Client Update: Introduction of Prince Edward Island’s new Business Corporations Act
A new Bill, the Business Corporations Act (“Act”), recently passed by the Prince Edward Island legislature, has made significant changes to the way corporations will be governed in Prince Edward Island. The new legislation is modeled on – and shares many of the same features with – the Canada Business Corporations Act (“Federal Act”). The legislation will supplant the current Companies Act, which today governs most Prince Edward Island businesses.
In this client update we have highlighted several of the significant changes contained in the new legislation.
1. Transition periods
It is very important to note that the new legislation will require all businesses incorporated under the Companies Act to be “continued” to the new legislation no later than three years from the date the Act comes into force (which is not yet known).
To migrate to the new legislation, the company must apply to the Provincial Director of Corporations (the “Provincial Director”). If the application has fulfilled all of the necessary requirements, the Provincial Director will issue the company a “certificate of continuance” – the legal document that certifies that the company is then governed by the new Act.
There are two requirements to make the application: 1) a 2/3 majority of the shareholders must authorize the application; and 2) a 2/3 majority of the shareholders must adopt articles of continuance. Articles of continuance are the legal documents that set out the name of the corporation, the amount and types of shares that will be issued by the corporation, the number of directors of the corporation, and any restrictions with respect to the corporation’s business.
While all companies incorporated under the current Companies Act have general governance bylaws, it may be prudent to review such bylaws and make changes at the time of filing the application of continuance.
For the remote event the required number of shareholders cannot agree on the terms of the company’s transition, the company – or one of its shareholders – may apply to a court to settle such issues.
Failure to apply for the certificate of continuance will result in a company being dissolved.
2. Changes to incorporation
Under the current system, incorporation is viewed as a privilege, not a right. Accordingly, it is theoretically possible for the provincial government to deny incorporation. Applicants are required to set out the purposes and objects of their proposed company and the application may only be approved if the Provincial Director is satisfied that it was truthful.
Incorporation under the new Act is substantially less regulated. All that is required is that the applicants file the following documents with the Provincial Director: a) the “articles of incorporation” (i.e., the legal document that sets out the corporate name, types and number of shares, etc.); b) a form listing the proposed corporate directors; and c) a form providing the location of the registered corporate office. Finally, it is anticipated that online incorporation will be possible under this new legislation, as is permissible under the Federal Act.
3. Eligibility requirements
Unlike the previous legislation, the new Act specifies several requirements with respect to corporate directors. In particular, the legislation provides that directors must be individuals who are at least 18 years of age, of sound mind, and do not have the status of a “bankrupt”.
We note that the Act does not place any residency requirements on directors. That is, directors do not need to reside in Prince Edward Island or even in Canada.
However, if the corporation does not have any directors who are resident in Prince Edward Island, there is an additional step that is required for incorporation. Applicants without a resident director will be required to send specified documents to the Provincial Director, including a certificate which must be completed by a lawyer authorized to practice in Prince Edward Island. These measures have been put in place in an effort to prevent money laundering and similar activities.
4. New rights for minority shareholders
Under the previous legislation, few rights were provided to minority shareholders. However, under the new Act, minority shareholders have been provided significant protections. Again, such protections mirror those available under the Federal Act and many other provincial regimes. We note the following three examples:
- An individual shareholder will be entitled to bring a “derivative action”. Such actions provide a mechanism to seek redress of a legal wrong committed against the corporation by a third party (often management), when the management of the corporation has chosen not to act.
- A further mechanism that has been made available to shareholders (as well as creditors, directors and officers) is the “oppression remedy”. This is a remedy which allows those specified individuals to bring an action against the corporation if it has acted in a manner that has unfairly prejudiced their rights. In other words, the oppression remedy imposes a legal obligation on the corporation to treat its stakeholders in a fair manner.
- Finally, a shareholder is now entitled to dissent when a corporation is undergoing “fundamental changes”. Fundamental changes include, among other things, restrictions on share transfers, corporate amalgamations, corporate dissolutions, and the sale of all or substantially all of the corporation’s assets. The right to dissent will, essentially, allow the shareholder to file a formal objection to the “fundamental change”, entitling him or her to receive fair market value for their shares when the “fundamental change” is adopted.
The foregoing is intended to provide a brief overview of the implications of the new Business Corporations Act and is intended for general information only. If you have any questions, or for more information, please contact James Travers, QC, Barbara Smith, QC, Spencer Campbell, QC, Geoffrey Connolly, QC, P.Eng, Paul Kiley, Perlene Morrison, Margaret Anne Walsh or Justin Milne.
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