Corporations incorporated under the Business Corporations Act (New Brunswick) (the “Act”) are now required to collect significantly more share ownership information than what has historically been required.read more
Amendments Affecting All Newfoundland and Labrador Corporations
In November, the House of Assembly of Newfoundland and Labrador passed Bill 24, which set out amendments to the province’s Corporations Act (the “Act”). The amendments, which come into force 1 April 2022, are notable and require attention as they will impose new obligations upon most corporations incorporated in the province.
In summary, the amendments:
- Require corporations incorporated under the Act to maintain a registry of individuals who have “significant control” over the corporation, and to provide such information to specific third parties upon request;
- Remove the requirement that 25% of directors of corporations be Canadian residents; and
- Require a legislative review of the Act by the Minister within five years of the amendment coming into force.
“Significant Control” Tracking and Disclosure
The most significant amendment with implications for all corporations incorporated under the Act is the requirement to record, track, and disclose the individuals having “significant control” in the corporation.
Prior to these amendments, corporations incorporated under the Act were only required to maintain a registry of the named shareholders of the corporation, and the shares held by each. This information was not required to be detailed and was not required to track instances where shares may be beneficially held for another person, meaning the named shareholder holds the shares for the benefit of, or at the instruction of, another person. The information was also not required to be registered or otherwise publicly disclosed. As such, it has traditionally been treated as highly confidential by most corporations. The only information about the corporation’s ownership or governance that required registration was the names of the directors. This structure was similar across most Canadian jurisdictions, including the federal regime under the Canada Business Corporations Act.
This traditional approach has been changing across Canada, and the “significant control” amendments in Bill 24 are the Newfoundland and Labrador implementation of these changes. The lack of transparency as to who owns or controls corporations in Canada, and specifically the lack of requirements to publicly disclose shareholdings and the beneficial ownership of corporations, has increasingly been seen as an issue in dealing with tax evasion, criminal money laundering, corruption, and the financing of international terrorism. The issue was recognized by federal and provincial governments as requiring action in 2017, and both levels of governments have moved ahead with similar amendments to their corporation legislation. Upon the introduction of Bill 24, the Government of Newfoundland and Labrador noted that six other jurisdictions, including British Columbia, Saskatchewan, Manitoba, PEI, Nova Scotia, and the Government of Canada, have already implemented such amendments, while all other jurisdictions have committed to doing so (a summary of the 2019 amendments brought in by Canada to the Canada Business Corporations Act can be found here).
Under the amendments effective 1 April, all corporations incorporated under the Act will be required to identify and record the individuals with “significant control” over the corporation. The corporation will be required to maintain a registry of the individuals who meet this definition of “significant control”. This registry must be kept current; the corporation will be required “at least once during each fiscal year” to take reasonable steps to ensure that it has identified any changes in the individuals with “significant control” over the corporation.
“Significant control” has a detailed and technical definition in the amendments. Overall, it seeks to capture both the named owners of shares in a corporation and the beneficial owners or controllers of shares. It applies to anyone controlling or influencing 25% or more of the voting rights or outstanding shares of the corporation, whether they do so directly or indirectly. In this, the requirement is significantly more substantial than the existing shareholder registry of a corporation. It will require the corporation to take at least reasonable steps to inquire as to any beneficial ownership status, or other ownership issues, with its shareholders, who are required by the Act to respond.
The most significant concern for corporations will likely not be the requirement to create and maintain this “significant control” registry, but the requirement to disclose the registry, or information from it, to certain third parties upon request. The third parties entitled to access this information include the Registrar of Companies under the Act, identified investigative bodies, shareholders, and creditors of the corporation. Once the corporation receives a request for this information, the corporation has no discretion — it is required to provide the “significant owner” information requested.
The requirement to disclose to the Registrar and investigative bodies (which means police, federal and provincial securities and financial regulators, and taxing authorities, including the Canada Revenue Agency and provincial authorities) is consistent with the law enforcement basis of the amendments. These agencies are restricted to requesting information in relation to ongoing investigations or in relation to administering or enforcing relevant legislation.
The disclosure requirements to shareholders and creditors will likely be the most surprising to many corporations and shareholders. “Creditors” is not defined under the Act or the Bill and should be expected to be broadly interpreted. The requirement is consistent with the theme of greater transparency and with the amendments in other jurisdictions. While shareholders and creditors are entitled to the information from the registry, they are constrained as to the circumstances when they can request same. They will not be free to request such information at will, but the permitted purposes are very broadly stated. They include matters to do with share acquisition transactions, share voting processes, and “any matter relating to the affairs of the corporation”.
These provisions are also unusual in that the enforcement provisions focus directly on officers and directors as opposed to the corporation itself. A corporation that does not maintain or create a “significant control” registry will have committed an offence under the Act, with liability on conviction of a fine of up to $5,000. However, a director and officer who “knowingly authorizes, permits or acquiesces in the contravention” by the corporation of obligations under the Act is personally liable on conviction for a fine of up to $200,000 and / or 6 months in prison. The same sanction applies to shareholders who knowingly provide false information. These are substantial sanctions; it remains to be seen whether there will be a move to have enforcement actions result in charges under the Act (which traditionally are not common). While this is a significant potential liability exposure, short of an active enforcement program by the Registrar under the Act, we expect commercial pressure will be the primary practical driver to ensure compliance. For example, banks and other financial institutions may start to require disclosure from such a registry as part of due diligence processes for financing or equity transactions. We also expect to see an increase in references to the “significant owner” registry in the representations and warranties in commercial contracts confirming that the corporation is in compliance with all relevant legislation.
Currently, the Act requires 25% of a corporation’s directors to be Canadian residents. The amendments eliminate this requirement as of 1 April 2022. This means both existing and new corporations will be able to have a board of directors without Canadian resident representation. With this amendment, Newfoundland and Labrador joins British Columbia, Nova Scotia, New Brunswick, Quebec, Alberta, and Ontario in eliminating the residency requirement.
The final amendment has potential benefits to all existing and future corporations incorporated under the Act, but only in the long term. There will now be a mandatory review of the Act, to occur within five years of the amendment coming into force (April 1, 2022). The Act, first passed in 1986, needs an overhaul; for example, in our previous article, A Closer Look at Illicit Loans and Financial Assistance in Newfoundland and Labrador, we noted sections 78 and 79 of the Act, as they apply to the concept of illicit loans, are particularly in need of review. While it is hoped such changes do not have to wait until 2027 before they would be recognized, the amendment at least provides a means to have these and other issues addressed.
Implications for NL Corporations
The “significant control” requirements represent a significant increase in potential disclosure obligations over how Newfoundland and Labrador corporations have traditionally operated. This will particularly be the case with respect to the requirement to disclose information on shareholdings. For some corporations, the preparation and maintenance of a “significant control” registry will mirror the existing share registries; however, for others, both large and small, the issues may be more complex. Requests for such information may become a common disclosure requirement on significant credit transactions. Ensuring the registry is in place and up to date will be crucial to ensuring that, if information is requested, it can be provided to the appropriate authority without delay.
Questions relating to the interpretation of “significant control” will arise as Newfoundland and Labrador corporations move to compliance before 1 April 2022. Cox & Palmer is ready to provide advice on these issues and is developing a process to help companies comply with these amendments by the required date. If you require guidance or are interested in receiving more information, please contact a member of our Corporate Commercial group in Newfoundland and Labrador.