Beginning on a date to be announced, privately-held B.C. Business Corporations Act (“BCA”) companies will be required to maintain a “transparency register” of “significant individuals”, being individuals who:
- directly or indirectly hold a significant number of shares; or
- have the right (or control or influence another SI’s right) to elect, appoint or remove the majority of directors of the company1.
Currently, BCA companies do not have to look behind the names of their registered shareholders to determine ultimate beneficial control.
These changes flow from B.C.’s commitments under an agreement made in December 2017 among Canada’s provincial and federal Finance Ministers to combat money laundering and terrorist financing.
Canada has already amended the Canada Business Corporations Act (“CBCA”) to require private federal corporations to create and maintain a register of “Individuals with Significant Control” (an “ISC Register”). Manitoba has introduced amendments modelled on the CBCA rules. It is likely that all other provinces and territories will follow suit over time. The proposed B.C. rules differ in some material ways from the federal rules.
The B.C. transparency register will not be available to the public. Unlike the CBCA, which allows access to the ISC Register to shareholders and creditors of the CBCA corporation as well as regulatory authorities, the B.C. transparency register will be open only to directors of the company and regulatory authorities.
Directors and officers will have personal liability to ensure the company complies with the new provisions.
These requirements will not apply to public companies or some other companies that may be exempted by regulation. Unless they are exempted by regulation, the rules will apply to subsidiaries of public companies. All references to “companies” in this bulletin refer to companies that are not reporting issuers or listed on a stock exchange.
The new provisions will come into force by regulation. It is hoped that the regulations may provide some additional detail to clarify and expand on the new obligations. None have yet been issued in draft or final form.
A. Who is a significant individual (“Sl”)?
An individual is an “SI” of a company when one of the following tests is met:2
- with respect to a “significant number of shares”, being (i) 25% or more of the issued shares of the company or (ii) issued shares that carry 25% or more of the rights to vote at a general meeting of the company:
- he or she is the registered holder of one or more of them;3
- he or she is the beneficial owner of one or more of them (other than an interest that is contingent on the death of another individual); and/or
- he or she has “indirect control” (within the meaning of regulations that have not yet been issued) over one or more of them; or
- the individual has any of the following rights or abilities (or any combination of them) that, if exercised, would result in the election, appointment or removal of the majority of the directors of the company:
- the right to elect, appoint or remove one or more of the company's directors;
- indirect control (within the meaning of regulations that have not yet been issued) of the right to elect, appoint or remove one or more of the company's directors; and/or
- the ability to exercise direct and significant influence over an individual who has the right or indirect control described in subparagraph (a) or (b).
Further circumstances may be prescribed by regulation. Individuals who jointly hold interests or rights may each be an SI.
Importantly, an SI need not be a shareholder at all - the “right or ability” to cause or control the election, appointment or removal of the majority of the directors of the company could arise under, for example, a financing agreement, purchase agreement or shareholders’ agreement.
B. Issues arising
The new rules (subject to regulations, if any) contain areas of uncertainty. For example:
- as noted above, the definition of “significant number of shares” includes (a) shares carrying 25% or more of the rights to vote at general meetings, and (b) 25% or more of the issued shares of the company - this second test is without regard to value or any other metric. In a company with more than one class or series of shares issued, measuring the significance of a person’s shareholding by number of shares owned can be quite meaningless. For example, a shareholder (“Shareholder A”) could hold 1,000,000 Class A shares that carry no votes and have only nominal value. Another shareholder (“Shareholder B”) could hold just one Class B share that carries all the votes and most of the value of the company. Both Shareholder A and Shareholder B would be SIs. Shareholder A might understandably object to the inclusion of his or her personal information in the transparency register. The CBCA provisions seem more appropriate in this respect, in that they measure “significant number of shares” by either votes or value, and not by raw number of shares issued.
- the control tests set out in paragraph A2 above, and particularly paragraph A2(c)4, do not use the familiar and well-tested wording used by the CBCA, being “direct or indirect influence that, if exercised, would result in control in fact of the corporation”. The phrase “ability to exercise direct and significant influence over an individual” is contained in the not-yet-in-force B.C. Land Owner Transparency Act. The only other reference to this language in Canadian statutes is to the potential conflict of interest of accountants having the ability to “exercise direct and significant influence” over the subject matter of their cases, contained in the Quebec Code of ethics of certified management accountants. There is no Canadian case law yet applying this wording in the context of corporate control. Accordingly, companies and their counsel may struggle to interpret the wording until it is clarified by either regulation or case law. Specifically, the wording in paragraph A2(c) applies if an individual has the ability to exercise direct and significant influence over an individual who has the right (or indirect control over the right) to elect, appoint or remove one or more of the company's directors. Unlike the “control in fact” test under the CBCA:
- the phrase “ability to exercise direct and significant influence” arguably applies in the absence of a legally enforceable right. Could a parent, grandparent, child, spouse or caregiver applying financial or other pressure to an individual shareholder be an SI? A beneficiary under a trust deed? A party granted a right of consultation under a contract?
- the “influence” is over an individual with the right (or indirect control of the right) to elect directors - it is not over the company itself or a related legal entity. It may be difficult to determine influence over an individual who is not a direct shareholder.
- records offices are required to give access to the transparency register to directors of the company and to “inspecting officials” (please see discussion in Section F below). It is an offence to fail to give such access to those persons or to give access to anyone else. Questions arising include:
- why can the register not be viewed by officers that are not directors? Officers are personally liable, just as directors are, for flaws in the registry. Presumably, officers will be responsible to create and update the registry, so it seems overly restrictive not to allow them to view it without the request being made through a director. Records offices will need to take care not to allow non-director officers or employees of a company to view the register; and
- how should a records office verify that a person is an “inspecting official”? As described below, “inspecting officials” are officials of various government and regulatory agencies viewing the register for certain purposes. The BCA allows records offices to require identification from the inspecting official. In addition to verifying the place of employment from the identification, records offices may consider asking inspecting officials to confirm in writing that they are carrying out the purposes set out in the BCA;
- “individual” is not defined in the BCA or the B.C. Interpretation Act, but presumably means a human being;
- who is the individual with indirect control of a trust? Depending on the circumstances, it might include all or any of the trustees, the person appointed in the trust deed to appoint replacement trustees, a protector or possibly an influential beneficiary. The regulations, once passed, may clarify this point;
- similarly, who is the individual with indirect control of a partnership? This would require an analysis of the partnership agreement, if any, as well as the regulations, once passed;
- what does it mean to have an interest as a “beneficial owner” of a share? “Beneficial owner” is not defined in the BCA or the B.C. Interpretation Act. Does a beneficiary of a discretionary trust have an interest as a beneficial owner of a share owned by the trust?
- how do contingent rights, options to purchase, veto rights and other provisions commonly found in shareholders’ agreements, convertible debentures, purchase agreements and other instruments affect control and influence?
- if management of a company feels they are already knowledgeable about issues of control and influence, what “reasonable steps” do they have to take every year to maintain a transparency register (please see discussion in Section C below)?
- how can management best protect the security of the information obtained from its inquiries?
- what, if any, responsibility does management have if it suspects, but is not sure, that shareholders are not being forthcoming with the names of their controlling individuals?
- what steps should law firms (as corporate records offices) take to implement the new registry and assist companies with the steps they must take annually to update it (please see discussion in Section E below)?
C. The transparency register generally
Companies must take reasonable steps to maintain a transparency register.
The register must list all SIs with the required personal information, including name, date of birth, address, citizenship, whether the individual is a resident of Canada for tax purposes, the date on which the individual became or ceased to be an SI and a description of the reason they are an SI. While some of this information may be relatively straightforward to ascertain, some may not be. For example, the determination of whether an individual is a resident of Canada for tax purposes is in the first instance a question of fact that depends on all of the relevant circumstances, including the individual’s ties to Canada. An individual who is not a resident of Canada as a matter of fact may nevertheless be deemed to be resident of Canada for tax purposes under certain circumstances. Further, an individual who is either a factual or deemed resident of Canada may nevertheless be deemed not to be resident of Canada for tax purposes under certain circumstances.
Companies must update the information within 30 days of becoming aware of new relevant information.
If some of the required information about an SI has not been obtained, the register must specify that information and the steps taken to obtain or confirm that information. If the company determines there are no SI’s, the register must state that fact.
At least once each year, within two months of the anniversary date of its recognition as a company in B.C., the company must take reasonable steps to confirm that the information contained in its transparency register is accurate, complete and up to date. These steps may include questioning shareholders and reviewing the company’s key agreements with an eye to issues of control and influence. Shareholders, if requested by the company, are required to take reasonable steps to compile these details about SIs, and to forward them to the company promptly. Shareholders commit an offence if they fail to do so.
A company must send a notice to an individual within ten days after recording him or her as an SI or removing him or her from the registry. This requirement is not contained in the CBCA provisions.
Within one year after the sixth anniversary of the day on which an individual ceases to be an SI, the company is required to dispose of all information and records about the SI that were gathered for the purposes of maintaining the transparency register.
A company must keep its transparency register either at its records office or at another location provided the register is available for inspection and copying at its records office by means of a computer terminal or other electronic technology.
D. What steps must a company take to create and maintain a transparency register?
Among other things (some of which may be established by regulations), a company will need to determine:
- those persons, if any, who separately or jointly with others are each the registered holder of a “significant number of shares” (as defined above), and obtain (or make reasonable efforts to obtain) the required information for:
- each registered holder (if any) who is an individual;
- each individual (if any) who beneficially owns shares that are not registered in the individual’s name;
- each individual, whether or not a shareholder, who has “direct and significant influence” over any such registered or beneficial holder; and
- each individual, if any, who has direct or indirect control of a registered holder that is not an individual (this inquiry could disclose the names of individuals far up the corporate chain, or may result in no names if no individual holds control);
- whether there are individuals (shareholders or otherwise) that have rights or abilities that, if exercised, would result in the election, appointment or removal of the majority of the directors of the company, arising from:
- the direct right to elect, appoint or remove directors;
- (b) indirect control over that right; or
- the ability to exercise direct and significant influence over an individual who has such rights or abilities?
Such an individual could include, for example, someone who controls a debentureholder that has the right to appoint the majority of the board, someone who has a right under a shareholders’ agreement to buy shares sufficient to elect a majority of the board and someone who holds direct and significant sway or influence over an individual that directly or indirectly controls the election of directors.
E. What are the responsibilities of the records office of the company?
New duties are placed on the person (often a law firm) that acts as the records office for the company. That person:
- must take reasonable steps to:
- keep the company's transparency register complete, and avoid its loss, mutilation or destruction;
- avoid falsification of entries in the transparency register; and
- provide inspecting officials and the company's directors with simple, reliable and prompt access to the transparency register; and
- must ensure that the company's transparency register is maintained in electronic form, on microfilm, in bound or looseleaf form or in another form if set by regulation;
- must not allow anyone to inspect the register except an inspecting official (see Section F below) or a director of the company, and must not allow inspections outside of specific hours; and
- must provide copies of the register if requested by an inspecting official or company director, and may charge a copying fee up to a set amount.
Law firms may benefit from systems they have recently developed to help CBCA clients establish their ISC Registers. Many law firms have developed a questionnaire to send to corporations, and an additional questionnaire that corporations can send to their shareholders. Information from these questionnaires feeds into the ISC Register created by the records office.
As a result of the provisions under the BCA, records offices may also choose to:
- remind the company that it is required to maintain its registry during the two-month period following its anniversary date of recognition in B.C.;
- inform the company that it may, by ordinary resolution, restrict viewing hours for inspecting officials to two consecutive business hours per day;
- remind the company to send a notice within ten days to each person they add to or remove from the registry, informing them that they have been added or removed; and
- remind the company that within one year following the sixth anniversary of a person being removed from the registry, the company must dispose of all information regarding an SI that was gathered for the purpose of the registry.
F. Who is allowed to view the registry, when and for what purpose?
Transparency registers may be viewed by “inspecting officials” and the directors of the company, and the company’s records office must allow such access. No one else may view the register.
“Inspecting officials” are:
- Canadian or B.C. taxation authorities administering or enforcing a domestic tax law or providing information to another tax authority (inside or outside Canada) to assist with the administration or enforcement of its tax laws, provided the assistance is authorized under an arrangement, written agreement, treaty or law of B.C. or Canada;
- a police officer or member of the RCMP conducting an investigation or a criminal intelligence operation in Canada or providing information to:
- another law enforcement agency in Canada conducting an investigation or a criminal intelligence operation in Canada; or
- an international law enforcement authority to assist with a foreign law enforcement proceeding, provided the assistance is authorized under an arrangement, written agreement, treaty or law of B.C. or Canada; and
- an official of a “regulator”, being the B.C. Securities Commission, the Financial Institutions Commission, the Financial Transactions and Reports Analysis Centre of Canada, the B.C. Law Society or other regulatory agencies set by regulation administering or enforcing a law for which the regulator is responsible or providing information to:
- another agency in Canada administering or enforcing a law for which the that agency is responsible; or
- an international law enforcement authority to assist with a foreign law enforcement proceeding, provided the assistance is authorized under an arrangement, written agreement, treaty or law of B.C. or Canada.
A company may restrict the hours during which inspecting officials may view the register to as little as two consecutive hours per business day. Directors are entitled to inspect the registry within statutory business hours.
G. Offences and potential liability
The BCA establishes a number of new offences relating to the transparency register that apply to companies, their shareholders, directors, officers and persons who act as their records offices. The penalties are fines up to $100,000 for corporate entities and $50,000 for individuals. For these purposes:
- a company commits an offence by:
- failing to keep, annually maintain and, as new information becomes available, update a transparency register containing the required information (including a note of missing information and the steps it took to obtain missing information, or a note that it has determined there are no SIs for the company);
- failing to delete from its transparency register, within one year after the sixth anniversary of a person ceasing to be an SI, all information in the register relating to the SI and related records;
- failing to notify an individual within ten days after recording that individual as an SI or removing that record from the register;
- subject to paragraph G3 below, a company commits an offence, and its directors and officers who authorize, permit or acquiesce in the following actions commit an offence, if the company’s transparency register:
- falsely identifies an individual as an SI;
- fails to identity an individual that is an SI;
- records information about an SI that is false or misleading in respect of any material fact; or
- omits information about an SI and the omission renders the information false or misleading;
- the company, its directors and officers are not liable for the offences described under paragraph G2 above if they:
- did not know; or
- with the exercise of reasonable diligence, could not have known
- a shareholder commits an offence by failing to compile and promptly send information requested by a company to maintain its transparency register;
- subject to paragraph G6 below, a shareholder who sends information to the company for the purposes of the transparency register commits an offence if the information:
- is false or misleading in respect of any material fact; or
- omits any material fact and the omission renders the information false or misleading;
- a shareholder is not liable of the offences described under paragraph G5 above if the shareholder
- did not know; or
- with the exercise of reasonable diligence, could not have known
- the person who maintains a company’s records office commits an offence by:
- failing to allow an inspecting official or a director of the company to inspect the company’s transparency register during the permitted hours; and
- permitting an unauthorized person to inspect the register.
H. Privacy and issues of personal liability
Note that only direct shareholders of a company are required to be responsive to questions from the company about SIs, not indirect shareholders. In some cases, this may limit the information a company would have about its SIs. Shareholders are required to be responsive, even if they are legal entities (such as corporations) and are not resident in B.C.
Directors and officers, as described above, who knowingly permit or acquiesce in the recording of false or misleading information in the register will be guilty of an offence. Consequently, they must contribute information known to them other than through their role for the company (such as through their roles for parent or holding companies). Entities wishing to retain the secrecy of ultimate controlling individuals will need to be aware that knowledge held by appointee directors will be taken into account in preparing the register.
The requirements around the register are extensive and the list of new offences is long. B.C. companies and their records offices will need to take care to update their practices as soon as the new provisions are in force.