Business Corporations Act (Bill 63) — A major reform of Québec corporate law
November 6, 2009
Bill 63, Business Corporations Act ("Bill 63"), which was introduced in the Québec National Assembly on October 7, 2009, constitutes a substantial reform and modernization of the Québec Companies Act (the "QCA"). The QCA currently governs Québec-incorporated companies and has not been significantly revised since 1981. Bill 63 is similar in content to most modern corporate statutes, such as the Canada Business Corporations Act (the "CBCA"), but does contain a number of enhancements, clarifications and innovations which, in the aggregate and together with some features of the QCA that have been retained, should make Bill 63 an appealing corporate statute and Québec an attractive jurisdiction for Canadian, and certainly Québec-based companies.
Bill 63 contains close to 500 sections relating to corporate law. In this Legal Update we highlight the differences that we have identified between the provisions of Bill 63 and those of either the QCA or the CBCA, or both, that we believe are of interest, in respect of:
- what Bill 63 does not contain;
- capital structure/corporate finance;
- shareholder rights and protections;
- governance; and
- corporate procedures.
What Bill 63 Does Not Contain
- No residency requirement for directors (although the company’s head office must be located in the Province of Québec).
- No proxy solicitation rules.1
- No provisions prohibiting loans, guarantees or other forms of financial assistance.
- No "balance sheet" test2 to be met for, inter alia, the payment of dividends, reduction of capital and purchase or redemption of shares.3
Capital Structure/Corporate Finance
Bill 63, in retaining certain provisions of the QCA while adding certain new features, will provide for flexible capital structures:
- Shares may be issued with or without par value, and shares may be issued that are not fully paid.
- Shares may be issued that are uncertificated.4
- Fractional shares may be issued that carry proportionate rights.
- Temporary "corporate incest" is permitted: subsidiaries will be able to hold shares of their parent for a period not exceeding 30 days.5
- Separate classes or series of shares may have identical rights and restrictions.6
- The paid-up capital account may be credited, in certain circumstances, with less than the full value of the consideration received on the issue of shares, and less than the full value of the shares issued on payment of a stock dividend.
- The issue of shares in excess of a corporation’s authorized share capital or otherwise in a manner inconsistent with the corporation’s articles may be regularized by unanimous resolution of the shareholders.
Shareholders Rights and Protections
Bill 63 contains an array of shareholder rights and protections typically found in modern corporate statutes — dissent rights, derivative actions, oppression remedy,7 right to requisition shareholder meetings, shareholder proposals, right to examine corporate records and financial statements, etc. — but with certain enhancements and clarifications. It also contains some new rights of interest:
- Companies that are not reporting issuers must notify shareholders of the details of any share buy-back.
- The dissent right provides a specific mechanism for beneficial shareholders to exercise this right.
- Bill 63 clarifies that a meeting requisitioned by shareholders may only transact business that is within the powers of the shareholders.8
- As in the CBCA, beneficial shareholders of reporting issuers or corporations with 50 or more shareholders will be able to submit proposals to be included on the agenda at the next annual shareholder meeting; also as in the CBCA, a shareholder proposal may include nominations for the election of directors if the proposal is signed by shareholders of not less than 5% of a class of voting shares. No such rights exist in the present QCA.
- The chair at a shareholder meeting must allow shareholders "a reasonable period of time" to discuss relevant matters.
- Shareholders and proxyholders have the right to inspect ballots and proxies used at a shareholder meeting.9
- Shareholders have a class vote in the case of any special resolution that "favours certain shareholders of a class" of shares or "changes prejudicially the rights attaching to all the shares of a class" except, inter alia, in circumstances where the rights attaching to all shares are changed "prejudicially in the same way".10
- Shareholders must approve by special resolution any sale, lease or exchange of property representing a "significant part of its business activity"; an exception is provided for dispositions to wholly-owned subsidiaries;11 a disposition of assets that represents 75% or less of the value of the corporation’s assets or pre-tax revenue is deemed not to constitute a "significant part" of a corporation’s business activities.12 A corporation also "must prevent"13 its subsidiary from disposing of property that would constitute a significant part of the corporation’s business activities unless, inter alia, authorized by the corporation’s shareholders.14
- Directors have a duty of loyalty (i.e., to act with "honesty and loyalty and in the interest of the corporation") and a duty of care owed, in both cases, to the corporation.15
- Bill 63 provides directors with a due diligence defence pursuant to which directors are expressly permitted to rely on the report or opinion not only of professional advisors or experts (as is the case in the CBCA and in the present QCA), but also on an officer of the corporation that is "reliable and competent" and a board committee that "merits confidence".
- Bill 63 clarifies16 that boards of directors may generally delegate their powers, but not, inter alia, to authorize the issue of shares or to appoint, and determine the remuneration of, the president of the corporation, the chair of the board, the CEO, the CFO and the COO.17
- Bill 63 contains an extensive disclosure regime for the disclosure of a director’s or officer’s interest in a contract or transaction with the corporation;18 it clarifies that, in circumstances where an interested director may not vote on the matter, such director will also not be able to be present during the relevant board deliberations.
- A corporation must indemnify directors and officers against all costs, charges and expenses reasonably incurred in the exercise of their functions, and advance costs, provided the director or officer has acted in the interest of the corporation; Bill 63 expressly provides, as is in the CBCA but not in the present QCA, that a corporation may purchase and maintain D&O insurance for the benefit of its directors and officers.
- If the articles so provide, the directors may appoint, mid-term, additional directors not to exceed in number one-third of the directors elected at the previous annual shareholders meeting.
- A unanimous shareholder agreement can withdraw all the powers from the board of directors; unlike under the CBCA, the shareholders may choose to dispense with a board of directors.
- Bill 63 clarifies that the majority required to have quorum at a board meeting is a majority of the directors "in office".
- The chair of a meeting of shareholders is entitled to a casting vote, unless the by-laws provide otherwise.
- Shareholder meetings may be held outside of Québec if the articles so allow.19
- A written resolution signed by all shareholders entitled to vote on the resolution is valid as if it had been passed at a shareholders meeting, without exception (as is presently the case in the QCA, but not in the CBCA where certain resolutions, such as a resolution to remove directors, may not be in writing).
Bill 63 contains the typical corporate procedures found in most modern corporate statutes, though formulated in some cases with modifications of interest:
- Plans of arrangement will no longer require a 75% shareholder vote to be approved, as is currently the case in the QCA; they will have the same flexibility as do such plans under the CBCA20 and, moreover, the certificate of arrangement may specify an effective "time"21 in addition to the date.22
- The statutory right of compulsory acquisition is available to offers who acquire not less than 90% of outstanding shares, other than shares held by the offeror or affiliates and associates, pursuant to a take-over bid. A "compelled acquisition" in favour of shareholders in such circumstances is, however, not provided.
- In the case of amalgamations, no director or officer declaration regarding the solvency of the amalgamating and amalgamated corporations, and certain creditor matters, is required; however, director liability will be triggered if the amalgamated corporation cannot pay its debts as they become due. The certificate of amalgamation may specify an effective "time", in addition to date.
- So-called "squeeze-out" transactions,23 whereby the shares of a shareholder may be cancelled without substitution of shares carrying equivalent or greater rights, are provided for in Bill 63; in the case of corporations that are not reporting issuers,24 such transactions must be approved by ordinary resolution of the "shareholders concerned", whether or not their shares carry voting rights, but not including certain interested shareholders.
- The articles of a corporation may be amended by special resolution of shareholders, and such resolution may specifically permit the board not to proceed with the amendment notwithstanding its approval. The certificate of amendment may specify an effective "time", in addition to date. Stock splits and stock consolidations, unlike under the CBCA, are not considered to be amendments to the articles and therefore may be authorized by the directors alone, without shareholder approval (except, in the case of a consolidation, if it would result in a shareholder holding less than one share).25
- Corporations may be dissolved, inter alia, by consent of the shareholders by special resolution, in which case a declaration of dissolution is required stating that the "board of directors […] has otherwise provided for" the corporation’s obligations.26
- As in the CBCA, but not currently permitted under the QCA, corporations incorporated under the laws of another jurisdiction may be "continued" under Bill 63 and vice versa.
McCarthy Tétrault Notes
In short, Bill 63 modernizes the present QCA while retaining some of its unique features. It also provides for the array of shareholder rights and protections found in most modern corporate statutes, while adding certain enhancements, clarifications and innovations which should make Bill 63 an appealing corporate statute and Québec an attractive jurisdiction for Canadian, and certainly Québec-based, companies.
The transitional provisions of Bill 63 provide that all companies governed by Part IA of the QCA will automatically be governed by Bill 63 once it comes into force. It is not anticipated that Bill 63 will be proclaimed in force before the end of 2011.
We will be pleased to assist McCarthy Tétrault clients and existing Québec companies with the mandatory aspects of the transition on an ongoing basis and present seminars to explain the new opportunities that Bill 63 offers. In particular, we will be pleased to assist in reviewing corporate by-laws and pointing out where it would be useful or appropriate to modify them.
1 Reporting issuers will, of course, be subject to the proxy solicitation rules under applicable securities law. Furthermore, Bill 63 does contain certain rules relating to proxies. For example, a proxy may be revoked at any time, and lapses one year after it is given, unless otherwise stated; a proxyholder who has conflicting instructions may not vote by a show of hands, there being no exception similar to that found in the CBCA where less than 5% of the votes will be cast against the resolution.
2 Requiring that the "realization value" of the corporation’s assets not be less than its liabilities and, depending on the circumstances, certain stated capital accounts.
3 However, the "solvency" test (i.e., ability to pay liabilities when due) remains and, in the case of the repurchase or redemption of shares, there is also the requirement that the payment shall not make the corporation unable, in the event of liquidation, to repay higher or equally ranking shares.
4 i.e, "direct registrations systems" are explicitly contemplated under Bill 63.
5 This, along with the fact that certificates of amendment, amalgamation and arrangement may specify an effective "time" (see below under "Corporate Procedures"), will facilitate internal corporate reorganizations, whether to simplify corporate structures or for tax planning purposes, that often require a subsidiary to hold shares of a parent at least momentarily.
6 i.e., "discretionary dividends" may be paid to different shareholders without requiring such shareholders to hold shares of different classes which differ artificially in their rights and restrictions.
7 In Bill 63, called the "rectification of abuse of power or inequity".
8 It remains to be seen how this provision will be interpreted where the business in question, even if it would otherwise not be within the "powers of the shareholders", is formulated by the requisitioning shareholder as an amendment to the by-laws.
9 Corporations must keep at their head office such ballots and proxies for at least three months.
10 This is a much more general, "principle-based" rule than the more detailed, analogous rule in the CBCA.
11 i.e., roll-downs of divisions to wholly-owned subsidiary will not trigger a shareholder approval requirement.
12 This would seem to codify the Québec Court of Appeal’s decision in Cogeco Cable v. CFCF, which set a "bright line" quantitative test at 75%. Since Bill 63 "deems" (i.e., an irrebuttable presumption) that a sale representing less than 75% of assets or revenues is not a "significant part of a business activity", it would appear that, in such case, there should be no need to conduct an additional "qualitative" analysis.
13 presumably, as shareholder of the subsidiary, by voting against the disposition.
14 This provision may be problematic, particularly where both the corporation and its subsidiary are public companies since, in such case, the ability of the subsidiary to proceed with a disposition that its board and shareholders have authorized will be subject to, and dependent on, the vote of the parent’s shareholders. Hopefully this provision will be discarded or at least refined before Bill 63 is proclaimed into force.
15 The Supreme Court of Canada in Peoples Department Stores v. Wise interpreted the duty of care, under the CBCA, to be owed generally and not just to the corporation.
16 It is unclear under the present QCA that boards may delegate to committees other than "administrative" matters.
17 i.e., compensation committees will be able to recommend to the board, but not determine, the CEO’s compensation.
18 which include, under Bill 63, "proposed" contracts and transactions. The Bill also defines "interest" as "any financial stake […] that may reasonably be considered likely to influence decision-making".
19 Currently, public companies incorporated under the QCA may hold their shareholder meetings only in Québec.
20 Certain authors have claimed (incorrectly, we believe) that, based on the wording of the arrangement sections in the QCA, amalgamations, for example, cannot be effected within an arrangement.
21 Under Bill 63, a court may make an interim order to, inter alia, protect the rights of "interested persons". This would be consistent with, but arguably goes beyond, the recent decision of the Supreme Court of Canada in Debentureholders v. BCE to the effect that, in special circumstances, an arrangement must consider not only security holders whose legal rights are altered or affected by the arrangement, but those whose economic interests may be prejudiced.
22 Bill 63, as in the CBCA but not in the QCA, also provides for the reorganization of insolvent corporations that have filed for protection under the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada).
23 As defined in Bill 63, such transactions need not involve an amendment to the corporation’s articles.
24 Reporting issuers, of course, will generally be subject to Multinational Instrument 61-101 in such circumstances.
25 i.e., declaring a stock dividend, with the related tax issues, will not be necessary to effect a stock split where it would be inconvenient to wait for the next annual shareholder meeting (or convene a special meeting) to do so.
26 This is similar to the present QCA, but differs from the CBCA in putting a direct onus on the board and in clarifying that the corporation’s liabilities need only be "provided for" and not "discharged".