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Yukon Territory's premier Darrell Pasloski photographed at the Yukon Legislative Assembly building. The territory has amended its act governing corporations to encourage more companies to incoporate there.Ian Stewart/The Globe and Mail

Canada's largest shareholder coalition is sounding warning bells about new Yukon legislation aimed at attracting more companies to incorporate in the territory, saying the changes may erode shareholder rights.

The amendments to Yukon's Business Corporations Act, which took effect in May, modernize rules and streamline red tape but also contain unique provisions to draw more companies to use Yukon as their base of incorporation.

One of the changes will allow a corporation to serve as a director of a subsidiary registered in Yukon. In all other regions in Canada, directors must be people and not corporations, which ensures individuals have a fiduciary duty to the corporation and can be held legally liable for wrongdoing.

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, said the amendments could start a "race to the bottom" in corporate-governance practices if provinces increasingly compete to attract business with less onerous regulations.

"We'd be very concerned if Canadian public companies now started to [transfer] to the Yukon to take advantage of these provisions," he said.

Yukon was the first jurisdiction in Canada to remove requirements that corporations must have Canadian directors on their boards, attracting a flurry of incorporations in the 1990s, but several other provinces later emulated the provision.

Fred Pretorius, Yukon's director of corporate affairs, said the new amendments were designed to find a balance that attracts companies back to Yukon but protects shareholder rights. He said some provisions add to shareholder rights.

"We've really tried to strike a balance in as far as we could," he said. "We really tried to streamline the administration and increase the use of compliance but while protecting stakeholder interests."

Whitehorse business lawyer Rod Snow from DLA Piper (Canada) LLP said lawyers in Yukon pressed for changes because the old act was outdated.

"We realized by standing still we were falling behind," he said. "We were losing business to other jurisdictions, which had modernized their legislation. We said to our government Yukon needs to remain competitive."

Mr. Erlichman from the Canadian Coalition for Good Governance said he is concerned about a provision in the new legislation that would allow a director to give a proxy to another director to vote on his or her behalf at a meeting, which is not allowed in other parts of Canada.

Mr. Pretorius said the provision is intended to make it easier for companies to organize meetings when directors are not all able to participate. But Mr. Erlichman said modern communications make it easy for directors to participate by phone from anywhere in the world, and there is a risk of abuse if a director is allowed to collect proxies and use the voting power to sway board decisions.

"Shareholders elect directors to supervise the management of the corporation … You don't just go and give away your vote to another director."

The legislation will also allow companies to add provisions in their articles of incorporation giving directors blanket approval to sell of all of the company's assets without requiring a shareholder vote.

Mr. Erlichman said shareholders may be unaware of the significance of such a provision at the time of an initial public offering, and deserve the right to vote on a specific deal when it is before them.

Toronto securities lawyer Carol Hansell, who specializes in corporate-governance advisory work, said she expects the asset-sale provision will be widely adopted by companies incorporating in Yukon. She also expects the ability to have corporations act as directors of Yukon subsidiaries will be a draw because companies are always looking for business structures that shelter individuals from personal liability.

"If I knew that we could get that kind of protection for individuals in the Yukon, I'd incorporate there for sure," she said. "But you just wonder from a public policy perspective."

Mr. Pretorius, however, said the change was intended to add administrative simplicity and was not designed to remove legal liability. He said the legislation states that liability will still apply to people who are directors of the parent company that owns the Yukon subsidiary.

Ms. Hansell, however, said the parent company directors share "joint and several" liability along with the corporation, which means it is possible the corporation could still pay the full costs.

Yukon's new rules also make it the first jurisdiction in Canada to have legislation allowing directors to personally take advantage of business opportunities that are rejected by the company's board. Such "safe harbour" legislation is increasingly common in U.S. states.

Mr. Erlichman said he is concerned that directors could end up rejecting deals and taking advantage of them personally, putting their own interests first. But Mr. Pretorius said the rule has a number of provisions to guard against abuse, including transparency requirements.

Whitehorse business lawyer Paul Lackowicz said the provision is especially aimed at directors of junior resource firms who are investors in many ventures and want clear rules about when they can develop a business opportunity rejected by another of their boards.

"I think it's one of the things that will be seen as useful and an advantage," he said.

Mr. Lackowicz said Whitehorse law firms have seen business shifting to other jurisdictions with more modern business legislation and he hopes some can be won back.

"If we could get back to the good old days, I'd have a couple more lawyers working for me and a couple more assistants supporting them, and that's all good for the local economy," he said.

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