June 14, 1935

UFA

Henry Elvins Spencer

United Farmers of Alberta

Mr. SPENCER:

We had a week for the

bills to be distributed, and any member interested enough in it could have got a copy.

Topic:   FOREIGN INSURANCE COMPANIES
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LIB

Jean-François Pouliot

Liberal

Mr. POULIOT:

We cannot run after bills; they must be distributed in the ordinary way.

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CON

Raymond Ducharme Morand (Deputy Speaker and Chair of Committees of the Whole of the House of Commons)

Conservative (1867-1942)

The CHAIRMAN:

I am in the hands of the committee.

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UFA

Henry Elvins Spencer

United Farmers of Alberta

Mr. SPENCER:

As the hon. member who is responsible for the bill has pointed out, in the committee and since on the floor of the house, the money that is being borrowed by policyholders is nothing more or less than their own money. The insurance companies are taking no risk at all, and the investments of the companies are not bringing in nearly as much as is being charged by them to their borrowers. I think there are very good reasons why we should stipulate a definite amount of interest, and that five per cent and no more shall be paid by borrowers. Moreover, the higher the rate the poorer the risk, and the policy is then not of as great a

value to the company; and that is distinctly true also as regards the owner of the policy, because the greater the amount of interest to be paid the less possibility there is of the borrower being able to keep the policy in shape. I do think that the hon. member for Macleod has done a great service in bringing this matter to the house and asking that the interest rate on loans made by insurance companies to policyholders should be cut down in line with the rates that are being charged to-day for borrowed money.

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UFA

George Gibson Coote

United Farmers of Alberta

Mr. COOTE:

May I ask the Prime Minister whether. a written proposal has been placed in his hands by the Life Insurance Underwriters' Association in addition to the letter sent to the Minister of Finance.

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CON

Richard Bedford Bennett (Prime Minister; President of the Privy Council; Secretary of State for External Affairs)

Conservative (1867-1942)

Mr. BENNETT:

I explained the situation

the other evening when I indicated why the government was of the opinion that a bill such as this should not be passed, and I also intimated that the representatives of the insurance companies had filed with the Minister of Finance an undertaking to the effect indicated just now by the hon. member for Macleod. The representatives of the insurance companies stated that they would file a formal agreement in tenms to be satisfactory to the Department of Finance and the Superintendent of Insurance, and an undertaking to that effect has been given. If the bill were withdrawn the reasons that apply to its not being proceeded with, as stated by me the other evening, apply with equal force to the amendment of the hon. member for Mount Royal (Mr. White). It is the principle of imposing an obligation upon either the company or the policyholder at variance with the contract entered into between them which I was speaking of the other evening. That is what I was discussing, and the effect upon the credit of the country generally. And especially is that so with respect to companies carrying on business in Canada, registered under the provisions of the statute. I am indebted to the chairman for a copy of the amended proposal, which reads: #

(1) No company shall charge, stipulate for, or recover as interest in respect of any loan made to any person on a policy of insurance issued or effected upon the life of any person resident in Canada at the time the policy was issued or effected, any amount in excess of five per centum per annum, compounded annually, on the balance of the loan from time to time unpaid by the borrower.

That covers all expenses.

(3) This section shall not apply to any loan or unpaid balance thereof made under an agreement executed, or advanced automatically under any policy issued, before the first day of January, 1936.

Companies Act-Mr. Cahan

So that its provisions do not become retroactive except from the first day of January, affecting no agreement that might be outstanding, carrying any rate of interest, and would automatically reduce the rate to five per cent. Apart from the question of jurisdiction, which is a delicate matter that has been discussed so often in this house and in the privy council, the other question still remains an integral part of the proposal, namely:

This section shall not apply to any loan or unpaid balance thereof made under an agreement executed, or advanced automatically under any policy issued, before the first day of January, 1936.

It still has that effect on contracts that might be outstanding with respect to it. I think, however, I should say this to the hon. gentleman, from what was stated to .me, that the companies would be .prepared to execute with the Minister of Finance or the Superintendent of Insurance, whoever is the appropriate person, an agreement in the terms suggested, which he himself inspected at the office of the Superintendent of Insurance, reserving an interest rate not exceeding six per cent. May I say to the hon. gentleman that I think if he accepts the proposal, undoubtedly the agitation will be such that the companies will probably reduce the rate to five per cent in another year. Personally I think the companies should charge not more than five per cent; I am wholly in accord with that view. That is one matter. Another is how to effect this. Having regard to the conditions that exist, I cannot endeavour to impose the will of parliament upon parties who .make the rates.

I do not intend to traverse the ground I covered the other evening,, but I believe as a result of what, the hon. gentleman has done, if he accepts the agreement and does not limit it as to time, the agitation that will be carried on will be sufficient to make the rate not exceeding five per cent rather than not exceeding six. That is my personal view about the matter. If it is not possible for the hon. gentleman to accept the proposal suggested, I would make a motion that the committee rise. If the committee did rise, that would be a short way of ending the difficulty.

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UFA

George Gibson Coote

United Farmers of Alberta

Mr. COOTE:

I wanted to make sure that I was not labouring under a wrong impression as to the attitude of the companies, and all that I had seen was the letter which was sent from them to the Minister of Finance, but I inferred from what I heard to-day that maybe a further letter was in the .hands of the Prime Minister, and that is the .reason I asked the question. If I am in order, Mr. Chairman, and so that I may have a chance of again discussing .the matter with the superintendent of insurance and possibly also with the Prime Minister, I would move that the committee rise, report progress and ask leave to sit again. If that .motion is accepted, that will leave the matter open.

Progress reported.

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COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING


The house resumed consideration of the motion of Mr. Cahan for the second1 reading of Bill No. 85, to amend the Companies Act, 1934.


CON

Charles Hazlitt Cahan (Secretary of State of Canada)

Conservative (1867-1942)

Mr. CAHAN:

When the house rose, I was discussing a recommendation with respect to the prevention of stock watering. This is carried out in section 15 of the bill which contains a proposed amendment to the act by inserting a new section 96B. As I stated, section 96B in terms applies to private as well as public companies. When the bill comes before a committee of the whole house, I will suggest to the committee that this section might be amended by inserting the word "public" before company, 'because I do not conceive that the 'Commission intended that this should apply to small and insignificant private companies.

There is also in section 96B, subsection 4, a provision to carry out the recommendation of the commission that this section shall not apply to any .mining company. I thought it necessary however to attempt a definition of "mining company" in order that there might be no misapprehension as to the application and meaning of those words. Therefore in subsection 4 I have defined "mining company" .as:

Any company whose principal objects are the exploration, development or operation of mining properties and' which, if it has commenced actual operations, is carrying out such objects as its principal business.

I have defined " mining properties " as follows:

"Mining properties" includes mines, minin" deposits, mining rights, metalliferous lands, mining claims or any interest therein including any option or licence in connection therewith.

I have attempted to give as precise a definition of "mining companies" and "mining properties" as I could under the circumstances, and I think the definition is quite clear. Personally I have sometimes found it difficult to understand the qualification in the report which states that mining companies are

Companies Act-Mr. Cahan

highly speculative. My experience is that most commercial and industrial companies are equally as speculative as are mining companies. If one could at the outset foresee the success of one of those other companies, it would be quite possible to accumulate a fortune in a short time. My own ventures have not been so successful, and I have often found that those companies, which I have regarded as most reliable and as having sure prospects of success, have been those which under adverse circumstances such as have existed during the past four or five years, have proved in fact highly speculative. There is no sure venture in either finance, industry, commerce or trade.

The final recommendation is this, that the whole trend of law should be toward putting the managers and directors in a trustee capacity with respect to all of the security holders. I think the English law which prevails in this country places the directors in the position of trustees, and I have not sought to give in this bill expression to that recommendation.

Certain suggestions have come to me since this bill was published. A number of the larger companies have already arranged to hold their annual meetings and have prepared at great expense, on the basis of the accounting provisions of the existing act, their accounts for the present year, ending many of them on July 1. Therefore they feel somewhat apprehensive that this bill may be brought into force immediately they think there should be a lapse of time of thirty days; indeed some of them would like a lapse of sixty days after the bill is enacted before it comes into force, and I shall ask the house in committee to consider whether such a section should not be added bringing the whole or parts of this bill into effect by proclamation.

All I can add is that we have endeavoured as best we can to bring before the house the recommendations of this commission in such form as may be easily understandable, with such correct definitions as we were able to devise. Therefore we leave it entirely to the judgment of the house on second reading and in committee, when the several sections of the bill may be more carefully considered.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Charles Edward Bothwell

Liberal

Mr. G. E. BOTHWELL (Swift Current):

While I intend to support the second reading of this bill, there are a few observations I should like to make before it goes to the committee. The Secretary of State (Mr. Cahan) in moving the second reading stated that he was somewhat in doubt as to the right of the price spreads commission to make the recommendations that they did.

The scope of the inquiry of that commission was a pretty broad one, and in the inquiries they made 1 have no doubt they came to the conclusion that many of the evils from which we are suffering are attributable to faulty legislation under our Dominion Companies Act. Therefore in endeavouring to carry out the duty imposed upon them by the order setting up the commission they investigated as far as they could what had been reported or what appeared to them to be wrong with the company legislation, and as a result of that inquiry made certain recommendations. Not only has it appeared to the members of that commission that there is something wrong with our company legislation; it has appeared so to many others throughout the country. In fact before the report of the price spreads commission was brought down, the Prime Minister (Mr. Bennett), in one of his radio addresses, I think the fourth, used these words:

Our Dominion Companies Act wall, therefore, have to be strengthened. There must be drastic simplification of capital structure so that the investor will be able to understand the nature of the stock or security he is purchasing. At the next session of parliament, the Companies Act will be amended so as to abolish the right to issue shares of no par value.

The price spreads commission-

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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CON

Richard Bedford Bennett (Prime Minister; President of the Privy Council; Secretary of State for External Affairs)

Conservative (1867-1942)

Mr. BENNETT:

Took a different view7.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Charles Edward Bothwell

Liberal

Mr. BOTHWELL:

-at page 39 of their report, after reciting certain difficulties that they believed existed, and also referring to constitutional questions that might arise, used these words:

But whatever may be the solution of this constitutional problem, it is clear that growing public resentment necessitates further social control of the financial operations of companies. Accordingly, it is urged here that, within its legal competence, the dominion should to the very limit give leadership with a strict act. We feel that the prestige of a dominion incorporation. is such that the provinces will follow such a lead.

The Secretary of State, apparently taking that as the basis of the situation w7as quite prepared to consider favourably the recommendations that they made, and although he has stated that many of these recommendations do not meet with his ideas, he nevertheless has brought them to the house for consideration. In doing that, although it may be an extraordinary proceeding, he has given us an opportunity of discussing the various recommendations.

At page 40 of their report the price spreads commission, in dealing with suggested amendments, say:

Companies Act-Mr. Bothwell

Therefore, in an effort to remedy some of the abuses discussed in the previous sections of this chapter, and pending some satisfactory solution of the problem of uniformity, we recommend certain changes to the Dominion Companies Act, irrespective of what the provinces may do.

These changes are based on -the assumption that limited liability company legislation involves three sets of obligations, as follows:

a. upon the company to create a non-withdrawable fund of capital, which would operate as security for bondholders, for creditors and shareholders.

And a little further down on the same page:

To strengthen and make more effective the first obligation, we recommend either the abolition of shares of no par value, or the requirement that the full consideration received for no par value shares would be credited to the capital account.

And further on:

The alternative proposal to complete prohibition, namely, the abolition of the right to allocate any part of the consideration received for an issue of no par shares to distributable surplus, would achieve the same objective.

In the amendments that have been brought down it appears to me

and I have gone through them carefully-that those recommendations hav-e not been carried out. The no par value share is still permitted, and- the distributable surplus is still permitted. Under section 4 of the bill provision is made in these words:

In the absence of other provisions in that behalf in the letters patent, supplementary letters patent or by-laws of the company, the issue and allotment of shares without nominal or par value may be made from time to time for such consideration as may be fixed by the board of directors of the company; and in fixing the. amount of such consideration, the board, subject to the provisions of this part, may provide in the contract of subscription for such shares that the consideration received therefor shall be deemed to be capital, excepting a part, if any, not exceeding twenty-five per centum thereof, which shall be set aside as distributable surplus;

In regard to this question of distributable surplus it strikes me that that provision of the bill now before us will permit a company, immediately after it is incorporated, before it has been able to earn- anything out of which to pay dividends, to use twenty-five per cent of its capital set-up for the purpose of paying dividends. That is the effect of it. To that extent the company starts out by paying part of its capital back to bondholders or shareholders or whoever shares in these dividends-in other words, starts out depleting its capital. Surely there can be no excuse for that. I heard the comment of the Secretary of State on the point this afternoon, but it does seem to me, as it does to many writers on the subject, that here is

no excuse for such a proceeding. There may be an argument in favour of no par shares; it seems to be a debatable question, but it would seem that the power to issue no par shares gives to promoters of a certain class just the opportunity they are looking for in order to pour water into the company. A no par value share is an elastic sort of thing. It is something like a rubber ruler. This was discussed last year when the bill was before the house; a full description was given of what can be done by a -company with no par value shares, and I do not intend to repeat the arguments that were used at that time. The minister has had them put to him, and- he is still opposed to amending the act to do away with no par value shares.

The next suggestion to which I should like to refer is found at page 42 of the report of the commission:

It is well known that a company customarily sells its shares, not to the public either direct or through agencies, but outright to an investment house. The investment dealer, in retailing the securities to the public, is not acting on behalf of the company, but is selling its own property and is not, therefore, subject to the new prospectus clauses. This, to a great extent, nullifies their value and should be altered.

The amendment made to section 73 of the act seems to provide for that; I think the minister has endeavoured to carry out fully the recommendation- of the committee in that respect. Then- on the same page I find this statement:

Furthermore, we believe that every prospectus should st-ate in clear detail all commissions, fees and other remuneration received by the promoters, underwriters or middlemen. The net consideration received or to be received by the company should be clear to the investor.

So far as I can find out that recommendation has not been implemented in any way.

Mr. -OAHAN; If the hon. gentleman- will allow me, I do not intend to discuss these clauses at length, but those matters are dealt within the balance sheet, and the balance sheet must be incorporated in the prospectus, so that whoever made that suggestion had not carefully read the -provisions of the 1934 act. I assure the hon. gentleman that now they must appear in the prospectus which is issued. If he looks into the -matter I am sure he will agree with me.

Mr. BOTHWE-LL: I am glad to have that explanation from the minister, and as we go through the bill in detail in committee n-o doubt other matters that may not be clear to us at the moment will be explained. The

Companies Act-Mr. Bothwell

next recommendation, to which I wish to refer is at the bottom of page 42:

We recommend also that steps should be taken to simplify the capital structure of corporations, by limiting the classes of shares that may be henceforth offered to the public, to common and preferred-without any of the numerous subdivisions that now so often confuse and' mislead the investor, and facilitate the concentration of control in the hands of entrepreneurial groups. Allied to this provision would be a stipulation that every share offered, both common and preferred, should bear equal voting rights. Management shares should be prohibited.

Some of the recommendations contained in that paragraph have been carried out. It is recommended that management shares should be prohibited; that has been provided for. Equal voting rights as between common and preferred shares is also provided for, but I am opposed both to the recommendation of the committee and to the amendment as it now exists.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Ian Alistair Mackenzie

Liberal

Mr. MACKENZIE (Vancouver):

So is the minister.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Charles Edward Bothwell

Liberal

Mr. BOTHWELL:

Yes, I believe the minister also said he was opposed to that. Equal voting rights are given the shares no matter what may be their denomination. It does seem to me that voting rights should be based in some way on the value represented by the share, and not on the share itself. In the first part of that recommendation the commission have asked that the classes of shares be limited. So far as I have been able to read these amendments, the only class of share that is eliminated is the deferred share.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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CON

Charles Hazlitt Cahan (Secretary of State of Canada)

Conservative (1867-1942)

Mr. CAHAN:

There are only two other classes, common and preferred.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Charles Edward Bothwell

Liberal

Mr. BOTHWELL:

We have the common and preferred shares and we have all the classes that we had under the old act.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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CON

Charles Hazlitt Cahan (Secretary of State of Canada)

Conservative (1867-1942)

Mr. CAHAN:

We have only the common and preferred1 now.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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LIB

Charles Edward Bothwell

Liberal

Mr. BOTHWELL:

Yes, but there are

various classes of preferred shares.

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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CON

Charles Hazlitt Cahan (Secretary of State of Canada)

Conservative (1867-1942)

Mr. CAHAN:

Would it not be better to discuss these matters as we reach the various sections in committee?

Topic:   COMPANIES ACT, 1934, AMENDMENT CONTINUATION OF DEBATE ON THE MOTION OF MR. CAHAN FOR SECOND READING
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June 14, 1935