GENERAL L E G A L I T I E S AUGUST 2005 Major Amendments To Alberta Corporate Law INTRODUCTION The Alberta Business Corporations Act ( the ABCA ) was amended in May 2005 resulting in a number of significant changes both in technical and more substantive areas, including the introduction of unlimited liability corporations to Alberta. This edition of On Record addresses a number of the changes to the legislation. continued on page 2 in this issue: Background...2 Major Changes to the Act...2 The Unlimited Liability Corporations Provisions...4 Conclusion...5 BD&P...Back Cover
continued from cover BACKGROUND When Alberta and Saskatchewan joined the Canadian Confederation in 1905, they brought into the union the laws on their books at that time. This included corporate law that was based upon the English Companies Act. Readers who were carrying on business in Alberta in the 1970s will recall that companies were incorporated under the Companies Act and formed by a memorandum and articles of association. In the 1970s and early 1980s fundamental changes took place in Canadian corporate law. Ontario led the way with the Ontario Business Corporations Act which was followed in 1975 by the Canada Business Corporations Act ( the CBCA ). The CBCA was enacted after a comprehensive study of corporate laws and was based largely on United States corporate law. The CBCA was adopted almost verbatim by the three Prairie Provinces with Alberta putting the ABCA into place in 1981. British Columbia, which had remained tied to the old English companies law legislation, recently amended their corporate law. As a result, only Quebec and Nova Scotia have not adopted the CBCA model. Since enactment, the ABCA has undergone some minor revisions. For example, the residency requirement for directors was changed from one-half Alberta residents to one-half Canadian residents and the section of the ABCA dealing with financial assistance by a corporation was amended to address the concerns of the lending community. Over the past number of years, a committee of lawyers has worked at a comprehensive revision of the ABCA. The urgency of completing this task became apparent after the CBCA was overhauled in 2001. In addition, the Alberta government recognized an opportunity to attract business to Alberta by grafting provisions onto the statute allowing for the incorporation of unlimited liability corporations. This particular corporate vehicle is attractive to companies based in the United States that wish to do business in Canada. Until the recent amendments to the ABCA, the only jurisdiction in which an unlimited liability corporation could be established was Nova Scotia. MAJOR CHANGES TO THE ACT (a) Distributing Corporation Companies that fall under the definition of a distributing corporation are subject to a number of special requirements. For example, a distributing corporation must have an audit committee of the Board of Directors and the shareholders of a distributing corporation are not able to waive the appointment of an auditor. Prior to the amending legislation, a distributing corporation was a company that had more than 15 shareholders. The definition has now been changed such that a distributing corporation must be a reporting issuer for the purposes of securities legislation. A reporting issuer is generally a company The CBCA was enacted after a comprehensive study of corporate laws and was based largely on United States corporate law. 2
that has issued a prospectus or whose securities are listed on a stock exchange. The result of this change is to eliminate, for more widely-held private companies that have not yet gone to the public markets to raise capital, some of the burdens of complying with what are, in effect, public company obligations. (b) Splitting of Shares Prior to the amendments, if a corporation wished to split its shares, it was required to have the shareholders pass a special resolution for that purpose. Public companies in particular often wish to split their shares and would prefer not to have to go through a lengthy and expensive process to call a shareholders meeting to do so. With the changes to the ABCA, the Board of Directors may, if the corporation has only one issued class of shares, resolve to subdivide or split the issued shares. The only requirement is that the corporation must notify the shareholders of the share split within sixty (60) days of the event. Public companies will, of course, be subject to the general requirement to make a disclosure by way of press release and a material change report prescribed by securities legislation. (c) Director s Obligation to Manage Prior to the amendments, the ABCA stated that the directors shall manage the business and affairs of the Corporation. In recognition of the fact that the directors often delegate the duty to manage to full-time managers, the obligation of the directors has been changed such that they must either manage or supervise the management of the business of the company. (d) Residency Requirement The residency requirement for directors was previously changed such that at least one?half of the directors must be resident Canadians as opposed to resident Albertans. The committee of legal practitioners advising the government on these amendments recommended that the residency requirement be eliminated in its entirety. The government did not accede to this request, but did reduce the residency requirement from one-half Canadian directors to one-quarter Canadian directors. (e) (f) (g) Directors Change of Address The legislation currently requires a company to file a Notice of Change of Directors, containing the addresses of all the directors, within 15 days of address changes being made among the directors. There was no previous requirement to notify the Registrar of Corporations of an address change of a director. This gap has now been filled and if a director changes his or her address, the director or the Corporation must send a notice of address change to the Registrar. There are a number of technical amendments to the ABCA, which allow meetings of directors and shareholders to take place using electronic means Meetings of Directors and Shareholders There are a number of technical amendments to the ABCA, which allow meetings of directors and shareholders to take place using electronic means, so long as all participants of the meeting are able to communicate adequately with each other during the meeting. Shareholder Proposals Shareholder proposals have become a larger part of corporate democracy in the past several decades. The CBCA amendments changed the rules regarding shareholder proposals and the amendments to the ABCA follow suit. Special interest groups have, on a number of occasions, sought to have matters raised at shareholder meetings. To eliminate any issues regarding the status of a shareholder, the ABCA has been amended to make it clear that either registered or beneficial shareholders may make proposals. The ABCA is also being amended to make it clear that the matters raised by the shareholders must relate to the business or affairs of the Corporation and not to some general social policy issue. The rules regarding shareholders who make proposals have also been clarified. Specifically, in order to make a proposal, the shareholder must have held a prescribed number of shares, for the prescribed period of time, have the prescribed level of support of other shareholders, and continue to hold the prescribed number of shares (all yet to be assigned), to the day of the meeting of shareholders. (h) Voting at Shareholder Meetings The ABCA permits voting at shareholders meetings to be by show of hands, except if any shareholder demands a ballot. It has been somewhat unclear as to how records ought to be kept of the votes for or against a resolution. The amendments deal with this issue and provide that the Minutes of the meeting showing the resolution to have been carried are sufficient proof of the results of the vote. No specific record needs to be kept of the number of votes for or against the resolution. 3
(i) (j) Shareholder Requisition of Meetings The ABCA has been amended to make it clear that either registered or beneficial owners of shares may requisition a shareholders meeting. However, the threshold for calling or requisitioning these meetings remains the same. That is, the shareholders requesting the meeting must still hold not less than 5% of the issued voting shares. Shareholder Meeting Materials Before the amendments came into force, a company with more than 15 shareholders was required to send a form of proxy and information circular to its shareholders in connection with meetings of shareholders. The information circular generally had to be in the same form as that used by public companies. For example, there had to be fairly comprehensive disclosure of management compensation. That requirement has now been eliminated for companies that meet the private issuer definition under securities legislation. A private issuer under securities legislation is essentially an entity that has 50 or fewer shareholders. Notwithstanding these amendments, many more widely-held private companies may still elect to send the information circular to their shareholders. (k) Financial Statements There are a number of amendments to the requirements regarding the financial statements. First, the shareholders may now by unanimous resolution waive the right to receive a financial statement for the initial stub period of the Corporation. Second, and more importantly, the shareholders may by unanimous resolution waive the requirement that the Corporation send out financial statements 21 days before the annual meeting of shareholders or before the resolution signed in lieu of that meeting. (l) Replacement of Auditors A public company must go through an involved process if it wishes to replace its auditors. Specifically, the Company must advise its shareholders as to the reasons for the change of auditors. The auditor to be replaced is then required to indicate whether there are any outstanding issues with management. The purpose of these rules, which exist under securities legislation and not corporate law, is to ensure that management does not simply replace an auditor with whom it has encountered problems without complete disclosure to the shareholders. Private companies are not generally subject to the requirements of securities legislation, and the corporate law obligations with respect to a change of auditors were rather lax. A change has been made with respect to a change of auditors in that a Corporation must make a statement to its shareholders as to the reasons for the proposed replacement of auditors. The incoming auditor may also make a statement commenting on the reasons given by the Corporation for the change. THE UNLIMITED LIABILITY CORPORATIONS PROVISIONS Unlimited liability corporations ( ULCs ) are most often used by United States business entities establishing new businesses in Canada. The shareholder of a ULC is entitled to treat it, for United States tax purposes, as a disregarded or look-through vehicle, which allows the shareholder to, among other things, consolidate the business losses generated by the ULC as if it was a branch operation. Although historically provincial Companies Acts (including Alberta s) allowed the formation of ULC s, until the amendments to the ABCA came into force, the only Canadian jurisdiction that continued to do so was Nova Scotia. continued on page 5 Before the amendments came into force, a company with more than 15 shareholders was required to send a form of proxy and information circular to its shareholders in connection with meetings of shareholders. 4
continued from page 4 Generally speaking, the primary advantage of operating an incorporated business is achieving limited liability for the shareholders, and without this advantage, the raising of risk capital would not be feasible. This is not the case with a ULC and United States investors generally hold their interests in these corporations through limited liability S corporations. Section 15.2 of the amended ABCA specifically provides as follows: the liability of each of the shareholders of a corporation incorporated under this Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature. Every corporation which is established as a ULC must be designated as such and contain in its name the words Unlimited Liability Corporation or the abbreviation ULC, rather then the conventional terms of Ltd. or Corp.. Similarly, the articles of a ULC must contain a statement that the liability of the shareholders of the ULC is unlimited. The ABCA allows for a company incorporated in another jurisdiction to be continued as a company subject to the ABCA. As a result, there are special rules that apply to such transfers of jurisdiction. Similarly, section 15.6 provides for transitional rules when a ULC converts to a limited corporation or vice-aversa. Section 15.7 establishes the rule that the liability of the shareholders for obligations of the ULC continues for two years after the ULCs dissolution. No provision specifies the extent to which a former shareholder s liability is relieved, making careful planning for liability issues essential with these entities. The addition of the ULC provisions is clearly an attempt by Alberta to assist practioners who advise American inbound businesses, and will likely result in Alberta becoming the jurisdiction of choice for the use of the ULC. Pursuant to Section 15.8, the listed shareholders of a ULC must provide to the Registrar of Corporations, upon request, the names and addresses of all unlisted shareholders of the ULC. Finally, in order to ensure the shareholders are aware of their obligations as shareholders, a share certificate issued to a shareholder of a ULC must contain a statement that the owner of the share or shares is liable for the extra defaults of the ULC, which liability is unlimited in extent and joint and several in nature. With these new provisions regarding ULCs, Alberta has shown itself to be highly accommodating of American business. The following are some of the advantages of incorporating a ULC in Alberta as opposed to Nova Scotia: (i) Alberta is a larger centre of business, well known to U.S. investors, especially in the oil and gas sector. U.S. investors who choose to invest in Alberta through a ULC will not have to use a vehicle created under the laws of another province to do so. (ii) the ABCA is a more modern piece of legislation based largely on U.S. corporate law, whereas Nova Scotia still uses the older English Companies Law. For example, the duties of directors are much more clearly spelled out in the Alberta legislation, (ii) the Alberta ULC provisions allow for the fairly easy transfer or continuance of a Nova Scotia ULC into Alberta, and (iv) with respect to a number of corporate acts or procedures, such as amalgamation, the legislation in Alberta is more favourable, in that court approval is not required. Due to the aforementioned advantages of the ABCA and the fact that to date the Nova Scotia government has levied significantly higher charges for incorporating these entities than Alberta intends to do, one would expect to see Alberta attract more ULC business. It remains to be seen whether American investors who have previously taken advantage of a Nova Scotia ULC will elect to continue their companies under Alberta legislation. CONCLUSION The amendments to the ABCA represent a thoughtful and considered revision of Alberta corporate legislation. Many of the amendments are technical in nature and take into account new technologies and the changing practice of allowing on-line registration of corporations. Not all of these technical changes have been discussed herein. The more substantive changes allow for greater relaxation of regulation, such as the more favourable rules regarding distributing corporations. The addition of the ULC provisions is clearly an attempt by Alberta to assist practioners who advise American inbound businesses, and will likely result in Alberta becoming the jurisdiction of choice for the use of the ULC. 5
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