Home > Resource Centre > Publications > Publication

INTRODUCTION

On October 7, 2009, Quebec's Finance Minister tabled draft legislation (Bill 63) entitled the Business Corporations Act (the "new Act"), which aims to modernize and substantially amend the legal framework applicable to legal persons currently governed by Parts I and IA of the Quebec Companies Act. Many of the new Act's provisions are inspired by the Canada Business Corporations Act (the "federal Act") and legislation in several other Canadian provinces, while others are entirely new law. Under the new Act, we will no longer refer to companies, but to business corporations. Major innovations introduced by the reform include provisions that will (i) establish a general framework outlining the duties and responsibilities of directors and officers, in particular regarding governance, (ii) add flexibility to the rules relating to the maintenance of share capital, (iii) enhance the rights and recourses of shareholders, particularly minority shareholders, (iv) simplify the internal functioning of corporations and (v) set out rules governing changes to a corporation's legal structure.

DUTIES AND RESPONSIBILITIES OF DIRECTORS AND OFFICERS

• The new Act refers specifically to the provisions of the Civil Code of Québec that describe the general duties of prudence, diligence, honesty and loyalty which directors owe to the corporation. As well, the new Act provides directors with a defence, similar to that in the federal Act, that relieves them from liability where they have acted with reasonable care and in good faith.
• As in the federal Act, the new Act will create a complete system of disclosure of directors' and officers' interests to enable corporations to better identify and manage conflict of interest situations.
• The new Act will permit a board of directors to delegate authority to make certain corporate decisions to a committee or an officer. The list of actions that may not be delegated is similar to the one in the federal Act, except that the new Act will prohibit a board of directors from delegating to a committee the power to set the remuneration of certain senior officers of the corporation.
• As under the current Quebec Companies Act, there will be no residency requirements for directors under the new Act.

CHANGES TO RULES RELATING TO THE MAINTENANCE OF SHARE CAPITAL

• The new Act will simplify the rules relating to the maintenance of share capital by modifying certain requirements regarding the declaration of dividends and the redemption of shares.
• Financial assistance to shareholders will be facilitated since the new Act proposes to abolish the accounting and solvency tests currently required for this purpose.

SHAREHOLDER RIGHTS AND RECOURSES

• The new Act will introduce a recourse, similar to the oppression remedy under the federal Act, that gives a court discretionary power to issue a variety of curative orders in cases where a corporation acts in an oppressive or unfairly prejudicial manner. However, there are two significant differences. First, the new Act will allow the court to intervene in situations where an act by a corporation "could be" oppressive or unfairly prejudicial. Secondly, unlike the federal Act, the new Act does not appear to allow the court to intervene to redress a situation where an act by a corporation unfairly disregards the interests of shareholders, other securityholders, directors or officers.
• The new Act will establish a complete legislative framework governing derivative actions (that is, lawsuits taken in the name and on behalf of a corporation).
• Under the new Act, any disposal (sale, exchange or lease) of the assets of a corporation that is "likely to result in the cessation of a significant part of its business activity" will now be subject to the prior approval of the shareholders expressed by special resolution (adopted by two-thirds of the votes cast at a meeting called for that purpose). Unless the necessary approval of its shareholders is obtained, a corporation will also be required to prevent its subsidiary from disposing of assets where the disposal would likely result in the cessation of a significant part of the corporation's business activity if the subsidiary's assets and business activities were the corporation's assets and business activities. Moreover, for this purpose, a corporation's loss of control of a subsidiary will be deemed to be a disposal of all the subsidiary's assets.
• The current requirement for court approval of a compromise or arrangement in addition to approval by three-quarters of the votes cast by the holders of shares of a class whose rights stand to be prejudicially changed will be replaced by the requirement that approval be given by special resolution of the holders of shares of such class, whether or not their shares otherwise carry voting rights; shareholders of such class who oppose the adoption of the special resolution will be entitled to demand that their shares be repurchased at their fair value.
• Along the lines of the right to dissent under the federal Act, the new Act will give shareholders the right to demand that the corporation purchase their shares at their fair value where they disagree with a major change being made to the legal structure of a corporation, such as an amalgamation, continuance of the corporation under the laws of another jurisdiction or transfer of property that could result in the cessation of a significant part of its business activity, or where the corporation proposes to amend its articles to add, change or remove a restriction on its business activity or on the transfer of the shares of its capital.
• The new Act will introduce provisions to allow shareholders of a corporation that is a reporting issuer or that has 50 or more shareholders to submit shareholder proposals at an annual meeting. Regulations to be adopted under the new Act will govern and establish the framework for exercising this right.
• The new Act will include detailed provisions relating to cumulative voting for the election of directors.
• A corporation will have to keep the financial statements of each of its subsidiaries whose accounts are consolidated in the financial statements of the corporation and allow its shareholders to examine and make extracts of those financial statements. The corporation may apply for a court order to prevent this disclosure if it can show prejudice to the corporation or one of its subsidiaries.

INTERNAL FUNCTIONING OF CORPORATIONS

• A sole shareholder will have the option of choosing not to establish a board of directors.
• The provisions of the new Act relating to unanimous shareholder agreements will be similar to those in the federal Act, allowing not only for the powers of the board to be restricted or completely withdrawn, but such an agreement also to be signed with third parties. A corporation will have to declare the existence or termination of a unanimous shareholder agreement to the enterprise registrar.
• Where a unanimous shareholder agreement withdraws all powers from the board, the corporation will have to declare the names of the shareholders or third parties who have assumed those powers to the enterprise registrar. In such cases, the shareholders will also have the option of not having a board of directors.

CHANGES TO LEGAL STRUCTURE

• A corporation governed by the new Act will be able to continue its existence under the laws of a jurisdiction other than Quebec, i.e., to "export" itself to another jurisdiction. Conversely, a legal person governed by another jurisdiction's statute will be able to continue its existence under the new Act.
• The new Act will contain more detailed provisions concerning arrangements, similar to those in the federal Act.
• There will be three ways of dissolving a corporation under the new Act. A corporation may be dissolved by consent of the shareholders, in which case the corporation must first liquidate its property and discharge its obligations in the manner set out in the new Act. A corporation may also be dissolved by declaration of the sole shareholder or, where the corporation has no obligations, no property and no shareholders, by consent of the board of directors. The directors of a legal person that, as sole shareholder, files a declaration dissolving a subsidiary will be personally and solidarily liable for the liabilities of the subsidiary that the legal person is unable to perform if there were reasonable grounds for believing that the legal person would be unable to pay the subsidiary's liabilities as they became due.
• The new Act will allow for the revival of a dissolved corporation.

TRANSITIONAL MEASURES

Companies that were incorporated, continued or amalgamated under Part IA of the Quebec Companies Act will now be governed by the new Act effective from a date to be set by the Government, without any special action being required on their part.

Companies incorporated under Part I of the Quebec Companies Act who do not continue their existence under the new Act within five (5) years after the new Act comes into force will be dissolved. Insurance companies and trust companies to which Part I of the Quebec Companies Act applies must also file articles of continuance within a two (2) year period following the effective date on which Parts I and IA of the Quebec Companies Act are replaced by the new Act, to be determined by the Government. Should they fail to file such articles of continuance, the new Act, with the exception of certain provisions, will be deemed to apply to them.

MODERNIZATION TO REFLECT NEW TECHNOLOGIES

Subject to conditions that remain to be specified, the new Act will allow for online incorporation, electronic transmission of articles and other documents to the registrar, remote voting and participation in meetings of shareholders and directors by means of new technologies, and the possibility of uncertificated shares.

COMMENTARY

To be sure, the efforts to modernize and reform the legislation applicable to Quebec companies are very laudable. In this regard, the introduction of provisions allowing for interjurisdictional continuance of Quebec companies, elimination of the specific restrictions applicable to the granting of financial assistance to shareholders, and simplification of the requirements with respect to the redemption of shares or the declaration of dividends are to be welcomed with enthusiasm. However, the reform raises a number of questions. Certain provisions, while designed in many respects to mirror the federal Act, are likely to give rise to major debate insofar as their application is concerned. By way of example, the disposal of assets of a corporation likely to result in the cessation of a significant part of its business activity is a concept that would seem to differ significantly from that of the sale, lease or exchange of all or substantially all the property of a corporation found in the federal Act, a concept which benefits from a well established body of case law.

One may also wonder whether introducing an oppression-type remedy that allows a court to intervene in situations where an act by a corporation "could be" oppressive or "could be" unfairly prejudicial does not in fact run the risk of substituting the judgment of the courts for that of the directors in the course of exercising the powers given to them, when our courts have seen fit to sanction the "business judgment rule."

In addition, the introduction of provisions permitting the submission of shareholder proposals could cause the attractiveness of the Quebec Companies Act for reporting issuers wishing to shelter themselves from activist shareholder proposals to be lost. With that advantage eliminated, certain issuers currently incorporated under the Quebec Companies Act may prefer to opt for the federal regime, which is more frequently used and thus affords greater certainty as to the rules governing the relationships between the corporation and its shareholders.

The transitional provisions of the new Act do not deal specifically with the application of the recourses it creates to legal situations that predate its coming into force.

The new Act demonstrates the Government's desire to enhance the protection of minority shareholders' interests by adopting measures modelled after those of the federal regime. It is important for Quebec entrepreneurs, especially small and medium-sized enterprises and family businesses, to take note of these changes, as they could represent additional challenges for managing their businesses.

In its desire to move closer to the regime under the federal Act, particularly in regard to the rights of minority shareholders, Quebec could lose a competitive advantage for entrepreneurs compared with other Canadian jurisdictions.

The purpose of this bulletin is to sketch the broad outlines of the proposed reform of Quebec company law. Given the very large number of changes to be introduced by the new Act, the technical nature of many of them and their very significant impact for our clients, we will keep you apprised of developments as the bill makes its way through the legislative process and will also publish a series of bulletins which will deal with more specific aspects of the reform.

Contacts

Jean-Pierre Colpron
Montréal
514.847.4880
jcolpron@ogilvyrenault.com
Profile

Amar Leclair-Ghosh
Montréal
514.847.4612
aghosh@ogilvyrenault.com
Profile

Paul Raymond
Montréal
514.847.4479
praymond@ogilvyrenault.com
Profile

Anne-Marie Naud
Québec
418.640.5058
anaud@ogilvyrenault.com
Profile

Louis Vaillancourt
Québec
418.640.5005
lvaillancourt@ogilvyrenault.com
Profile