approval) to add language that clearly permits the use of electronic signatures. This provides considerable flexibility with respect to the use of electronic signatures for share certificates, even for corporations the constitutional and governing documents of which currently require that certificates be “signed manually” by at least one person.
Electronic Commerce Statutes
Even if the applicable corporate statute and constitutional and governing documents provide no insight into whether a share certificate may be signed in whole or in part by electronic means, the electronic commerce statutes in effect in each of the four Atlantic Provinces provide considerable leeway in this regard.
Specifically, subsection 11(1) of each of New Brunswick’s Electronic Transactions Act, Nova Scotia’s Electronic Commerce Act, and Newfoundland and Labrador’s Electronic Commerce Act, and subsection 9(1) of Prince Edward Island’s Electronic Commerce Act, provide that a requirement under the law of the applicable province for a person’s signature may be satisfied by an electronic signature—unless otherwise prohibited by the regulations thereunder or another statute.
The term “electronic signature” is defined nearly identically in the New Brunswick, Nova Scotia and Newfoundland and Labrador statutes—namely:
“electronic signature” means electronic information [or, in Nova Scotia, “information in electronic form”] that a person has created or adopted in order to sign a document and that is in, attached to or associated with the document.
However, the definition of “electronic signature” in the Prince Edward Island statute imposes stricter requirements:
“electronic signature” means information in electronic form that a person has created or adopted in order to sign a document and that is in, attached to or associated with the document, and has the following characteristics:
(i) it is uniquely linked to the signatory;
(ii) it is capable of identifying the signatory;
(iii) it is created using means that the signatory can maintain under his sole control; and
(iv) it is linked to the data to which it relates in such a manner that any subsequent change of the data is detectable.
While the requirements for an electronic signature to be uniquely linked and capable of identifying the signatory may be easier hurdles to overcome, the requirement that the signatory maintain his or her electronic signature under their sole control may be more difficult to satisfy. For example, an auto-fill feature for an online signature may be contrary to the definition of “electronic signature” in Prince Edward Island’s statute, as it may permit a third party to insert the signature.
Each province’s statute also provides that “information” (defined in the New Brunswick statute to include “a document”, but undefined in the other three statutes) shall not be denied legal effect solely on the ground that it is electronic—though the statutes also make it clear that no person is required by the applicable statute to accept information in electronic form.
Finally, the electronic commerce statutes are helpful but are not necessarily determinative of whether share certificates can be signed electronically, for at least three reasons:
- These statutes do not purport to override the express provisions of the constitutional and governing documents. If those documents clearly require at least one wet-ink signature on share certificates, then their share certificates should not be signed solely by electronic means.
- Since the electronic commerce statutes do not require anybody to accept information in electronic form, the shareholders may have trouble pledging their shares in the future. A lender who wishes to perfect its security interest by possession of an original share certificate may indeed (rightly) not be satisfied, absent a wet-ink signature, that it has received the only original of the certificate in question.
- Without any judicial interpretation of the term “signed manually”, one cannot say with certainty whether the electronic commerce statutes are meant to override statutory references to “manual” (as opposed to “original”) signatures.
Based on the foregoing, an electronic signature should satisfy the statutory requirement that share certificates be “signed manually”, provided the constitutional and governing documents either expressly permit electronically-signed share certificates or allow the directors to modify a default requirement for a wet-ink signature. In this case, it may be worth having the directors pass a resolution expressly authorizing the applicable director(s) and/or officer(s) to sign share certificates electronically until further notice.
If the constitutional and governing documents are ambiguous or clearly require at least one wet-ink signature, they can be amended (usually by shareholder action or with shareholder approval) to allow share certificates to be signed electronically.
It should be kept in mind that lenders are not required to accept delivery of a share certificate that has been signed by wholly electronic means. If a shareholder is considering pledging their shares, they should confirm whether the lender intends to perfect its security interest by possession of the share certificate and, if so, whether the lender requires a certificate with at least one wet-ink signature.
The definition of “electronic signature” in each province’s electronic commerce legislation is broad, and should be satisfied by the use of DocuSign, as a DocuSign signature would be considered a form of electronic information that is “created or adopted” in order to sign the share certificate and is unique and under the signatory’s control (at least, to the extent that the signatory sets up a password-protected account and uses his or her own signature rather than the standard DocuSign template signature). Since DocuSign will generate a record containing information meant to authenticate a person’s electronic signature, it may be preferable to use DocuSign than for a signatory to scan an image of his or her signature and add it to the share certificate using an image editing program.
As a final point, the corporate statutes aside from the NSCA³ all expressly provide that a document executed on behalf of a corporation or company by a director, officer or agent is not invalid merely because the corporate seal is not affixed thereto (see section 21 of the NBBCA; subsection 30(2) of the PEBCA; and section 32 of the NLCA). Accordingly, for corporations incorporated under the NBBCA, the PEBCA or the NLCA, the signing director(s) and/or officer(s) should be able to sign share certificates electronically without the corporate seal—subject to any provision to the contrary in the constitutional or governing documents. For Nova Scotia companies, whether a corporate seal is required will depend on the form of share certificate that was adopted by the company and the provisions of its Articles.⁴
Unless and until provincial governments take definitive legislative action to authorize the types of shifts to virtual governance that many businesses are now forced to contemplate, any corporate-level decisions in this regard will need to be guided by the existing statutory framework, the corporation or company’s constitutional and governing documents, and an awareness of the prevailing judicial attitude locally.
Our next installment will discuss various cyber-security issues that may arise from the use of tech-based governance solutions. Stay tuned.
1 In Nova Scotia, most companies incorporated under the NSCA (and all ULCs) will adopt their own Articles. For those few companies that do not adopt their own Articles, the NS Regs apply and require that share certificates be signed by the company’s president, a vice-president or a director, and the company’s secretary, an assistant secretary or such other persons as the directors may authorize, and an authorized officer of the company’s transfer agent (if one has been appointed) (NS Regs, subsection 12(2)). That said, the president/vice-president’s signature “may be engraved, lithographed or printed”—as can the secretary/assistant secretary’s signature, if a transfer agent has been appointed—and such certificates shall be valid “when signed by the Secretary, an assistant secretary, such other person as the directors authorize, or, if a transfer agent has been appointed, an authorized officer of such transfer agent” (NS Regs, subsection 12(3)). While these provisions have not been interpreted by the courts, a plain reading appears to require either a secretary or a transfer agent to affix their original signature to the company’s share certificates, though the other signatures may be printed on the certificates.
² And, if adopted (as is rarely the case), by-laws.
³ Part IV of the Corporations Miscellaneous Provisions Act, RSNS 1989, c 100, provides a similar rule in Nova Scotia but is limited to “contracts”.
⁴ Following a 2008 amendment the NSCA stopped requiring the sealing of shares certificates; however, the Articles of companies incorporated pre-2008, and many afterwards, continue to require that a seal be impressed upon the share certificates. The company’s Articles should always be reviewed to confirm what is needed.
This update is intended for general information only. If you have questions about the above, please contact a member of our Corporate Formation/Reorganization Group.
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