Venture Capitalists and Founders Beware: CBCA Mandates Public Disclosure of Significant Control
The move by the federal and provincial governments (excluding Alberta) towards requiring shareholder transparency registers identifying individuals with significant control (“ISC”) has gone a major – and perhaps alarming – step further with the November 2, 2023, passing of Bill C-42, amending, among other statutes, the Canada Business Corporations Act (“CBCA”).
As of January 22, 2024, not only will private companies (and the non-wholly owned subsidiaries of public companies) incorporated under the CBCA be required to file with Corporations Canada their ISC registers (together with their annual returns), but certain personal information included in the ISC registers will also be made publicly available.
Unfortunately, the amendments have been implemented with limited consideration to the complexities in creating and importantly maintaining such a register, and with potentially severe financial penalties for directors, officers and shareholders for non-compliance.
ISCs are those who, generally speaking, hold 25% or more of a CBCA company’s equity or value, directly or indirectly, individually or jointly or in concert, or who have control in fact over the company (e.g., an ability to affect its economics, operations or management), or a combination of these factors. Importantly, the chain of investigation for identification does not stop at the entity level but rather requires drilling down to the ultimate controlling interest.
The ISC information of CBCA companies will need to be filed with their respective annual returns and within 15 days of any changes to the ISC register (among other filing triggers). In addition, certain information from these ISC registers and their respective updates will be publicly accessible on the Corporations Canada website.
For each ISC, the following information will be made publicly available:
- address for service (if provided);
- residential address (if no address for service provided);
- day on which each individual became or ceased to be an individual with significant control; and
- a description of how each individual is an ISC, including, as applicable, a description of their interests and rights in respect of shares of the corporation.
What Does It All Mean?
For venture capital, private equity, family office and other high-net-worth investors who, for a variety of reasons and concerns, do not want this information to be shared publicly, the implications may be concerning, particularly as many may not hold substantial shares, but have “control in fact” positions. Information which before now had been kept private and confidential by a CBCA company will now be made publicly accessible. If the ISC filing register is not co-ordinated carefully with the company, personal residential addresses of ISCs could be listed for all to see, in addition to the details of ISCs’ control. Also, failure to provide accurate and timely information on request from a company to permit its preparation of the ISC register could lead to substantial fines (up to $1 million) or even a prison term up to five years.
For private CBCA companies, these changes may seem less of a concern as, among other things, details regarding directors and officers are already included in public corporate registers, and so adding more colour to the public filing may not be as problematic. However, these same companies, or those to be incorporated or continued under the CBCA, should consider whether a federal incorporation outweighs the potentially negative effects this legislation may impart on private capital providers.
Furthermore, directors and officers of CBCA companies should be acutely aware that their authorization, permission or acquiescence of or to the failure of a CBCA corporation to prepare the required ISC register, or to the filing of the required ISC information, could make them subject to the same penalties described above.
What Can You Do?
The transparency requirements of the CBCA enacted in the last few years is not a new or unique phenomenon. Most Organisation for Economic Co-operation and Development (OECD) countries have or are adopting similar requirements. Quebec has already adopted similar legislation that applies to companies incorporated or extra-provincially registered there. Over time, this trend is likely to take hold across most provinces, eventually leading to the adoption of public disclosure legislation similar to the CBCA.
For venture capitalists, family offices and other high-net-worth investors, limiting investments below the triggering thresholds would, in many cases, allow them to remain outside of the ISC register. However, that is not always possible nor optimal. Creative capital and structuring elements and techniques, or migrating the investee company to a provincial jurisdiction, may be required. The amendments do include limited public disclosure exemption opportunities, but ISCs should expect that exceptions granted will be based on unique circumstances.
Most CBCA companies are closely held, so creating and maintaining the ISC register should not be overly burdensome. However, for complex corporate structures, maintaining an up-to-date register and filing the required information that appropriately tracks and identifies ISCs can potentially be very difficult, costly and represent a new and significant administrative burden. In order to minimize this burden and avoid potential liability from unintentional non-compliance, all CBCA company boards and management should be informed and aware of the ISC reporting requirements, and develop and maintain a consistent approach for keeping up to date with their ISC register requirements and filings.
Aird & Berlis LLP supports many companies and investors in navigating ISC registers and compliance. For assistance, please reach out to the authors, your Aird & Berlis lawyer or any member of the Corporate/Commercial and Capital Markets teams.