By Michael
Volker
New
Corporations Act Explained
This
month's column is mainly about the legal and regulatory environment in which
B.C. companies operate. We'll shed some light on the major changes relating to
two Acts: the Securities Act and the
new Business Corporations Act. With
the increased emphasis on proper corporate governance, I believe that it is
necessary for company directors and executives to be familiar with these
changes.
Building
a technology business in British Columbia has never been better - at least with
respect to rules and regulations. There have been two noteworthy developments:
first, the securities regulations respecting the raising of equity capital have
been entirely revamped. This makes it easier for growing companies to access
investors' capital. Second, the new Business
Corporations Act, will soon replace the outdated B.C.
Company Act (BCCA) providing the first major legislative updates in over
three decades.
Growing
technology ventures often opt to incorporate federally under the Canada
Business Corporations Act (CBCA), rather than incorporate under the B.C.
Company Act (BCCA) because of various restrictions in the BCCA.
To
help us better understand the new corporate regime, I posed a number of
questions to Herb Ono, a partner
with the Corporate Finance/Securities Department at the Vancouver law firm of Clark,
Wilson.
Herb,
let's start with some basics. First of all, the changes that are being made
pertain mainly to two Acts - the Business Corporations Act (to replace the B.C.
Company Act) and the overhauled Securities Act, correct?
Herb:Correct.
The new Business Corporations Act will introduce a number of modern
corporate reforms. It was
originally expected to come into force in November, 2003, but its implementation
has been delayed until some time early next year.
The
Securities Act has not yet been “overhauled” in the same sense - the
replacement of the Securities Act with new legislation is not as imminent as the
replacement of the Company Act by the Business Corporations Act.
But the British Columbia Securities Commission has used its rule-making
power to help facilitate capital-raising in this Province.
For
the past year and a half, the British Columbia Securities Commission has also
been leading a charge towards a more streamlined, principles-based approach to
regulation (with fewer detailed regulatory requirements), which is now embodied
in a recently released draft Securities Act and Rules.
The changes, if implemented, will be so far-reaching that this initiative
is referred to as the “BC Model”. The
protection of investors and market integrity remain as key objectives of the
draft legislation, but in a manner that seeks to minimize the regulatory burden
on market participants. The
Commission is seeking comments on the draft Securities Act and Rules before
making final recommendations to the British Columbia government at the end of
2003.
I
am pleased that one of my partners, Bernard Pinsky, is assisting the
Commission in this process, as a member of the Securities Law Advisory
Committee. Like myself, Bernard is
also a member of the California Bar, and brings a unique cross-border
perspective to securities law and practice.
The
BC Model has not been embraced by all Canadian securities regulators, some of
whom - most notably David Brown, Chair of the Ontario Securities Commission -
have raised concerns that the BC Model may be too lax.
I personally think that the BC Model makes a lot of sense in this day and
age.
Mike:
In general, why are these changes so important to companies, especially to
growing technology ventures?
Herb:
It
may sound a little clichéd, but we live in a global economy.
Technology ventures, in particular, tend to look beyond our borders not
only for their customers, but also for their human resources and capital.
Competition for these resources is fierce not only locally, but also
internationally. Outdated
legislation or over-regulation can seriously hinder a company’s ability to
compete with competitors subject to a more flexible regulatory regime.
By the same token, modern legislation and a balanced approach to
regulation can in many instances help to level the playing field.
(Note in this context that more flexible legislation and regulatory
policies do not necessarily translate to a more lax regulatory environment – a
point that Doug Hyndman, Chair of the British Columbia Securities
Commission, has made much more eloquently.)
It
may be helpful to illustrate this with an example:
Let’s
suppose the majority of a company’s important customers are located in the
United States, and it makes sense to appoint two well-respected U.S. residents
with specific industry-related experience to fill two vacancies on the
three-person board. But there’s a
problem: The existing B.C. Company
Act requires that the majority of the directors be persons ordinarily resident
in Canada, and that at least one director be ordinarily resident in British
Columbia.
This
scenario is not uncommon. I have
acted for several public companies which have continued under the laws of a
jurisdiction whose corporate laws do not have residency requirements for
corporate directors (e.g. Yukon Territory).
The
new B.C. Business Corporations Act will not have any residency requirements for
directors, which will undoubtedly be good news to many local technology
companies with business interests overseas.
Securities
legislation can also prove to be a significant obstacle to raising financing.
As a general rule, a person must not distribute a security unless the
distribution has been qualified by a prospectus,
or unless an exemption from the prospectus
requirement is available. The B.C.
prospectus requirements (and related registration requirements) will apply
clearly if a company issues shares or other securities (such as debentures) to
any B.C. residents. It is less well
known that, under existing regulatory policies, these requirements can also
apply to distributions of securities to persons resident outside of British
Columbia, and even if the issuer of the securities has been formed outside
British Columbia, if the issuer’s “mind and management” is located in
British Columbia.
For
example, let’s suppose that a closely-held
technology company is incorporated under the laws of Mauritius, but that
the majority of its board of directors and all of its senior officers reside and
are headquartered in Kelowna, British Columbia.
The company wishes to raise capital by effecting a private placement to
two residents of the State of California. The
transaction would have to comply with the corporate – and possibly the
securities – laws of Mauritius, the securities laws of British Columbia, the
federal securities laws of the United States and the “blue-sky” laws of
California. It will be seen that
overly restrictive securities laws in any one of these jurisdictions could
seriously impair the company’s ability to access much-needed
capital. Worse still,
assuming that the private placement could be effected under US law but not under
BC law, a competitor of the company that is wholly based in the United States
would be able to proceed with a private placement to the same investors!
Mike:
So, will the new Corporations Act entirely replace the old B.C. Company Act?
Herb:
Once
the new BC Business Corporations Act is proclaimed in force, it will repeal the
existing B.C. Company Act, and every company then existing under the Company Act
– referred to in the new Act as “pre-existing companies” - would
immediately become subject to the
BC Business Corporations Act. There
will be a two-year transitional period during which every pre-existing company
would have to take certain steps to bring themselves into compliance with the
new Act. However, every
pre-existing company should be planning for this transition now, and closely
reviewing their articles against the new requirements.
The BC Business Corporations Act prescribes certain mandatory provisions
for inclusion in corporate articles, as well as many optional ones, so the
review process can potentially take significant time and
attention on the part of management and the company’s professional
advisers. Any company that does not
bring itself into compliance with the Business Corporations Act within the
two-year transitional period will risk being
dissolved by the Registrar of Companies.
Is
the new Corporations Act more like the CBCA? In what ways is it different (or
better) than the CBCA?
Herb:
The
Canada Business Corporations Act is based in large part on a US statutory model
of incorporation, and is premised on a statutory division of powers between
directors, officers and shareholders. The
existing BC Company Act and the new BC Business Corporations Act are based on a
so-called “contractarian” model rooted in English company law, where the
corporate constitution is essentially a contract among the Company and each of
the shareholders. Corporate theory
aside, from the point of view of day to day operations, this difference is
transparent.
It
is fair to say that the CBCA is a more modern form of corporate statute that our
existing Company Act. However, the
choice of which statute to incorporate under has traditionally been
business-driven. For example, a
CBCA corporation can use its name anywhere in Canada, subject to compliance with
applicable extra-provincial registration requirements of provincial statutes.
Thus, many corporations intending to carry on business in two or more
provinces (including Canadian subsidiaries of large multi-national concerns)
have been formed under the CBCA.
Apart
from the advantage that federal
incorporation affords to a company seeking to use its name in more than one
jurisdiction in Canada, the new BC Business Corporations Act appears at first
sight to remove many of the relative disadvantages that incorporation under the
BC Company Act would give rise to, as opposed to incorporation under the CBCA.
For
example, the pre-emptive rights contained in the existing BC Company Act, which
requires the directors of a company that is not a reporting company to first
offer any allotment of shares to the existing shareholders of the company on a
pro rata basis, have from time to time proved troublesome for private BC
companies seeking to raise financing or complete
other types of commercial transactions where share consideration is
involved. Neither the CBCA nor the
BC Business Corporations Act provides for such rights (except with respect to
pre-existing corporations in the case of the BC Business Corporations Act).
Mike:
Herb, let me interrupt here and ask what is meant by reporting company and
reporting issuer - terms often heard.
Herb:
The concept of "reporting issuer" is essentially a securities law
concept; the Company Act contains a definition of "reporting company".
The securities concept is broader because it applies to a broader range of
entities than merely companies - e.g. limited partnerships, unit trusts, etc.
I
should note that the CBCA was significantly amended in November 2001.
The result of these amendments was to make the CBCA a truly modern
corporate statute. For example, the
somewhat troublesome financial assistance provision formerly contained in
section 44 of the CBCA was repealed, and electronic communications between
corporations and their shareholders were clearly made permissible .
As
an aside, prior to the November 2001 amendments, one major disincentive for
incorporating a closely-held corporation under the CBCA was the requirement for
any corporation whose consolidated gross revenues exceeded $10 million or whose
consolidated gross assets exceeded $5 million to prepare audited financial
statements, and to file them with the director appointed under the CBCA.
Such financial statements would be available for inspection by the public
– including the corporation’s employees and competitors.
This requirement has been repealed under the CBCA.
(There is no equivalent provision in the BC Company Act or in the BC
Business Corporations Act.)
When
the CBCA was amended, the residency requirements for directors was relaxed.
In place of the old requirement that not less than a majority of the
directors be resident in Canada, and subject to some limited exceptions, the
CBCA now requires that not less than 25% of the directors be resident in Canada.
As discussed above, the BC Business Corporations Act offers more
flexibility in this regard, as it does not impose any residency requirements at
all on directors.
In
summary, both the CBCA and the new BC Business Corporations Act should
prove to be very good platforms for modern businesses.
Given the recent reforms at both the federal and provincial levels, it
may well be that the choice between incorporation under the CBCA or the BC
Business Corporations Act will essentially be driven by where the company will
be carrying on business. Since a
CBCA corporation will have to become extra-provincially registered in BC if it
wishes to carry on business here, it may well make sense for a truly local
business to incorporate under the BC Business Corporations Act.
Mike:
Let's look at some of the major changes under the new Act. Starting with
Governance, what does it mean for us? (e.g. directorship requirements,
shareholders, etc)?
Herb:
As
I indicated earlier, one of the most significant changes has been the removal of
the residency requirements for directors. This
should provide greater flexibility to companies seeking directors with specific
skill-sets or industry experience.
The
Company Act requires that a company have a president and a secretary - who,
except in a company with only one member, must be different persons – and that
the president also be a director. These
requirements have not been carried over to the Business Corporations Act, which
simply provides that subject to the memorandum (of a pre-existing company) and
articles of the company: the directors may appoint officers and specify their
duties; any individual, including a director, may be appointed to any office;
and two or more offices of the company may be held by the same individual.
As is the case under the Company Act, a person who is not qualified to
act as a director of a BC company may not serve as an officer.
I
expect that there will be cases where a company would welcome the flexibility to
appoint a president or chief executive officer who is not a director.
For example, under the existing Company Act, a director would have to
resign in order to accommodate a new president if the company has no room left
to appoint any additional directors and it is desirable for the existing
president to remain on the board.
Under
the BC Business Corporations Act, it will be possible for the articles of a
company to restrict the powers of the directors to manage or supervise the
management of the company’s business and affairs, and to transfer the
restricted powers to one or more other persons.
This could be used, for example, to transfer the management of the
company to the shareholders. The
person or persons to whom the management powers are transferred will, however,
face all of the potential liabilities now faced by directors without necessarily
being covered by the company’s directors and officers insurance policy (if
any).
The
fiduciary obligations of directors and officers to act honestly and in good
faith with a view to the best interests of the company, and the standard of care
required of them, remain unchanged under the new Business Corporations Act.
However, the Business Corporations Act contains a much more developed set
of rules for dealing with conflicts of interest faced by directors and senior
officers.
The
requirement under the Company Act for court approval for indemnification by a
company of a director or officer, or of a former director or officer, has been
removed. Indemnification is not
possible in some circumstances, including the case where proceedings are brought
against the director or officer by or on behalf of the company or an associated
corporation – for example, a derivative action.
However, it will still be possible for the company, or the director or
officer, to apply for a court order directing the company to provide
indemnification.
Mike:
So,
could a company concoct a "creative" title such as Chief Yahoo instead
of CEO?
Herb:
You are correct that
under the new BC Business Corporations Act, a company could presumably pick
unconventional titles for its officers, but this will likely lead to
complications in the real world. Third parties, like banks providing loans and
suppliers, like to know who - in terms of the company's internal pecking order -
they are dealing with. Accordingly, I would recommend that companies pick titles
which conform generally to the officers' respective roles.
Mike:
What about Corporate Finance? (e.g. share structures - par value vs non-par
value, share capital, share pricing, etc.)
Herb:
Unlike the Company Act, the Business
Corporations Act will allow a company to have an unlimited number of authorized
shares. A company may also make
provision for separate classes and series of shares, as is the case under
the Company Act. It will also be
possible for the company to have shares with par value as well as shares without
par value. This flexibility should
help to facilitate certain financing and tax planning transactions.
Shares
will still have to be fully paid for before they are issued, either in cash,
property or past services; “property” does not include a note or other
evidence of indebtedness. However,
the prohibition contained in the Company Act against a company providing
financial assistance in connection with a purchase or subscription for shares or
convertible debt of the company has not been incorporated into the Business
Corporations Act. Subject to
certain exceptions, the company will be subject to certain disclosure
requirements if it provides material financial assistance to any person in
connection with the purchase of shares of the company or of an affiliate of the
company. (These disclosure
requirements will also apply if the company gives material financial assistance
to: (a) a shareholder (including a beneficial owner of shares), director,
officer or employee of the company or of an affiliate of the company; or (b)
their respective associates.)
As
I mentioned earlier, the pre-emptive rights (also commonly referred to as rights
of first refusal) currently found in section 41 of the Company Act have not been
carried over to the new Business Corporations Act, except in relation to
pre-existing companies that are not public companies.
This is a welcome change, since obtaining waivers of such pre-emptive
rights in advance of a private placement financing transaction can be a
time-consuming and cumbersome process.
Moreover, the restrictions on waivers contained in section 41 of the
Company Act can create traps for the unwary, which can prove very problematic
later on since issuing any shares without complying with section 41 has the
effect of invalidating the issuance of such shares.
There
is a similar right of first refusal in the Company Act which applies when a
company is proposing to repurchase or redeem some of its outstanding shares.
Subject to certain exceptions, the offer to purchase or the redemption
must be made proportionately to all of the shareholders of the same class or
series of shares. This provision
has not been carried over into the Business Corporations Act, except in relation
to pre-existing companies. This
should provide more flexibility to companies seeking to restructure.
Mike:
What about the Securities
Act? Does this overlap with the Company Act? There have been some very major
changes here, haven't there? What are some of these changes and how will they
benefit technology companies (e.g. in the raising of capital).
Herb:
As
I indicated earlier, the British Columbia Securities Commission has released for
comment a draft Securities Act and Rules which, if enacted, will introduce
significant reforms to securities regulation in this Province.
The draft legislation will form the cornerstone of the BC Model of
securities regulation, which will put greater emphasis on continuous disclosure
of material information by reporting issuers and regulation of secondary market
trading activity, as well as a more streamlined, “principles-based” approach
to regulation of market participants such as registered securities dealers and
advisers. There will be fewer
detailed requirements for market participants, but
they will be required to comply with a code of conduct with investor
protection as its focus.
The
envisioned changes will be
accompanied by increased enforcement powers for Commission staff.
In this regard, I should note that the duties of directors and officers
of companies (and their counterparts in other types of issuers) are contemplated
to be included in the securities legislation, with the result that breach of the
duties could be subject to enforcement action, in addition to being actionable
in a court action under parallel corporate legislation.
The
BC Model could form a topic unto itself, and will undoubtedly be subject to
further changes. Accordingly, I
propose to focus the rest of my discussion on recent changes to the capital
raising regime here in British Columbia:
Effective
April 4, 2002 and March 30, 2002, respectively, the British Columbia and Alberta
Securities Commissions adopted Multilateral Instrument 45-103 which
significantly changed the private placement regime in both provinces.
The changes are centered around four new and expanded exemptions from the
registration and prospectus requirements.
Private
Issuer Exemption
MI
45-103 provides for an enhanced private issuer exemption from the registration
and prospectus requirements. Previously,
in order to have qualified as a “private issuer,” an issuer had to meet
several conditions, including the requirement that it must not have distributed
any securities to the public. Given
the broad meaning ascribed to the word “public” by regulators and in the
case law, this effectively limited private issuers to a very narrow group of
potential investors, each of whom were generally required to have close “bonds
of association” with one or more principals of the issuer.
A
private issuer can now issue securities without a prospectus not only to those
with close bonds of association with a principal of the issuer, but also to
“accredited investors”. As I
will explain later, “accredited investors” can include a person who would be
a member of the “public”.
Family,
Friends and Business Associates Exemption
MI
45-103 provides for registration and prospectus exemptions in respect of a trade
in a security if the purchaser is: (a) a director, senior officer or control
person of the issuer, or of an affiliate of the issuer; (b) a spouse, parent,
grandparent, brother, sister or child of a director, senior officer or control
person of the issuer, or of an affiliate of the issuer; (c) a close personal
friend of a director, senior officer or control person of the issuer, or of an
affiliate of the issuer; (d) a close business associate of a director, senior
officer or control person of the issuer, or of an affiliate of the issuer, or
(e) a person or company that is wholly-owned by any combination of the foregoing
categories of persons or companies.
The
new family, friends and business associates exemption bears similarities certain
prospectus exemptions available formerly available in British Columbia, but
is far more expansive in that: (a) it is available not only to TSX
Venture Exchange issuers, but all issuers and their shareholders; (b) it applies
to trades to a greater class of qualifying purchasers; and (c) it is not subject
to limitations on the number of purchasers and aggregate purchase price.
Offering
Memorandum Exemption
MI
45-103 provides registration and prospectus exemptions with respect to a trade
by an issuer in a security if the
issuer delivers an offering memorandum to the purchaser and obtains a
straightforward risk acknowledgement from the purchaser in prescribed form.
In
Alberta, unlike British Columbia, the offering memorandum exemption is subject
to a cap on a single purchaser’s investment of
not more than $10,000 unless the purchaser qualifies as an “eligible
investor”. As defined in MI
45-103, an eligible investor will include a person or company who: (a) has net
assets, alone or with a spouse, in excess of $400,000, net income; (b) has net
income before taxes in excess of $75,000 in each of the two most recent years
and who expects to exceed that income level in the current year; (c) has net
income before taxes combined with a spouse in excess of $125,000 in each of the
two most recent years and who reasonably expects to exceed that income level in
the current year; or (d) has obtained advice regarding the suitability of the
investment from an investment dealer, securities dealer or their equivalent
registered under applicable Canadian securities legislation.
The
prescribed forms of offering memorandum are relatively simple disclosure
documents, compared to the previous form of offering memorandum prescribed under
the BC Rules. The offering
memorandum must contain a certificate that states, “This offering memorandum
does not contain a misrepresentation.” The
certificate must be signed not only by the issuer’s chief executive officer
and chief financial officer, but also on behalf of the directors of the issuer
by: (a) any two directors (other than any directors signing the certificate in
their respective capacities as CEO or CFO), or (b) all of the directors and each
of the promoters of the issuer.
In
contrast to the previous form of offering memorandum prescribed under the BC
Rules, there is a positive obligation on the issuer to give potential purchasers
an update to the offering memorandum if a material change occurs after initial
delivery of the offering memorandum and the closing of the offering.
The update must include a newly signed and dated certificate.
Each
purchaser now has the right, which must be described in the offering memorandum,
to cancel the purchase agreement by written notice to be delivered not later
than midnight on the second business day after the purchaser signs the
agreement. During this period, the
issuer must arrange for any subscription proceeds to be held in trust on behalf
of the purchaser. If the offering
memorandum contains a misrepresentation, the purchaser can sue the issuer as
well as any director of the issuer at the date of the offering memorandum and
any other person who signed the offering memorandum.
Assuming
that the issuer is prepared to bear the time and cost of preparing an offering
memorandum, it greatly increases the universe of potential investors in the
issuer. It should be borne
in mind, however, that an offering of securities must comply also with
the securities laws of the jurisdiction in which the purchaser of the securities
is resident, if he or she lives outside of British Columbia.
Many other jurisdictions – most notably Ontario – have much more
restrictive private placement rules than BC.
Accredited
Investor Exemption
In
similar fashion to Ontario Securities Commission Rule 45-501, MI 45-103 permits
an exempt distribution to "Accredited Investors", which includes:
certain financial institutions; governments; municipalities; high net worth or
high income individuals; a person or company registered under Canadian
securities legislation as an adviser or dealer (other than a limited market
dealer registered under the Securities Act (Ontario)); a regulated pension fund;
a registered charity; a company, limited partnership, limited liability
partnership, trust or estate other than a mutual fund or non-redeemable investment
fund, that had net assets of at least $5,000,000 as reflected in its most
recently prepared financial statements; certain types of mutual funds or
non-redeemable investment funds; and a person or company in respect of which all
of the legal and beneficial owners of direct and indirect interests are person
or companies that are accredited investors.
The
high net worth or high income individual accredited investor categories are
limited to:
a)an
individual who beneficially owns, or who together with a spouse beneficially
own, financial assets (i.e., cash, securities or any contract of insurance or
deposit or evidence thereof that is not a security) having an aggregate
realizable value that, before taxes but net of any related liabilities, exceeds
$1,000,000; or
b)an
individual whose net income before taxes exceed $200,000 in each of the two most
recent years or whose net income before taxes combined with that of a spouse
exceeded $300,000 in each of those years and who, in either case, has a
reasonable expectation of exceeding the same net income level in the current
year.
Certain
investors - particularly individuals - who would otherwise qualify for the
$97,000 private placement exemption under British Columbia and Alberta
securities legislation may not qualify as an “accredited investor”.
Accordingly, the BC Securities Commission has indicated that the $97,000
private placement exemption is being retained indefinitely.
Mike:
I'm involved with a number of startups at the moment. Most of these are confused
as to what they can or cannot do, i.e. do they go with the current rules or
start operating under the new rules? For example, one company is worried about
getting more than 50 shareholders. Why should they be concerned about this?
Herb:
Under
MI 45-103 - and under BC securities
legislation that preceded it - a “private issuer” must have not more than 50
shareholders (not including shareholders who are employees or former employees)
and its shares must be subject to restrictions on transfer.
More significantly, the issuer must not have distributed any securities
to the “public,” other than accredited investors.
Thus, even if a issuer has less than 50 shareholders, it (and its
shareholders) will cease to qualify for the private issuer exemption if it
issues any securities to a member of the public other than an accredited issuer.
Thereafter, all sales of the issuer’s securities will have to be
qualified by a prospectus or effected pursuant to other, more specific,
prospectus exemptions. Generally,
use of these prospectus exemptions will require filings with the Commission.
Mike:
Something that's not well understood is the matter of being a "reporting
issuer" vs being a "public company". Can you shed some light on
this? Have these definitions changed under the new rules?
Herb:
For
the purposes of the BC Securities Act, a “reporting issuer” can best be
understood as an issuer that has become subject to the continuous disclosure
requirements of BC securities legislation, generally by having had a prospectus
receipted by the Commission. The
insiders of a reporting issuer are also subject to various regulatory
requirements, including the requirement to file insider reports.
Reporting issuer status in British Columbia is a prerequisite for having
freely trading stock in British Columbia: The
rationale for this is to ensure that investors in the issuer’s publicly traded
securities will have ready access to publicly available financial and other
information about the company and its affairs, in order to permit them to make a
reasoned investment decision – i.e. the decision to buy or sell the
securities. Thus, all public
companies that are listed on the TSX Venture Exchange must be reporting issuers
under BC securities legislation (as well as in Alberta).
Securities
issued to a resident of British Columbia under
a prospectus exemption are subject to a hold period under Multilateral
Instrument 45-102 (which may be substantially
amended in the near future), as adopted by the BC Securities Commission.
If the issuer of the security is not a reporting issuer in any Canadian
jurisdiction, the hold period will be indefinite, and the security holder will
essentially have to find a prospectus exemption in order to trade the security.
On the other hand, the security will be subject to a 12-month hold period
(or if the issuer meets certain requirements for a “Qualifying Issuer,” a
four-month hold period), even if the issuer is not a reporting issuer in BC,
provided that the issuer:
·
is a reporting issuer in Alberta,
Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan;
·
has
been subject to continuous disclosure requirements in one of the foregoing
participating jurisdictions for at least 12 months (or, if a Qualifying Issuer,
for at least four months); and
·
files
its continuous disclosure filings electronically on the System for Electronic
Document Analysis and Retrieval (SEDAR) maintained by CDS Inc. on behalf of the
Canadian Securities Administrators.
A
public company is colloquially understood to mean any company whose securities
are publicly traded, wherever the market for those securities might be.
It will be seen that a company can be a public company without being a
reporting issuer in British Columbia. For
example, a public company whose shares trade on the New York Stock Exchange will
not necessarily be a reporting issuer in British Columbia or in any other
Canadian jurisdiction.
“Public
company” is specifically defined in the new Business Corporations Act to mean
a reporting issuer (as defined in the BC Securities Act), a “reporting issuer
equivalent” (that is, a corporation that is a reporting issuer or the
equivalent of a reporting issuer in any other Canadian jurisdiction), a company
that has registered its securities in the United States under the Securities
Exchange Act of 1934, or a company that has any of its securities traded on a
securities exchange or quotation system. The
definition is important for certain purposes
of the Business Corporations Act. For
example, consistent with the existing Company Act requirements for “reporting
companies,” a public company must have a minimum of three directors, and an
audit committee constituted by at least three directors (a majority of whom must
be not be officers or employees of the company or of an affiliate of the
company).
Mike:
Have there been any attempts
to move us into the electronic age? i.e. are there any changes pertaining to
electronic filings or reporting that we should be aware of?
Herb:
Since
1997, reporting issuers in Canada have been required to file their continuous
disclosure filings - such as annual and quarterly financial statements, material
change reports, and proxy solicitation materials – electronically via the
SEDAR system, which is the conceptual equivalent of the US Securities and
Exchange Commission’s EDGAR system. Since
June of this year, insiders of reporting issuers have been required to file
their insider reports electronically via the System for Electronic Disclosure by
Insiders (SEDI).
The
changes to the resale regime introduced under MI 45-102, discussed earlier,
represent a clear acknowledgement by the Canadian of the wide accessibility of
electronic regulatory filings: The
fact that an issuer is not a reporting issuer in the jurisdiction of residence
of a selling securityholder is no longer a bar to the aging of an applicable
hold period, so long as the issuer is a reporting issuer in another qualifying
Canadian jurisdiction and a SEDAR filer, since it was recognized that a
potential purchaser of those securities could instantly
access a reporting issuer’s electronic
regulatory filings.
The
Canadian Securities Administrators have also published National Instrument
11-201, wherein they prescribe certain procedures for electronic delivery of
documents – for example, proxy solicitation materials -
that would satisfy certain delivery requirements contained in securities
legislation. However, the BC
Company Act generally requires that management of a company with more than 15
shareholders send an information circular to the shareholders by prepaid mail,
in connection with a proxy solicitation.
The
CBCA also requires a management information circular to be furnished to
shareholders in connection with a proxy solicitation, unless the corporation is
not a “distributing” (i.e., a public) corporation and has 50 shareholders or
less. However, when the CBCA
was amended in November 2001, provision was made for electronic delivery
of documents, with the shareholder’s
consent. The new Business
Corporations Act goes one better by not speaking to proxy solicitation, leaving
this to be covered by securities legislation.
Accordingly, it should be possible for many public companies to save
printing costs in connection with shareholder meetings.
Both
the CBCA and the Business Corporations Act also permit both director and
shareholder meetings to be held electronically or telephonically.
Finally,
the Registrar of Companies is ramping up a new electronic filing system to be
known as Corporate Online, and many filings under the Business Corporations Act
will be required to be filed on Corporate Online.
Mike:
Similarly,
do the changes provide the public with any better access to corporate
information - especially pertaining to non-reporting companies? On the other
hand, I also understand that reporting companies no longer need to disclose who
their investors are (when doing financings) - is this indeed, true?
Herb:
I
understand that the electronic Corporate Online service will be publicly
accessible, which should improve the transparency of corporate filings.
However, some significant documents, such as corporate articles and
documentation with respect to amalgamations and corporate alterations, will no
longer be required to be filed; in their place, companies will be required to
file one or two-page notices.
Like
the Company Act, the Business Corporations Act prescribes certain corporate
records to be kept at its records office, including the company’s articles,
and provides for public access to some of those records.
Like the Company Act, the Business Corporations Act provides that minutes
of directors’ meetings and directors’ consent resolutions, and proceedings
of committees of directors, are available for inspection only by directors and,
in certain circumstances, former directors. If the corporation is not a public
company, a broader range of records are protected from public access, including
minutes and consent resolutions of the shareholders and financial statements.
Based
on a preliminary review of the provisions of the Business Corporations Act,
apart from electronic accessibility to a broader range of corporate filings via
Corporate Online, I don’t believe that the public will be afforded markedly
better access to the corporate records of a non-public company than was the case
under the Company Act.
Both
reporting and non-reporting issuers are generally
required to file reports of exempt distribution in connection with
private placements. The notable
exception is private placements effected under the private issuer exemption.
The report of exempt distribution is filed with the Commission on Form
45-103F4, the schedule to which still requires disclosure of each investor’s
name and residential address. However,
the schedule does not form part of the public record of the company maintained
by the Commission, and should therefore be protected from public scrutiny.
Mike:
Well, Herb, I want to thank
you for your detailed comments on this subject. I'm hopeful that all these
changes will, on balance, be good for tech companies and your answers would
indicate this to be the case. On the negative side, though, it looks like all
companies will have to go through a transition stage that will cost them some
time and expense and knowing some of the details as you've explained may
mitigate that pain somewhat.
Herb
Ono is a partner with Clark,
Wilson’s Corporate Finance/Securities Law Group (website: www.cwilson.com).
The Group assists companies listed on Canadian and U.S. stock exchanges
and over-the-counter trading markets, including NASDAQ, Amex, TSX and the OTC
Bulletin Board. With lawyers
qualified to practice in various Canadian and United States jurisdictions, the
Group has experience in Canadian, U.S. and cross-border transactions; U.S. and
Canadian regulatory filing and SEC registrations; reverse takeovers; and mergers
and acquisitions. If you have any
questions about this article or any securities matter, please feel free to
contact Herb at 604.643.3140; email: hio@cwilson.com.
VEF
UPDATE
The
Vancouver Enterprise Forum is
back in action this Fall - starting Tues Sept 30th, with its early stage
financing forum. Two seasoned
technology entrepreneurs and financiers, Michael Brown and Glenn
Ballman, will talk frankly about how to finance and build an
early-stage technology venture. In the sound-bytes portion of the evening,
you'll hear Basil Peters and yours truly espouse the virtues of their new early
stage funds - the BC Advantage Fund and the WUTIF Fund.
A
complete calendar of local technology events can be found on T-Net's
Events page.
Footnotes
If
you're an entrepreneur looking for a place to get your company started; there's
some great space available at Harbour Centre downtown. The New Media
Innovation Centre (NewMIC) and SFU's TIME Centre have teemed up to
provide not only office space but also access to various resources, e.g. tech
advisors, access to capital, mentors, etc. Worried about the high cost of being
downtown? Well, not to worry - they'll even reduce the fees and take some
payment in the form of equity. Check www.sfu.ca/time
for contact info.
A
reminder: SFU's TIME Centre is open for business - business folks, that is. TIME
is an acronym for Technology, Innovation, Management, and Entrepreneurship.
TIME supports the growth and development of the tech industry in B.C. TIME
features a "Business Centre" (looks like an airport business lounge)
which is open to technology entrepreneurs and business people to use as a
drop-in downtown office facility. Need to plug-in? Make some calls? Do some
work? Hold a meeting? There are some great facilities for holding your company's
AGM. Why hang out at MacDonald's when you can work productively at the TIME
Centre? Drop by and check it out! It is located at SFU's downtown campus at 515
West Hastings St.
Michael Volker,
a technology entrepreneur, is Director of the University/Industry Liaison
Office at Simon Fraser University, Chair of the B.C. Advanced Systems
Institute, Chair of the Vancouver
Angel Network and past Chair of the Vancouver
Enterprise Forum. He owns shares in many of the companies he writes about. Copyright,
2003.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is
a bi-weekly column that focuses attention on new and emerging BC publicly listed
technology companies.
Contact: risktaker@volker.org
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