New B.C. Business Corporations Act transparency register requirements: A primer

Beginning on a date to be announced, privately-held B.C. Business Corporations Act (“BCA”) companies ‎will be required to maintain a “transparency register” of “significant individuals”, being individuals who:‎

• directly or indirectly hold a significant number of shares; or ‎
• have the right (or control or influence another SI’s right) to elect, appoint or remove the majority ‎of directors of the company‎¹‎.  ‎

Currently, BCA companies do not have to look behind the names of their registered shareholders to ‎determine ultimate beneficial control. ‎

These changes flow from B.C.’s commitments under an agreement made in December 2017 among ‎Canada’s provincial and federal Finance Ministers to combat money laundering and terrorist financing. ‎

Canada has already amended the Canada Business Corporations Act (“CBCA”) to require private federal ‎corporations to create and maintain a register of “Individuals with Significant Control” (an “ISC Register”). Manitoba has introduced amendments modelled on the CBCA rules. It is likely that all other provinces ‎and territories will follow suit over time. The proposed B.C. rules differ in some material ways from the ‎federal rules.‎

The B.C. transparency register will not be available to the public. Unlike the CBCA, which allows access ‎to the ISC Register to shareholders and creditors of the CBCA corporation as well as regulatory ‎authorities, the B.C. transparency register will be open only to directors of the company and regulatory ‎authorities.‎

Directors and officers will have personal liability to ensure the company complies with the new ‎provisions.  ‎

These requirements will not apply to public companies or some other companies that may be exempted ‎by regulation. Unless they are exempted by regulation, the rules will apply to subsidiaries of public ‎companies. All references to “companies” in this bulletin refer to companies that are not reporting ‎issuers or listed on a stock exchange.‎

The new provisions will come into force by regulation. It is hoped that the regulations may provide some ‎additional detail to clarify and expand on the new obligations. None have yet been issued in draft or ‎final form.‎

A.‎ Who is a significant individual (“Sl”)?‎

An individual is an “SI” of a company when one of the following tests is met:‎²‎

1. with respect to a “significant number of shares”, being (i) 25% or more of the issued shares of ‎the company or (ii) issued shares that carry 25% or more of the rights to vote at a general ‎meeting of the company:
1. ‎he or she is the registered holder of one or more of them;‎³‎‎ 
2. he or she is the beneficial owner of one or more of them (other than an interest that is ‎contingent on the death of another individual); and/or
3. he or she has “indirect control” (within the meaning of regulations that have not yet been ‎issued) over one or more of them; or


2. the individual has any of the following rights or abilities (or any combination of them) that, if ‎exercised, would result in the election, appointment or removal of the majority of the directors of ‎the company:‎
‎
1. the right to elect, appoint or remove one or more of the company's directors;
2. indirect control (within the meaning of regulations that have not yet been issued) of the ‎right to elect, appoint or remove one or more of the company's directors; and/or
3. the ability to exercise direct and significant influence over an individual who has the right ‎or indirect control described in subparagraph (a) or (b).‎

Further circumstances may be prescribed by regulation.  Individuals who jointly hold interests or rights ‎may each be an SI.

Importantly, an SI need not be a shareholder at all - the “right or ability” to cause or control the election, ‎appointment or removal of the majority of the directors of the company could arise under, for example, a ‎financing agreement, purchase agreement or shareholders’ agreement.

B.‎ Issues arising

The new rules (subject to regulations, if any) contain areas of uncertainty. For example:‎

1. ‎as noted above, the definition of “significant number of shares” includes (a) shares carrying 25% ‎or more of the rights to vote at general meetings, and (b) 25% or more of the issued shares of ‎the company - this second test is without regard to value or any other metric. In a company with ‎more than one class or series of shares issued, measuring the significance of a person’s ‎shareholding by number of shares owned can be quite meaningless. For example, a shareholder ‎‎(“Shareholder A”) could hold 1,000,000 Class A shares that carry no votes and have only ‎nominal value. Another shareholder (“Shareholder B”) could hold just one Class B share that ‎carries all the votes and most of the value of the company. Both Shareholder A and Shareholder ‎B would be SIs. Shareholder A might understandably object to the inclusion of his or her ‎personal information in the transparency register. The CBCA provisions seem more appropriate ‎in this respect, in that they measure “significant number of shares” by either votes or value, and ‎not by raw number of shares issued.‎


2. ‎the control tests set out in paragraph A2 above, and particularly paragraph A2(c)‎⁴‎, do not use the ‎familiar and well-tested wording used by the CBCA, being “direct or indirect influence that, if ‎exercised, would result in control in fact of the corporation”. The phrase “ability to exercise direct ‎and significant influence over an individual” is contained in the not-yet-in-force B.C. Land Owner ‎Transparency Act. The only other reference to this language in Canadian statutes is to the ‎potential conflict of interest of accountants having the ability to “exercise direct and significant ‎influence” over the subject matter of their cases, contained in the Quebec Code of ethics of ‎certified management accountants. There is no Canadian case law yet applying this wording in ‎the context of corporate control. Accordingly, companies and their counsel may struggle to ‎interpret the wording until it is clarified by either regulation or case law. Specifically, the wording ‎in paragraph A2(c) applies if an individual has the ability to exercise direct and significant ‎influence over an individual who has the right (or indirect control over the right) to elect, appoint ‎or remove one or more of the company's directors. Unlike the “control in fact” test under the CBCA:
1. ‎the phrase “ability to exercise direct and significant influence” arguably applies in the ‎absence of a legally enforceable right. Could a parent, grandparent, child, spouse or ‎caregiver applying financial or other pressure to an individual shareholder be an SI?  A ‎beneficiary under a trust deed? A party granted a right of consultation under a contract?
2. the “influence” is over an individual with the right (or indirect control of the right) to elect ‎directors - it is not over the company itself or a related legal entity. It may be difficult to ‎determine influence over an individual who is not a direct shareholder.


3. records offices are required to give access to the transparency register to directors of the ‎company and to “inspecting officials” (please see discussion in Section F below). It is an ‎offence to fail to give such access to those persons or to give access to anyone else. Questions arising include:
1. ‎why can the register not be viewed by officers that are not directors? Officers are ‎personally liable, just as directors are, for flaws in the registry. Presumably, officers will ‎be responsible to create and update the registry, so it seems overly restrictive not to ‎allow them to view it without the request being made through a director. Records offices ‎will need to take care not to allow non-director officers or employees of a company to ‎view the register; and
2. how should a records office verify that a person is an “inspecting official”?  As ‎described below, “inspecting officials” are officials of various government and regulatory ‎agencies viewing the register for certain purposes. The BCA allows records offices to ‎require identification from the inspecting official. In addition to verifying the place of ‎employment from the identification, records offices may consider asking inspecting ‎officials to confirm in writing that they are carrying out the purposes set out in the BCA;‎


4. ‎“individual” is not defined in the BCA or the B.C. Interpretation Act, but presumably means a ‎human being;‎


5. who is the individual with indirect control of a trust? Depending on the circumstances, it might ‎include all or any of the trustees, the person appointed in the trust deed to appoint replacement ‎trustees, a protector or possibly an influential beneficiary. The regulations, once passed, may ‎clarify this point;‎


6. similarly, who is the individual with indirect control of a partnership? This would require an ‎analysis of the partnership agreement, if any, as well as the regulations, once passed;‎


7. ‎what does it mean to have an interest as a “beneficial owner” of a share? “Beneficial owner” is not ‎‎defined in the BCA or the B.C. Interpretation Act. Does a beneficiary of a discretionary trust have ‎‎an interest as a beneficial owner of a share owned by the trust? ‎


8. how do contingent rights, options to purchase, veto rights and other provisions commonly found ‎in shareholders’ agreements, convertible debentures, purchase agreements and other instruments ‎affect control and influence?‎


9. if management of a company feels they are already knowledgeable about issues of control and ‎influence, what “reasonable steps” do they have to take every year to maintain a transparency ‎register (please see discussion in Section C below)?‎


10. how can management best protect the security of the information obtained from its inquiries?‎


11. what, if any, responsibility does management have if it suspects, but is not sure, that ‎shareholders are not being forthcoming with the names of their controlling individuals?‎


12. what steps should law firms (as corporate records offices) take to implement the new registry ‎and assist companies with the steps they must take annually to update it (please see discussion ‎in Section E below)?‎

C.‎ The transparency register generally

Companies must take reasonable steps to maintain a transparency register.  ‎

The register must list all SIs with the required personal information, including name, date of birth, ‎address, citizenship, whether the individual is a resident of Canada for tax purposes, the date on which ‎the individual became or ceased to be an SI and a description of the reason they are an SI. While some ‎of this information may be relatively straightforward to ascertain, some may not be. For ‎example, the ‎determination of whether an individual is a resident of Canada for tax purposes is in the ‎first instance a ‎question of fact that depends on all of the relevant circumstances, including the individual’s ties to ‎‎Canada. An individual who is not a resident of Canada as a matter of fact may nevertheless be deemed ‎‎to be resident of Canada for tax purposes under certain circumstances. Further, an individual who is ‎‎either a factual or deemed resident of Canada may nevertheless be deemed not to be resident of ‎Canada ‎for tax purposes under certain circumstances. ‎

Companies must update the information within 30 days of becoming aware of new relevant information.‎

If some of the required information about an SI has not been obtained, the register must specify that ‎information and the steps taken to obtain or confirm that information. If the company determines there ‎are no SI’s, the register must state that fact.‎

At least once each year, within two months of the anniversary date of its recognition as a company in ‎B.C., the company must take reasonable steps to confirm that the information contained in its ‎transparency register is accurate, complete and up to date. These steps may include questioning ‎shareholders and reviewing the company’s key agreements with an eye to issues of control and ‎influence. Shareholders, if requested by the company, are required to take reasonable steps to compile ‎these details about SIs, and to forward them to the company promptly. Shareholders commit an offence ‎if they fail to do so.  ‎

A company must send a notice to an individual within ten days after recording him or her as an SI or ‎removing him or her from the registry. This requirement is not contained in the CBCA provisions.‎

Within one year after the sixth anniversary of the day on which an individual ceases to be an SI, the ‎company is required to dispose of all information and records about the SI that were gathered for the ‎purposes of maintaining the transparency register.  ‎

A company must keep its transparency register either at its records office or at another location provided ‎the register is available for inspection and copying at its records office by means of a computer terminal ‎or other electronic technology.‎

D.‎ What steps must a company take to create and maintain a transparency register?‎

Among other things (some of which may be established by regulations), a company will need to ‎determine:‎‎ ‎

1. ‎those persons, if any, who separately or jointly with others are each the registered holder of a ‎‎“significant number of shares” (as defined above), and obtain (or make reasonable efforts to ‎obtain) the required information for:‎ ‎
   1. ‎each registered holder (if any) who is an individual;‎
   2. each individual (if any) who beneficially owns shares that are not registered in the ‎individual’s name;‎
   3. each individual, whether or not a shareholder, who has “direct and significant influence” ‎over any such registered or beneficial holder; and
   4. each individual, if any, who has direct or indirect control of a registered holder that is not ‎an individual (this inquiry could disclose the names of individuals far up the corporate ‎chain, or may result in no names if no individual holds control);‎
2. whether there are individuals (shareholders or otherwise) that have rights or abilities that, if ‎exercised, would result in the election, appointment or removal of the majority of the directors of ‎the company, arising from: ‎‎ ‎
   1. ‎the direct right to elect, appoint or remove directors;‎
   2. (b)‎ indirect control over that right; or
   3. the ability to exercise direct and significant influence over an individual who has such ‎rights or abilities?‎

Such an individual could include, for example, someone who controls a debentureholder that has ‎the right to appoint the majority of the board, someone who has a right under a shareholders’ ‎agreement to buy shares sufficient to elect a majority of the board and someone who holds ‎direct and significant sway or influence over an individual that directly or indirectly controls the ‎election of directors.    ‎

E.‎ What are the responsibilities of the records office of the company?‎

New duties are placed on the person (often a law firm) that acts as the records office for the company. That person:

1. must take reasonable steps to:‎ ‎
   1. ‎keep the company's transparency register complete, and avoid its loss, mutilation or ‎destruction;‎
   2. avoid falsification of entries in the transparency register; and
   3. provide inspecting officials and the company's directors with simple, reliable and prompt ‎access to the transparency register; and
2. must ensure that the company's transparency register is maintained in electronic form, on ‎microfilm, in bound or looseleaf form or in another form if set by regulation;‎


3. must not allow anyone to inspect the register except an inspecting official (see Section F below) ‎or a director of the company, and must not allow inspections outside of specific hours; and


4. must provide copies of the register if requested by an inspecting official or company director, ‎and may charge a copying fee up to a set amount.‎

Law firms may benefit from systems they have recently developed to help CBCA clients establish their ‎ISC Registers. Many law firms have developed a questionnaire to send to corporations, and an ‎additional questionnaire that corporations can send to their shareholders. Information from these ‎questionnaires feeds into the ISC Register created by the records office.‎

As a result of the provisions under the BCA, records offices may also choose to:‎

1. remind the company that it is required to maintain its registry during the two-month period ‎following its anniversary date of recognition in B.C.;‎


2. inform the company that it may, by ordinary resolution, restrict viewing hours for inspecting ‎officials to two consecutive business hours per day;‎


3. remind the company to send a notice within ten days to each person they add to or remove from ‎the registry, informing them that they have been added or removed; and


4. remind the company that within one year following the sixth anniversary of a person being ‎removed from the registry, the company must dispose of all information regarding an SI that was ‎gathered for the purpose of the registry.‎

F.‎ Who is allowed to view the registry, when and for what purpose?

Transparency registers may be viewed by “inspecting officials” and the directors of the company, and ‎the company’s records office must allow such access. No one else may view the register.‎

“Inspecting officials” are:

1. Canadian or B.C. taxation authorities administering or enforcing a domestic tax law or providing ‎information to another tax authority (inside or outside Canada) to assist with the administration or ‎enforcement of its tax laws, provided the assistance is authorized under an arrangement, written ‎agreement, treaty or law of B.C. or Canada;‎


2. a police officer or member of the RCMP conducting an investigation or a criminal intelligence ‎operation in Canada or providing information to:‎ ‎
   1. ‎another law enforcement agency in Canada conducting an investigation or a criminal ‎intelligence operation in Canada; or ‎
   2. an international law enforcement authority to assist with a foreign law enforcement ‎proceeding, provided the assistance is authorized under an arrangement, written ‎agreement, treaty or law of B.C. or Canada; and
3. an official of a “regulator”, being the B.C. Securities Commission, the Financial Institutions ‎Commission, the Financial Transactions and Reports Analysis Centre of Canada, the B.C. Law ‎Society or other regulatory agencies set by regulation administering or enforcing a law for which ‎the regulator is responsible or providing information to:‎
   1. ‎another agency in Canada administering or enforcing a law for which the that agency is ‎responsible; or ‎
   2. an international law enforcement authority to assist with a foreign law enforcement ‎proceeding, provided the assistance is authorized under an arrangement, written ‎agreement, treaty or law of B.C. or Canada.‎

A company may restrict the hours during which inspecting officials may view the register to as little as ‎two consecutive hours per business day. Directors are entitled to inspect the registry within statutory ‎business hours.‎

G.‎ Offences and potential liability

The BCA establishes a number of new offences relating to the ‎transparency register that apply to ‎companies, their shareholders, directors, officers and persons ‎who act as their records offices. The ‎penalties are fines up to $100,000 for corporate entities ‎and $50,000 for individuals.  For these ‎purposes:‎

1. a company commits an offence by:‎
   1. ‎failing to keep, annually maintain and, as new information becomes available, update a ‎transparency register containing the required information (including a note of missing ‎information and the steps it took to obtain missing information, or a note that it has ‎determined there are no SIs for the company); ‎ ‎
   2. failing to delete from its transparency register, within one year after the sixth ‎anniversary ‎of a person ceasing to be an SI, all information in the register relating to the SI and ‎related records;‎ ‎
   3. failing to notify an individual within ten days after recording that individual ‎as an SI or ‎removing that record from the register;‎ ‎ ‎


2. subject to paragraph G3 below, a company commits an offence, and its directors and officers ‎who authorize, permit or acquiesce in the following actions commit an offence, if the company’s ‎transparency register:‎‎ ‎
   1. ‎falsely identifies an individual as an SI; ‎
   2. fails to identity an individual that is an SI;‎
   3. records ‎information about an SI that is false or misleading in respect of any ‎material ‎fact; or ‎
   4. omits ‎ information about an SI and the omission renders the information false or ‎misleading;‎ ‎
3. the company, its directors and officers are not liable for the offences described under paragraph ‎G2 above if they:‎‎ ‎
   1. ‎did not know; or ‎
   2. with the exercise of reasonable diligence, could not have known

that the identification or exclusion of the individual was incorrect or that the information about an ‎SI was false or misleading; ‎

4. a shareholder commits an offence by failing to compile and promptly send information ‎requested by a company to maintain its transparency register;‎


5. subject to paragraph G6 below, a shareholder who sends information to the company for the ‎purposes of the transparency register commits an offence if the information:‎‎ ‎
   1. ‎is false or misleading in respect of any material fact; or
   2. omits ‎any material fact and the omission renders the information false or misleading;‎ ‎
6. a shareholder is not liable of the offences described under paragraph G5 above if the ‎shareholder ‎‎ ‎
   1. ‎did not know; or
   2. with the exercise of reasonable diligence, could not have known

that the information was false or misleading; and

7. the person who maintains a company’s records office commits an offence by:‎
   1. ‎failing to allow an inspecting ‎official or a director of the company to inspect the ‎company’s transparency register during the permitted hours;‎ and
   2. permitting an unauthorized person to inspect the register.‎ ‎ ‎

H.‎ Privacy and issues of personal liability

Note that only direct shareholders of a company are required to be responsive to questions from the ‎company about SIs, not indirect shareholders. In some cases, this may limit the information a company ‎would have about its SIs. Shareholders are required to be responsive, even if they are legal entities ‎‎(such as corporations) and are not resident in B.C.‎

Directors and officers, as described above, who knowingly permit or acquiesce in the recording of false ‎or misleading information in the register will be guilty of an offence. Consequently, they must contribute ‎information known to them other than through their role for the company (such as through their roles for ‎parent or holding companies). Entities wishing to retain the secrecy of ultimate controlling individuals will ‎need to be aware that knowledge held by appointee directors will be taken into account in preparing the ‎register.‎

The requirements around the register are extensive and the list of new offences is long. B.C. companies ‎and their records offices will need to take care to update their practices as soon as the new provisions ‎are in force.‎