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Adrian Myers is a lawyer at Torkin Manes LLP
Think of it as cosmetic surgery.
The recent expert report prepared for the Ontario government on modernizing our corporate law contains a series of recommendations as to how Ontario can become a more current and attractive jurisdiction for business. The report contains many suggestions, but the most interesting ones concern an almost invisible story – how financial, legal and technological innovations can cause our corporate statutes to fall out of date.
Often, the simpler something appears on the surface, the more complicated underneath. Take your stock portfolio. Once upon a time, you would have been the owner of a physical stock certificate that sat in your office. When you sold, you would have actually signed over and delivered your shares to the person buying them.
For private companies, it still usually works this way. For public companies, however, this process would be a nightmare. It would be nearly impossible to transfer the millions of shares sold every day through brokers if the physical share certificates had to be exchanged between investors. So, public company shares are held by transfer agents through an electronic book entry system that allows transfers with the pressing of a few keys.
Title to the shares is usually registered to the name of your broker, which means that when you sell shares, the name in the corporation's shareholder register doesn't need to be changed – it's still the broker. However, you, the investor, are the one who holds the beneficial interest in the shares, gets to vote with the shares at annual meetings and receives the proceeds of any sale of shares.
To simplify the process of transferring large numbers of shares, we've added layers of complexity to the concept of ownership.
This system for transferring shares has been around since the 1970s, but is something of a problem for our corporate laws – the Ontario Business Corporations Act, in many places, specifies that rights belong to "shareholders" without specifying whether those rights belong to the holders of title or the beneficial interest.
For example, it's not clear exactly who has the right to dissent to a fundamental corporate change, sell shares at fair market value, or requisition a shareholder meeting: beneficial shareholders, registered shareholders or both.
In short, a complicated process that has developed to simplify the transfer of shares has added legal ambiguity to the rights actually available to shareholders.
Or, take the old adage that "possession is nine-tenths of the law." Under Ontario's Personal Property Security Act (PPSA) – the statute that governs loan security – this is very much the case.
Companies will often buy or lease equipment; the provider of the equipment will take security in that equipment, which will be evidenced by chattel paper (chattel, from the old French word for "cattle"). The dealer of the equipment will often sell that paper to a third party who will take security in the goods and thereby transfer the risk of non-payment to the third party.
The third party will then be entitled to payments on the equipment and, in the case that the purchaser goes bankrupt or defaults on its credit terms, the dealer or third party will be able to take possession of the goods before other secured creditors. Somewhat oddly, this priority right requires physical possession over the chattel paper itself despite the fact that these transaction can be done entirely electronically. No paper, no priority.
So, the report recommends providing electronic chattel paper to save the cost of producing and storing the paper. After all, the paper itself is a useless formality – numbers in a computer can reflect the true value of the paper (the priority right) just as well as ink on a page. The problem is tractable, but our laws need to catch up with our technology.
Similarly, the Supreme Court of Canada has recognized that a licence can be personal property within the meaning of the PPSA if those licences allow the holder to acquire physical property (for example, a fishing licence). But licences don't require the acquisition of physical property to have economic value. Intellectual property licences, quotas and other licences relating to non-physical assets have all the economic and legal properties of licences that allow for the acquisition of physical property. As non-physical assets, such as software, grow in importance, it makes sense, as the panel recommends, to treat those licences the same as licences allowing the holder to acquire physical property.
These discrepancies highlight the long historical shift in the way we think about economic value. Increasingly, the right to receive the economic value of a thing – be it a corporation or a licence agreement – is distinct from the physical ownership of that thing. Once, owning a business required physical ownership of the means of production, then it required physical ownership of a share certificate; now, it is mostly done through the ownership of rights to a set of numbers, registered in someone else's name, in a computer system somewhere in Toronto. Legal and financial innovation is largely about making ownership rights and, therefore, the right to receive economic value, increasingly abstract.
This process means that statutes that don't anticipate growing abstractions can start to go stale.
Which is why it's nice that the Ontario government assembles a group of lawyers to suggest how to give our sturdy old statutes a botox injection.
Adrian Myers