Will amendments to the Canada Business Corporations Act affect share pledges?

29 April 2019

Bill C-86, an act that implements certain budgetary measures from the 2018 budget, received Royal Assent on December 13, 2018.

The act included amendments to multiple pieces of legislation including the Canada Business Corporations Act ("CBCA"). These amendments will come into force on June 13, 2019.

The CBCA amendments in the act introduced the requirement to record individuals (a natural person) who have significant control over a corporation. Individuals having "significant control" over a corporation include, by way of these amendments, an individual who has "direct or indirect control or direction" over interests or rights pertaining to a significant number of shares of a corporation or who has "direct or indirect influence that, if exercised, would result in control in fact of the corporation". A "significant number of shares" is defined as those shares having 25% or more of the voting rights or fair market value.

Corporations must maintain a register containing certain personal information of Individuals with significant control. Such information shall include name, dates of birth, latest known address, jurisdiction of residence for tax purposes, the day on which significant control was obtained or ceased and the individual's interests and rights in the Corporation's shares. Corporations shall take steps to update such information at least annually and update it within 15 days of becoming aware of any relevant information. Records shall be expunged six years after significant control ceases (subject to other legislation). Reporting and listed issuers are exempt. The register is accessible by shareholders and creditors.

It is not unusual for share pledges to contain language controlling the rights to vote shares. Such language might including the following:

Prior to an event of default a pledgor will have the exclusive voting power with respect to any shares of capital stock (including any of the pledged shares) constituting collateral, and the secured party will promptly deliver all proxies and other documents, if any, to allow the pledgor to exercise that voting power. No vote will be cast, and no consent, waiver, or ratification given, or action taken, by the pledgor that would impair the collateral or be inconsistent with or violate the provisions of any agreement, instrument, contract or document (including this agreement) made between the pledgor and the secured party or in favour of the secured party.

Other more lengthy clauses on voting of shares are sometimes included in share pledges and related documentation. It seems reasonably possible to suggest that if 25% or more of the shares of a corporation are (a) pledged in favour of an individual creditor or perhaps even if an individual controls the creditor; and (b) the documentation includes restrictions on voting such as the example given above, this would be interpreted as having created an individual who has indirect control over a significant number of shares and would therefore be subject to the corporate registration requirement. While failure to do so would not negate the pledge, it would be subject to the penalties included in the CBCA against the corporation, which are set at fines of up to $5,000 and jail time of not more than six months. Directors or officers who knowingly contravene the requirements or who knowingly allow the recording of fake or misleading information are subject to a fine of up to $200,000 and imprisonment of not more than six months. The same penalties apply to shareholders.

Of additional note is the right of creditors to search the beneficial ownership register. However the amendments do not seem to allow an intended creditor to search the register as part of its due diligence prior to becoming a creditor of the corporation. On a plain reading only existing creditors may have that right and may only do so on delivery of an affidavit stating that the request is for influencing voting, acquiring securities or "any other matter relating to the affairs of the corporation". Perhaps as part of due diligence intended creditors may request access to the beneficial ownership register and the register could be voluntarily provided by the corporation. Creditors might also be able to use the register for know-your-client/anti-money-laudering diligence.

British Columbia has introduced similar provincial legislation (Bill 24, Business Corporations Amendment Act, 2019 which currently stands at first reading) for its provincial companies. The British Columbia legislation is very similar to the federal legislation, though some rules around access to the register are different. Legislators across the provinces are expected to follow suit.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.