Written By Beth Riley, Denise Bright and Emerson Frostad

Effective June 13, 2019, each private corporation incorporated under the Canada Business Corporations Act (CBCA) will be required to prepare a register of "individuals with significant control" (ISC) over such corporation.

Since our blog announcing these new ISC information requirements:

1. Corporations Canada has provided guidance (the "Guidance") to corporations to assist with their preparations to comply with the new ISC information requirements; and
2. the Canadian Government has proposed further amendments to the CBCA through Bill C-97 (not yet in force) to provide certain investigative bodies with powers to compel corporations to provide ISC information to assist with criminal investigations.

Notwithstanding this Guidance, the Canadian Government has not issued regulations or specific guidance to assist corporations in their compliance with these new ISC information requirements, with Corporations Canada specifically advising corporations to seek legal guidance in certain instances.

Corporations Required to Comply with ISC Requirements

The new ISC information requirements apply only to corporations incorporated under the CBCA that are not "public" corporations. In recognition of insider reporting requirements in Canada and internationally that apply to 5 percent or 10 percent shareholders of public companies, as applicable, these requirements do not apply to public corporations that are "reporting issuers" in Canada or whose shares are traded on the NYSE, the NASDAQ and the Euronext, among other designated exchanges. Note that these disclosure requirements, however, will apply to the CBCA subsidiaries of such public companies.

While the CBCA is the first jurisdiction to adopt these owner information requirements in Canada, these requirements are consistent with Canada's commitments to beneficial ownership transparency under certain international arrangements and is consistent with other jurisdictions' approaches, including notably the European Union and also the Cayman Islands, Bermuda and the British Virgin Islands. In addition, in Canada, the provincial finance ministers have agreed to adopt similar legislation (with Manitoba and British Columbia recently commencing legislative action to implement similar rules). Accordingly, the continuance of a CBCA corporation to a provincial jurisdiction or foreign jurisdictions may only enable corporations to avoid the application of these information requirements for a short time.

Who is an "Individual with Significant Control"?

An ISC is defined broadly as an individual:

1. who is the registered or beneficial holder of, or who has direct or indirect control or direction over shares that carry 25 percent or more of the voting rights attached to all of the corporation's outstanding voting shares;
2. who is the registered or beneficial holder of, or who has direct or indirect control or direction over shares that equal 25 percent or more of all of the corporation's outstanding shares measured by fair market value. Note that the meaning of, and method to calculate, "fair market value" is not defined and guidance is not included in the Guidance;
3. who has any direct or indirect "influence" that, if exercised, would result in "control in fact" of the corporation. Note that the meaning of "influence" and "control in fact" is not defined and guidance is not included in the Guidance; or
4. any other individuals identified by regulations. Note that no such regulations have been proposed at this time.

Generally, a "control individual" will be someone who is a legal or beneficial owner of, or who exercises control or direction over, 25 percent or more of the outstanding shares of the corporation (measured by voting rights or the fair market value of the corporation's outstanding shares ("25% Threshold"). Any combination of direct or indirect legal or beneficial ownership of shares, or control or direction over shares is relevant for purposes of assessing the 25% Threshold. In addition, a person will be considered an ISC if he/she has direct or indirect influence that, if exercised, would result in him/her having control, in fact, of the corporation. Two or more individuals may be considered a single ISC if their:

1. ownership interests/rights in respect of shares are held jointly; or
2. interests/rights in respect of shares are exercised jointly or in concert under an agreement or other arrangement.

While the identification of ISCs in many cases may be straight-forward, the determination of who may be an ISC may be challenging in certain circumstances as the definition of an ISC is not limited to ownership of voting shares of a corporation, and extends to significant equity holders (who may not have any voting shares) and any other individuals who have any direct or indirect influence that, if exercised, would result in "control in fact" of a corporation. While "control in fact" is not defined in the CBCA, an assessment of "control in fact" may be relatively subjective and depends on a detailed analysis of the relationship between the individual and the corporation, including, for example, the right to appoint directors and the ability to determine strategic decisions, among other factors.

It should also be noted that the register is of 'individuals' with significant control, and consequently when the registered shareholder is not an individual but rather a corporation, partnership, trust or other entity, additional analysis will be required to determine the applicable individuals who should be included in the register.

That being said, third parties, such as creditors with relatively typical credit agreements, would not typically be found to "control in fact" a corporation without additional arrangements with such corporation. However, to the extent such third parties have an ability to direct the voting of any shares, such third parties may (inadvertently) be found to be an ISC.

ISC Information Requirements

Commencing June 13, 2019, CBCA corporations will be required to include in the ISC register the following information in respect of each such ISC:

1. the name, date of birth and last known address;
2. the jurisdiction of residence for tax purposes;
3. the date when such individual became or ceased to be an ISC; and
4. a description of how such individual qualifies as an ISC.

In addition, the corporation will be required to update the register within 15 days of learning new information and to take reasonable steps once each financial year to ensure that it has identified all ISCs and that the registrar is accurate, complete and up-to-date.

Who has Access to the Register?

Unlike certain other jurisdictions, CBCA corporations will only be required to include this ISC information in an ISC register, rather than report such information to a government agency or otherwise make such information public. For example, a search of the CBCA government registry will not include any information in respect of such ISC. However, each corporation will be required to disclose such information as follows:

1. upon request, to the director appointed under the CBCA; and
2. upon application (with a supporting affidavit), to the shareholders and creditors of the corporation, provided the information is only used in connection with: (a) an attempt to influence the voting of shareholders of the corporation (i.e., for proxy purposes in connection with a shareholders' meeting); (b) an offer to acquire securities of the corporation (i.e., a takeover bid); or (c) any other matter relating to the affairs of the corporation. At this time, it is uncertain the breadth that will be afforded for matters "relating to the affairs of the corporation".

Bill C-97 proposes that, a corporation provide ISC information to investigative bodies (any police force, the Canada Revenue Agency (and provincial equivalent bodies) and other investigative bodies to be identified by regulation), upon request, that have reasonable grounds to suspect that:

1. the ISC information would be relevant to an investigation of a "prescribed offence". Bill C-97 identifies a broad range of prescribed offences under the Criminal Code that go beyond money laundering, terrorism financing and tax evasion, and include insider tipping and trading, fraudulent manipulation of stock exchange transactions, theft, bribery, corruption of foreign public officials, possession of property obtained by crime, unauthorized importing or exporting, trademark offences, terrorism, trafficking, and sexual assault; and
2. any of: (a) the corporation committed the offence or was used to commit the offence, facilitate the commission of the offence, or protect from detection or punishment a person who has committed the offence; (b) an ISC is also an ISC over another corporation that satisfies the test in item (a); or (c) the ISC is also an individual who, directly or indirectly, influences the affairs of an entity, other than a corporation, that satisfies the test in item (a).

Failure to Comply

The Guidelines provide summary guidance to a corporation to comply with the establishment of an ISC register, being:

1. identify the ISCs and confirm their information by contacting all shareholders and asking them if they own the shares directly or if they are holding them on behalf of other persons and registered shareholders are required to provide accurate and complete responses to requests of corporations for information;
2. record the requisite ISC information in the ISC register; and
3. update the ISC register regularly.

Challenges may arise in respect of identifying all ISCs and gathering the requisite ISC information, given that these ISC information requirements are not binding on persons that are not CBCA corporations or their officers, directors or registered shareholders, meaning that there may be limitations to the ability of a CBCA corporation and its officers, directors and registered shareholders to obtain information regarding an individual that is an ISC through indirect beneficial ownership or control of a CBCA corporation. Neither the CBCA nor the Guidelines prescribes detailed steps to be taken by a corporation or its officers, directors and registered shareholders to ensure that all ISC are properly identified and all requisite information in respect of such ISC has been provided.

Notwithstanding this uncertainty, the CBCA includes sanctions against corporations and its directors, officers and registered shareholders for failure to comply with the ISC information requirements. Directors and officers can face fines of up to $200,000 and jail terms of up to six months. Shareholders are subject to the same penalties and jail terms if they fail to answer ISC register related questions from the corporation to the best of their knowledge and in a timely manner.

Implications for CBCA Corporations and Investors

The full implications of the ISC information requirements on CBCA corporations and registered shareholders remain to be determined, especially in light of the lack of a prescribed information gathering process, the broad definition of an ISC and the access and potential breadth of use of such information by shareholders and creditors.

Notwithstanding such concerns, it is clear that corporations and registered shareholders should take steps to comply with the ISC information requirements as of June 13, 2019, and that investors and creditors should consider the implications, if any, from such requirements when structuring proposed direct and indirect investments and other arrangements in CBCA corporations.

We will continue to monitor the progress of Bill C-97 and Corporations Canada's approach to compliance with the new ISC information requirements.

Please contact us for further information and advice regarding compliance with these new ISC information requirements.