J. Ownership

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 128-132

Page 128

The unique and foundational role of banks in any national economy means that issues relating to ownership, such as who may own banks

Page 129

and the maximum permitted size of the ownership of shares, are strictly and closely regulated to ensure that ownership is in what is regarded as the national interest. Thus, historically, banks in Canada have been required to be widely held and largely owned by Canadians resident in Canada. From the Bank Act, 1980, four different criteria have been used in successive Acts to regulate the ownership of shares in domestic Canadian banks: the issue, ownership, registration, and exercise of voting rights in shares. The current Act continues to use these criteria, although their particulars have changed over the past twenty-five years.

Prudential concerns⁴¹⁸have dictated a general approach of prohibiting any person from owning more than 10 percent of the shares of any class of shares and of prohibiting foreign ownership in excess of 25 percent of all shares. Not only did these limits underscore domestic ownership without control; they also precluded the upstream commercial risks associated with self-dealing should a large shareholder with significant commercial interests gain a position to influence lending decisions contrary to the interests of the depositors and other shareholders. Wider-share ownership also tends to greater transparency in corporate governance.

The MacKay Task Force⁴¹⁹sustained these reasons for the wide ownership rule but also proposed that the rule reflect additional policies, including fostering greater competition and the entry of new banks, which would be more likely if entrepreneurial individuals could be assured of enjoying the fruits of their risk taking by not being required to divest their holdings above 10 percent after the initial start-up period. The Task Force recommended a three-tier ownership regime based on asset size as the best way to balance traditional prudential concerns and the need to foster competition. The 10 percent rule could continue to apply to large banks with equity in excess of $5 billion, subject to the discretion of the Minister of Finance to authorize individual ownership up to 20 percent; medium-sized banks with an equity between $1 billion and $5 billion could be held or controlled up to 65 percent by a single person, subject to the discretion of the Minister to waive the other 35 percent public float; and small banks of less than $1 billion could be wholly owned by one person. The 2001 and 2007 amendments reflect these recommendations.⁴²⁰

Page 130

The Act provides that no person shall have a "significant interest" in any class of shares of a bank.⁴²¹

A significant interest means an interest in excess of 10 percent of the shares of any one class beneficially owned by a person or entities controlled by a person.⁴²²

Ownership, rather than control, is the key test here. However, the Act also gives the Minister of Finance the discretion to approve the acquisition of a significant interest, including through amalgamation, merger, or reorganization.⁴²³

Again, the role of the Minister in overall supervision of the banking sector and of individual banks is underlined by this provision. The remaining provisions of Part VII of the Act relating to ownership operate as exceptions to the 10 percent rule.

For large banks with an equity in excess of $8 billion, the Act provides that no person may be a "major shareholder,"⁴²⁴that is, no person may own more than 20 percent of the voting shares of any class or 30 percent of the shares of any class of non-voting shares.⁴²⁵

This restriction does not apply to certain entities that control a large bank, including a widely held bank,⁴²⁶a widely held bank holding company,⁴²⁷a widely held insurance company,⁴²⁸another eligible Canadian financial institution,⁴²⁹an eligible foreign institution,⁴³⁰or an entity which controls one of these.⁴³¹

These exceptions reflect three other policies promoted by the 2001 amendments: the introduction of bank holding companies,⁴³²the further advancement of the assimilation of the four pillars of the financial services sector (banks, insurance companies, trust companies, and brokerages), and the encouragement of strategic alliances with foreign financial institutions.⁴³³

This rule also applies in mergers;⁴³⁴in situations where a bank’s equity increases to more than

Page 131

$8 billion; and to widely held banks that...