If the business you manage, or are a shareholder of, is governed by the Companies Act (Quebec) (the “QCA”), or if you are considering incorporating or continuing a corporation, this reform concerns you!
On February 14, 2011, the Business Corporations Act (Quebec) (the “QBCA”) will come into force and will effectively replace the QCA, with all companies currently governed by Part IA of the QCA automatically being continued as corporations governed by the QBCA.
Companies governed by Part I of the QCA will have until February 14, 2016, to submit articles of continuance under the QBCA, otherwise they will be automatically dissolved on that date.
The changes brought by the coming into force of the new QBCA will affect hundreds of thousands of Quebec companies which are currently governed by the QCA. However, not all the changes will affect all companies in the same way.
The main goals of the reform are to make the law more attractive for businesses desiring to carry on activities in Quebec and to propose a more modern alternative to the Canada Business Corporations Act (Canada) (the “CBCA”). The last major reform of the QCA was in the early 1980s and the QCA had become, in the eyes of many, rather dated and out of line with the requirements of businesses.
The QBCA is inspired in large part by the CBCA and several other provincial business corporations acts but also includes new, innovative concepts. It is worth noting that the QBCA incorporates many important new provisions that will apply to reporting issuers and private companies with 50 shareholders or more formed under the QCA. However, we will not deal with the changes that will apply to such companies in this article.
so long company, hello corporation!
A first change to note concerns terminology. Many new expressions appear in the QBCA. Among others, you should be aware that from now on, “companies” will be called “corporations”.
increased shareholder protection
As a shareholder of a corporation governed by the QBCA, you may notably benefit from the following rights, protections, powers and recourses:
- Shareholders will enjoy greater protection against squeeze-out transactions;
- The QBCA contains specific provisions permitting the articles of a corporation to provide for cumulative voting for the election of directors. This could allow minority shareholders to have greater control over their representation on the board of directors, though the application of these provisions is optional;
- The right to demand a repurchase of shares provided for in the QBCA, known in the federal legislation as the “right to dissent”, will permit a minority shareholder, in certain circumstances, to demand the repurchase of his, her or its shares by the corporation at their fair value. This right of repurchase will only apply in certain cases, which include the following:
- a squeeze-out transaction,
- an amendment of the articles affecting the restrictions on the corporation’s business activity or on the transfer of the corporation’s shares,
- an alienation of corporate property (including the sale, exchange or lease of its property) that would make the corporation unable to retain a significant part of its business activity, or that of an affiliate,
- a merger,
- a continuation of the corporation under the laws of a jurisdiction other than Quebec;
The QBCA increases the number of decisions that will be subject to shareholder approval by way of a special resolution (requiring at least 2/3 of the votes cast). For example, the following will require a special resolution: an alienation of property resulting in the corporation being unable to retain a significant part of its business activity, a merger, the continuation of a corporation governed by the QBCA under the laws of another jurisdiction, and the amendment of the articles of the corporation.
- Shareholder meetings may be held outside of Quebec;
- The QBCA provides several mechanisms of judicial surveillance and control. The following recourses will now be expressly provided by the new act:
- an application for an investigation of the corporation,
- derivative actions,
- rectification of abuse of power or iniquity (comparable to the “oppression remedy” available under the federal regime),
- an application for a court order directing compliance with the QBCA, the articles, the by-laws or a unanimous shareholders’ agreement.
a unanimous shareholders’ agreement to be disclosed
Under the QBCA, a unanimous shareholders’ agreement is an agreement among all of the shareholders of a corporation, whether or not their shares carry voting rights, by which the powers of the board of directors are restricted or withdrawn. Therefore, it is essential to understand that the changes discussed below do not apply to all agreements which may exist between shareholders.
Corporations must disclose the existence of any unanimous shareholders’ agreement in the Quebec Enterprise Register, as of the date fixed for the filing of the next annual declaration of the corporation after the coming into force of the QBCA. If the unanimous shareholders’ agreement which must be disclosed withdraws all of the powers from the directors, the corporation must also disclose the name and domicile of the shareholders (or third parties) to whom these powers are delegated.
It is worth noting that the QBCA provides a right in favour of the creditors to consult the unanimous shareholders’ agreement of a corporation: you should take the time in advance to evaluate the potential impact of such a right and, if necessary, communicate with one of our professionals to discuss the options available to you.
The declaration of the sole shareholder is equivalent, under the QBCA, to a unanimous shareholders’ agreement and the foregoing comments apply to such a declaration as well.
There are several provisions worthy of attention. Some highlights include:
- There is no obligation to issue at least one share at the organization meeting;
- The issuance of shares in bearer form will no longer be permitted. However, bearer certificates issued by companies incorporated under Part IA and continued into corporations governed by the QBCA can be exchanged for certificates in registered form;
- Corporations will maintain the ability to issue shares which are not fully paid;
- Corporations will be permitted, for a period of 30 days, to hold shares in their parent corporations (and vice versa), which will facilitate certain tax reorganizations;
- Multiple categories of shares will now be able to carry the same rights; a development which is likely to please shareholders wishing to keep separate accounts;
- Subject to the articles, as concerns the purchase and repurchase of shares and the payment of dividends, what is commonly referred to as the “accounting test” is eliminated. As a result, these operations will be permitted as long as the corporation can pay its obligations as they come due, without the need to satisfy any other test;
- The provisions of the QCA restricting the granting of financial assistance have not been maintained in the QBCA.
liability of directors and officers
The QBCA establishes a clear, enhanced regime for the duties and obligations of the directors and officers, without duplicating the applicable provisions of the Civil Code of Quebec on the matter.
- The directors and officers are duty-bound to act with prudence and diligence, honesty and loyalty and in the interest of the corporation. They must also fulfil the obligations imposed on the exercise of their functions by the Civil Code of Quebec;
- The presumption that a director acted with prudence and diligence will not only apply in cases where the directors relied on the opinion or report of an expert or professional, but will also apply where the director relied, in good faith and based on reasonable grounds, on a report, information or opinion of an officer that the director considers reliable and competent or of a committee of the board of which such director is not a member but considers such committee to be trustworthy;
- The QBCA contains an obligation for the corporation to indemnify its directors and officers and to advance moneys required to cover the costs of certain proceedings, provided that the director or officer carried out her or his functions with honesty, loyalty and in the interest of the corporation;
- The QBCA contains obligations for directors and officers to disclose any interest they may have in contracts and transactions to which the corporation is a party (including any interest of a related person). An important point to retain is that a director in such a situation must abstain from participating not only in the vote, but in the deliberations relating to such question;
- There is no Canadian residency requirement for directors;
- The board of directors will be authorized, without requiring the authorization of the shareholders or the court, to correct errors, irregularities or illegal provisions in the articles of the corporation, provided that such correction would not prejudice the rights of the creditors or the shareholders of the corporation.
simplified regime for the sole shareholder
The QBCA allows a sole shareholder to choose not to establish a board of directors, not to appoint an auditor, and such shareholder may decide not to comply with certain requirements of the act relating to the by-laws, shareholders meetings and meetings of the board of directors.
Notwithstanding this simplified regime for the sole shareholder, it is nonetheless recommended to properly document decisions of the corporation and to maintain records for the corporation.
don’t allow the chair of the shareholders meeting to decide for you!
If the ownership of your business is divided between two or more groups of shareholders, the QBCA may hold a surprise for you in the case of a tie… The chair of a shareholder meeting casts the tie-breaking vote in any corporation governed by the QBCA, unless the by-laws provide otherwise. This provision could have an important impact on the taking of certain decisions.
changes to legal structure
The QBCA puts into place a more flexible regime for mergers, and innovates in permitting the importing, exporting and revival of corporations. It is also worth noting that the QBCA now consolidates, in a single statute, rules relating to the dissolution and liquidation of corporations.