Proposed Changes to the Canada Business Corporations Act – How Could this Affect You?

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Last month, the Government of Canada tabled Bill C-25 to amend the Canada Business Corporations Act (the “CBCA”). The objective of these amendments is to modernize Canada’s legal and regulatory framework for the country’s nearly 270,000 federally incorporated corporations, and would also amend the Canada Cooperatives Act and the Canada Not-for-profit Corporations Act.

The following are some key changes which were proposed, and, if the bill is passed, should be considered should they impact your organization:

  1. Annual Elections and Individual Votes: There will be a requirement to hold annual elections and individual votes for director candidates, as opposed to slate voting. This is consistent with the requirements already imposed on TSX-listed companies, and many companies have already adopted this requirement voluntarily.
  2. Majority Vote: Directors must receive a majority of votes in favour of their election when the number of candidates is the same as the number of positions to be filled.
  3. “Notice and Access”: The CBCA’s requirements for paper-based communications will be replaced with a “notice and access” system which would allow for corporations to use electronic communications to provide notice of shareholder meetings, and online access to relevant documents.
  4. Diversity: Reporting issuers will be required to provide to its shareholders information concerning the gender composition of their boards and senior management, as well as disclose any diversity policies or explain why none are in place.

While these amendments are still in the early stages and will likely undergo further revisions, they are worth noting as they may have significant impacts on your organization if they come into effect.

 

BC Societies – The New Act

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New legislation will come into force the end of this November to govern societies formed or operating in BC. The new Societies Act (the “Act”) replaces the outdated Society Act with a more comprehensive framework that includes modern governance provisions that provides societies more flexibility in how they are created and operated.   Similar to what was done when the federal legislation governing non-profits was replaced, the Act borrows various provisions and concepts from the Business Corporations Act to allow societies to function and be run more like companies.

The following are some of the more significant features of the Act. Continue reading

Succession Planning: 0930032 B.C. Ltd. v. 3 Oaks Dairy Farms Ltd.

For those who pass their business on to the next generation, particularly to family, it is undoubtedly the hope that the successors will work together to ensure that the business continues to thrive for many years to come. It’s hardly anyone’s plan to see their children in court against one another.

However, such situations regrettably do happen. Recently, the Court of Appeal affirmed the decision of the Supreme Court of Canada in the matter of 0930032 B.C. Ltd. v. 3 Oaks Dairy Farms Ltd., and the Supreme Court’s interpretation of a promissory note in respect of a shareholder loan.

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Changes to Federal Privacy Laws and the Impact on Business Transactions

On a recent transaction where a client was purchasing an Ontario company we encountered some issues in conducting our due diligence.  On this deal, the vendor refused to disclose any personal information of any contractors, employees, customers or other relevant individuals related to their business to us or our client due to confidentiality concerns.  A timely amendment to the Personal Information Protection and Electronic Act (“PIPEDA”), however, enabled us to get past that hurdle.

What’s the issue? 

In BC, we rely on the Personal Information Protection Act (British Columbia) to disclose and receive personal information during the due diligence stage of a business transaction.  This act permits the disclosure of personal information to potential purchasers evaluating a company without obtaining consent.  Various other provinces however, including Ontario, do not have similar legislation (other than legislation directed at health information) and are instead subject to PIPEDA.  Prior to the aforementioned amendment, there were no exemptions similar to that in the BC Act and PIPEDA required a vendor to obtain an individual’s consent prior to disclosing their personal information to a potential purchaser.

What’s changed? 

In June of this year various amendments to PIPEDA came into force, including an exemption for obtaining consent to disclose personal information in the context of a business transaction.  In particular, if parties are involved in a prospective purchase and sale of an organization or its assets, merger or amalgamation of two or more organizations, financing to an organization, or charging, leasing or licensing an organization’s assets (each defined as a “Business Transaction”), such parties can use and disclose personal information without obtaining any individual’s consent if certain conditions are met.  One exception to this exception is where the primary purpose of the Business Transaction is the acquisition or disposition of the personal information itself.

How does it work?

In order to avail oneself of the exception to obtaining consent to use and disclose personal information under PIPEDA the following conditions must be met:

  1. the party disclosing, and the party receiving the personal information must enter into an agreement that requires the receiving party to only use the personal information for purposes related to the proposed Business Transaction, keep such personal information confidential and if the proposed Business Transaction does not proceed, to return or destroy such disclosed personal information;
  2. the personal information disclosed must be necessary both to determine whether to proceed with proposed Business Transaction and, if proceeding, to complete it; and
  3. with respect to the use and disclosure of personal information after the proposed Business Transaction completes:
    • both parties to such Business Transaction must enter into an agreement that requires both of them to only use and disclose personal information for the purposes for which it was collected or permitted to be used prior to the completion of the such Business Transaction, keep such personal information confidential and give effect to any withdraw of consent from an individual done in accordance with PIPEDA;
    • the personal information must be necessary to carry on the business that was the object of the proposed Business Transaction; and
    • one of the parties must notify each individual whose personal information was disclosed that the proposed Business Transaction completed and that their personal information was disclosed.

What does this mean?

For those of you familiar with the due diligence process with respect to the disclosure of personal information in BC, such process is now similar across the country.  For anyone involved in the acquisition, sale, lease or financing of a business, it is now easier to obtain, use and disclose personal information to evaluate and complete such transaction.

Differences between the Oppression Remedy and Derivative Actions

The Ontario Court of Appeal (the “Court”) recently provided much needed guidance on the distinction between the oppression remedy and derivative actions. While both claims can be used to address corporate misconduct, there are important differences between the oppression remedy and derivative actions which should determine the choice of remedy in a particular set of circumstances.

The oppression remedy allows shareholders (and other appropriate persons) to apply to court if a company’s affairs have been conducted in a way that is oppressive or unfairly prejudicial to one or more shareholders. The oppression remedy is an equitable remedy which gives the court broad discretion to remedy the oppressive conduct. For example, the court can direct or prohibit any act, regulate the conduct of the company’s affairs and appoint or remove directors, among other remedies. In contrast, a derivative action is a procedural step necessary to bring a legal proceeding in the name of a company. Unlike the oppression remedy, a derivative action is designed to remedy harm that is done to the company. There are several procedural requirements that must be met in order to bring a derivative action, such as the complainant having made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding.

In Rea v. Wildeboer, the appellants asserted an oppression claim under the Ontario Business Corporations Act alleging misappropriation of funds from a TSX-listed company. The appellants were seeking to recover the funds on behalf of the company. The appellants argued that they were entitled to proceed under the oppression remedy because the distinction between the oppression remedy and derivative actions has been significantly weakened over time. However, the lower court disagreed and struck the claim. On appeal, the Court dismissed the appeal and clarified that the oppression remedy and the derivative action are two different remedies with separate rationales and statutory foundations. The oppression remedy is a personal remedy, whereas the derivative action is a corporate remedy.

Specifically, the Court accepted that the oppression remedy and the derivative action are not mutually exclusive where the factual circumstances give rise to both types of claims. In this case, however, the Court held that a claim must be brought by way of derivative action in the following circumstances:

  • the claim only seeks to recover for wrongs done to a public company;
  • the relief sought is only for the benefit of the company; and
  • there is no allegation that the complainant’s personal interests have been impacted in a way that is different from other stakeholders’ interests.

The Court noted that in most cases where an oppression claim has been allowed to proceed for wrongs done to a company, the wrongful acts directly impacted the complainant in a way that was different from the indirect impact on other complainants. Further, most of these cases involved small closely‑held companies, rather than large public companies. Going forward, where the factual circumstances may give rise to both a personal claim (oppression remedy) and a corporate claim (derivative action), the question of whether the claimant is entitled to proceed under the oppression remedy will have to be determined on a case by case basis.

If you have any questions about the decision, please contact us and we can discuss the implications of the case with you, or contact the author Andrew Charters.

Friends with Money: A Cautionary Tale

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An interesting case has recently been heard in the Court of Queen’s Bench of Alberta in respect of a regrettable instance of friends loaning money to their friend’s business.  The plaintiff, Wan Ru Zheng, was asked by her friend Ryan Wittenberg to invest in his new car business, Your New Car Calgary Inc. Mr Wittenberg offered the investment as either a partner, with 20% of the shares of the business, or as a loan. Ms Zheng invested $125,000 in two loans, and received promissory notes in return. To her credit, Ms. Zheng requested significant information about the business and its assets from Mr Wittenberg, both before and after her investment, and even travelled to Calgary to investigate the business – but part of her decision to invest was influenced by her personal relationship with Mr Wittenberg, and his ability to talk up his business acumen.

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Donations of Private Company Shares

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Last week, the federal government released its 2015 budget. The budget contains a number of proposals to amend the Income Tax Act, and also provides updates regarding previously announced tax measures. One of the proposed changes announced in the budget will be especially relevant to business owners who are considering a future sale of their business.

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Changes to the Investment Canada Act

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Changes to the Investment Canada Act (the “ICA”) review thresholds for WTO investors are on the horizon.  Currently, acquisitions by WTO investors are subject to review where the asset value of the business acquired exceeds the monetary threshold of $369 million.  However, on April 24, 2015, the review thresholds will change to consider enterprise value with the potential for more investments by WTO investors being scrutinized under the ICA.

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The NDA (or Confidentiality Agreement)

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If you are thinking about selling your business, you should be aware of the heightened need these days for protection of private information. I am constantly surprised by the amount of private information business owners are willing to supply to prospective purchasers of their business. Unsophisticated sellers often allow potential buyers access to highly confidential information, without ever considering that they may be giving up business secrets for free. As a seller, you should never allow anybody to access your confidential information without first having them sign a confidentiality agreement. Continue reading

Shareholders Agreements & CCPC Status

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A corporation that meets the definition of “Canadian-Controlled Private Corporation” (“CCPC”) in the Income Tax Act is entitled to a number of tax benefits, including a reduction in corporate income tax on active business income. Because of these tax advantages, the question of whether or not a corporation qualifies as a CCPC is often an important one.

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