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BC Business Law Group

On October 31, 2002, the British Columbia government approved the new Business Corporations Act (the "New Act"), which, as amended in October 2003 by the Business Corporations Amendment Act, 2003 and the Business Corporations Amendment Act (No. 2), 2003, will replace the current Company Act (the "Old Act").  The New Act is modelled substantially on the Canada Business Corporations Act and the Ontario Business Corporations Act and will modernize corporate law in BC.  To consult the New Act and the 2003 amendments, see Related Links on the Business Corporations Act Project website at http://www.fin.gov.bc.ca/registries/colin/default.htm.

The New Act will provide greater flexibility to companies by removing many of the restrictive provisions of the Old Act, such as directors' residency requirements and pre-emptive rights of shareholders.  The New Act will also reduce the regulatory burden on companies by eliminating some filing and record-keeping requirements and by implementing an electronic filing system, called "Corporate Online".

The New Act is scheduled to come into force on March 29, 2004.  In the meantime, the government is finalizing the infrastructure required to accommodate electronic filing.  Companies will have two years after the implementation date during which to make the transition to the New Act.  In the weeks leading up to the implementation of the New Act, we recommend that BC companies review their constating documents and practices to determine what alterations will be necessary or desirable to make the transition to the New Act.

TERMINOLOGY

The New Act employs the following terminology that differs from the Old Act:

• shareholders" rather than "members";
• authorized share structure" rather than "authorized share capital"; and
• notice of articles" rather than "memorandum".

Although the title of the New Act refers to "business corporations", the word "company" is still used as in the Old Act.

Requirements found in the Old Act that apply to reporting companies, such as those relating to proxies, information circulars and financial statements, have not been carried over to the New Act, as it is intended that these be covered by securities legislation.  However, certain reporting companies that are not otherwise governed by Canadian securities legislation (i.e., that are not reporting issuers or the equivalent) are designated as "pre-existing reporting companies" under the New Act and will be subject to a set of regulations called Statutory Reporting Company Provisions.

INCORPORATION AND RECORDS

The New Act permits incorporation by a company or an individual, unlike the Old Act, which contemplated only incorporation by an individual.

Rather than filing Articles with the Corporate Registrar, companies need only file a one-page "Notice of Articles", which will replace the current Memorandum.  The company's Articles will be filed only in its records office.  An incorporation application can specify a future date and time at which incorporation will become effective.  Companies may enter into pre-incorporation contracts, subject to the company adopting the contract after incorporation.  A person who purports to enter into the contract in the company's name will be exposed to liability if the company fails to adopt the contract within a reasonable period after incorporation.

DIRECTORS AND OFFICERS

Unlike the Old Act, the New Act does not contain directors' residency requirements.  The New Act also permits directors to provide a "prescribed address" rather than their residential address, in order to protect their privacy.

The Old Act required each company to appoint a president and a secretary, who could not be the same person unless the company had only one shareholder; unless the Articles of the company provided otherwise, the company's president also had to be a director.  The New Act does not prescribe any officer designations.  Under the New Act, an officer need not be a director, but must be qualified to be a director.

Under the New Act, a company's Articles may restrict directors' powers and may transfer those powers to another person.With respect to directors' liability, the New Act provides that directors must "act honestly and in good faith with a view to the best interests of the company" and "exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances" in accordance with the New Act and the company's constating documents.  This language is virtually identical to that in the Old Act.

Under the New Act, directors may be personally liable if they vote for or consent to the company:

• exercising any power that it is restricted from exercising by its Notice of Articles or Articles;
• paying an unreasonable commission or permitting an unreasonable discount on share purchase;
• paying a dividend when the company is insolvent (or when paying the dividend causes insolvency);
• purchasing, redeeming or otherwise acquiring shares when the company is insolvent (or when making a payment or giving other consideration would cause insolvency); and
• granting an indemnity or making an indemnity payment that breaches the rules of the New Act (such as if the person being indemnified did not act in good faith).

The New Act provides directors with defences against personal liability provided the director has relied in good faith on financial statements, professional reports, or other documents that a court considers would, if genuine and accurate, have provided reasonable grounds for the director's actions.

The New Act permits a company to indemnify a director or officer against expenses, judgments and settlements which may be reasonably incurred by reason of being or having been a director or officer if the director or officer acted honestly and in good faith in the best interests of the company, or, in the case of an administrative or criminal matter, if the director or officer had reasonable grounds to believe that his or her conduct was lawful.  Unlike under the Old Act, no court application is required to approve the indemnification, except in the case of actions by the company as a plaintiff against the director or officer.

SHARE CAPITAL AND SHARE RIGHTS

Whereas the Old Act required each company to state a limit on its authorized capital, the New Act permits unlimited authorized capital.  The New Act also permits the issuance of fractional shares.

The New Act retains par value shares, but expands the concept to permit shares valued in non-Canadian currency.

A company may reduce its share capital under the New Act by a court order or by special resolution, provided the capital of the company is reduced to an amount that is not less than the "realizable value of the company's assets less its liabilities".  The Old Act only permitted companies to reduce their capital by court order.

Under the New Act, in share offerings companies are not required to offer shares pro rata to existing shareholders before the shares are offered to potential investors, unless such pre-emptive rights are set out in the company's Articles.  Companies incorporated under the Old Act may alter their Articles by special resolution to remove pre-emptive rights.

The New Act clarifies that a subsidiary can acquire shares of its parent, provided the subsidiary is solvent and the purchase will not render the subsidiary insolvent.  Like the Old Act, the New Act provides that a subsidiary cannot vote shares held in its holding company.

As does the Old Act, the New Act permits a company to hold its own shares.  The company cannot, however, vote its own shares.

SHAREHOLDER MEETINGS, RESOLUTIONS AND PROPOSALS

Unlike under the Old Act, under the New Act, shareholders' meetings may be held outside BC, without approval of the Registrar, if the company's Articles so provide or if approved by ordinary resolution of the shareholders.  Shareholders may participate in and vote at a meeting by telephone or by another means of communication if all shareholders and proxyholders attending the meeting can communicate with one another.

Under the New Act, the approval required for special resolutions can range from 2/3 to ¾ of votes cast.  The default majority is 2/3 for newly incorporated companies, if not specified in the company's Articles.  For companies incorporated under the Old Act, the default majority will remain ¾.

The New Act also permits the use of "exceptional resolutions", which require a majority vote of the shareholders greater than a special majority, or the written consent of all shareholders entitled to vote at general meetings.  The company's Articles may set out the majority required for an exceptional resolution.  The Articles may also identify certain actions that cannot be taken by the company or its directors, or specify provisions of the Articles that may not be changed unless such action or change is approved by exceptional resolution.

The New Act extends the time limit for holding a company's first AGM to 18 months after incorporation, and 15 months after the prior AGM for each subsequent AGM.  Furthermore, under the New Act shareholders may waive the holding of an AGM, whereas under the Old Act an AGM could only be postponed.

The New Act contains provisions for shareholders' proposals, which were not permitted under the Old Act.  According to the New Act, any person who is a beneficial holder of voting shares of a public company and has been a beneficial holder of such shares for an uninterrupted period of at least two years may submit a proposal for consideration at the company's next AGM.  The company is required to send the proposal to all persons entitled to notice of the meeting, but may reject the proposal on the following grounds:

• substantially the same proposal was submitted to shareholders in a previous period;
• the proposal does not relate in a significant way to the business or affairs of the company;
• the primary purpose of the proposal is to secure publicity or enforce a personal claim or redress a personal grievance;
• the proposal has already been substantially implemented;
• the proposal, if implemented, would cause the company to commit an offence; or
• the proposal deals with matters beyond the company's power to implement.

The New Act expands dissent provisions to include beneficial owners of shares, so that a dissenting shareholder may dissent in respect of shares held on the shareholder's own behalf or on behalf of beneficial owners whose shares the shareholder holds.  The dissenting shareholder will have one month, rather than the 14 days permitted under the Old Act, in which to confirm dissent after receipt of the company's notice of intention to proceed with respect to the resolution under dispute.

FINANCIAL ASSISTANCE

The New Act permits all forms of financial assistance to any person for any purpose by means of a loan, guarantee, the provision of security or otherwise.  If financial assistance is given to a shareholder, director, officer, affiliate or employee of the company, to a person who is an associate of the foregoing persons, or to any person for the purpose of acquiring shares in the company, then the company must disclose the particulars of the financial assistance in a record filed in the company's records office or in a directors' resolution approving the assistance.  There are exceptions to the disclosure requirement, such as when the assistance is on account of expenditures incurred on behalf of the company.

The insolvency test under the New Act is more certain than under the Old Act.  The New Act provides that insolvency means (rather than includes, as under the Old Act) the inability to pay debts as they become due in the usual course of business.  The wording in the New Act makes it much easier to assess and meet the test for solvency, and decreases directors' liability that could arise due to an inadequate assessment of insolvency.

FUNDAMENTAL CORPORATE CHANGES

Amalgamation:  Under the New Act, a court-approved amalgamation with full amalgamation agreement will remain an option, but companies may also amalgamate by resolution without a court order if the company's creditors will not be prejudiced.  In addition, companies may undertake short form amalgamations, whereby related corporations amalgamate vertically or horizontally, without shareholders' approval.  The New Act provides for inter-jurisdictional amalgamation, as well as for a one-step amalgamation and continuation out of British Columbia.  The New Act will also permit three-cornered amalgamations, in which shareholders receive assets including shares of another corporation, instead of only shares from the newly formed entity.

Disposal of Undertaking:  Under the New Act, a company can obtain shareholder approval of the disposition of substantially all of the company's undertaking either before or after the disposition.

Dissolution and Liquidation:  Voluntary dissolution can occur entirely electronically and filings can specify a future date and time at which dissolution will become effective.  Liquidation under the New Act does not require a meeting of the company's creditors or a meeting of the shareholders.

Restoration:  The New Act permits restoration to be effected by an application to the Registrar or by court application.  Any money or assets of the company that vested in the government on dissolution and that have not been disposed of by the government will automatically re-vest in the company.

EXTRAPROVINCIAL COMPANIES

The extraprovincial provisions of the New Act are less onerous than under the Old Act.

A "foreign entity" is required to register as an extraprovincial company under the New Act within two months after starting to carry on business in BC.  The definition of "foreign entity" includes corporations incorporated, continued or amalgamated outside BC, and includes limited liability companies.  The definition of "carrying on business in BC" is similar to that in the Old Act, and includes:

• listing an address or telephone number in a BC telephone directory;
• publishing the company's name in any advertisement in which an address or telephone number in BC is given for the company; and
• the company having a resident agent, office, warehouse or other place of business in BC.

While it will continue to be an offence subject to a fine under the New Act for a "foreign corporation" to carry on business in BC without being registered, the most onerous provisions of the Old Act have been removed.  Under the Old Act, registration was required before an extraprovincial company could acquire or hold land in BC, and an unregistered extraprovincial company could not maintain a court action in BC.  Neither provision has been carried over into the New Act.

Under the Old Act, an agent or representative of an unregistered extraprovincial company was personally liable for debts and obligations incurred by the person as agent and the Old Act included an offence provision.  That provision has not been carried over into the New Act.

An extraprovincial company will no longer require a head office in BC unless the company's charter states otherwise, and accordingly the records required under the Old Act need no longer be maintained in BC.  However, under the New Act an extraprovincial company must have an attorney resident in BC for the service of documents.

Registration of extraprovincial companies will be completed electronically and therefore copies of the constating documents will not be required to be filed.
The New Act contains provisions for the use of an assumed name by a foreign corporation, where the foreign corporation's true name cannot be approved in BC.

No action will be required by existing extraprovincial companies to make the transition to the New Act.  The attorney appointed by a pre-existing extraprovincial company registered in BC will continue to be the attorney appointed under the New Act.

ELECTRONIC FILING AND OTHER PRATICE POINTS

Electronic filing of all incorporation and annual reporting documents will occur on-line.  The Registrar is currently updating its system to accommodate electronic filings.  Implementation will occur in several stages.  During Phase One, basic transactions such as incorporations, amalgamations, the filing of annual reports, changes of directors and transition to the New Act will occur electronically.  Additional transactions and capabilities will be added in subsequent phases.  As soon as it becomes possible to file a document electronically, paper filings of that document will no longer be permitted by the Registrar.  Eventually, filings for societies and other types of corporate entities will be added to the system.

Some complex filings will continue to be submitted in paper form only.

The New Act explicitly provides for rights of withdrawal of applications.

The New Act also provides for finely tuned timing of filings, such as for same-day sequential transactions.

MAKING THE TRANSITION

Pre-existing companies have two years after the date when the New Act comes into force in which to:

• file a transition application together with a Notice of Articles;
• modify their Articles as necessary to ensure compliance with the New Act; and
• supplement the information in their share register (to be called the "central securities register") to comply with the New Act.

If the company fails to meet the two-year deadline, it will receive a letter from the Registrar, after which if the company does not comply, the Registrar may dissolve the company without further notice.

The New Act also contains a provision that will require companies to make an immediate change to their records.  The New Act requires that all companies maintain a central securities register, in lieu of the registers of members, allotments and transfers required under the Old Act.  This requirement is effective on the date the New Act comes into force.

The BC Business Law Group would be pleased to assist companies with their transition to the new regime.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
For further information, please contact one of the lawyers of the BC Business Law Group mentioned below:

Andrew Ahonen (604) 806-3826  aahonen@ogilvyrenault.com
Warren G. Brazier (604) 806-3825  wbrazier@ogilvyrenault.com
Jennifer MacGregor-Greer 604-806-3835  jmacgregorgreer@ogilvyrenault.com
John E. Stark (604) 806-3841  jstark@ogilvyrenault.com
Catherine Elaine Wade (604) 806-3865  cwade@ogilvyrenault.com

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