Canada: P.E.I. Joins (Most Of) The Rest Of Canada: 3 Ways The New P.E.I. Business Corporations Act Will Modernize P.E.I. Corporations

Last Updated: July 19 2018
Article by John W. Hennessey, QC, Kaitlyn Angus Hornsby and Sean Corcoran

P.E.I. corporations are currently governed by the P.E.I. Companies Act – legislation that's substantially unchanged since it was enacted in 1888 as the Joint Stock Companies Act. But that's about to change: on June 12, 2018 the P.E.I. government passed Bill No. 12, the Business Corporations Act. The new Act, which will only take effect on the date the government sets, will replace part one of the current P.E.I. Companies Act dealing with for-profit companies. Modeled on the Canada Business Corporations Act (CBCA), a model that the corporations legislation of all other Canadian common law provinces with the exception of N.S. and (until now) P.E.I. have adopted (and that has recently itself been modernized), the new Act will fundamentally change – and modernize – the corporate landscape in P.E.I.

Here are the three transition steps that P.E.I. corporations incorporated under the current P.E.I. Companies Act will need to take, and the three key ways in which the new P.E.I. Business Corporations Act will change – and modernize – the legal regime governing P.E.I. corporations when it takes effect.

3 Transition Steps for Existing P.E.I. Corporations

When the new P.E.I. Business Corporations Act takes effect, P.E.I. corporations currently incorporated under Part 1 of the P.E.I. Companies Act (that is, for-profit corporations) will need to take certain steps pursuant to the Act's provisions pertaining to the transition between the old and new regimes. However, the new Act won't affect non-profit companies incorporated under Part II of the P.E.I. Companies Act, which will remain in effect and non-profit companies incorporated pursuant to it won't need to take any steps to transition to the new Act. Here are the three steps that for-profit corporations will need to take:

Certificate of continuance. Companies incorporated in P.E.I. by way of Letters Patent and the Companies Act will be required to obtain a certificate of continuance under the new P.E.I. Business Corporations Act by applying to the P.E.I. Director of Corporations. Before doing so, the shareholders who are entitled to vote at the corporation's shareholder meetings will be required to adopt articles of continuance, authorize the directors to apply for the certificate of continuance, and may adopt bylaws to become effective on issuance of the certificate of continuance.

Time period to apply for continuance. An existing P.E.I. corporation must apply to the Director of Corporations for that certificate of continuance within three years after the date the new P.E.I. Business Corporations Act comes into force. However, the new Act provides that a corporation experiencing hardship can make an application to the Supreme Court of Prince Edward Island to extend that period for an additional period not exceeding one year. A P.E.I. corporation that fails to apply within those time periods will be dissolved (that is, will cease to exist) on the expiry of that time.

Prohibition of Incorporation or Revival under Part I of Companies Act. When the new Act takes effect, all new incorporations from that point would be under the new Act; no corporations will be incorporated and no dissolved corporation will be revived (permitted to resume as a corporation after dissolution) under Part I of the P.E.I. Companies Act.

3 Key Ways the P.E.I. Corporate Legal Regime Will be Modernized

The new P.E.I. Business Corporations Act, though not yet in force, differs in many ways from the current Companies Act. This includes the process for initial incorporation and ongoing public filings: it will shift the current system of Government authorization issued through Letters Patent to a comprehensive system of Articles of Incorporation issued on application. Here are three key ways in which the new Act will change and modernize the legal regime governing P.E.I. corporations when it takes effect.

1. More Shareholder Rights & Protections

The new Act will also implement changes that will offer P.E.I. corporation shareholders increased rights and protections:

Statutory Shareholder Remedies. The new Act will offer shareholders – specifically minority shareholders – statutory remedies, as does the CBCA. The current Companies Act doesn't provide for statutory shareholder remedies, leaving shareholders to rely solely on legal actions for breach of fiduciary duty against individual directors and officers for relief from allegedly wrongful conduct by the corporation or its majority shareholders. The two primary remedies the new Act provides are:

  • Derivative Actions. Shareholders can apply to the court for leave (the court's permission) to sue in the name and on behalf of a corporation, or to intervene in an action to which a corporation is a party, for the purpose of prosecuting, defending or discontinuing the action on the corporation's behalf. However, the court will only grant such leave if it's satisfied that: the complainant has given notice to the directors of the corporation of its intention to do so; the complainant is acting in good faith; and it appears to be in the interests of the corporation that the action be brought, prosecuted, defended or discontinued (as the case may be). The new Act gives the court the power to make any order it thinks fit, including an order: authorizing the complainant to take control of the action; giving directions for the conduct of the action; directing that any amount adjudged payable by a defendant in the action be paid to former and present security holders of the corporation; and requiring the corporation to pay reasonable legal fees incurred by the complainant.
  • Oppression Actions. A "complainant" (as defined in the new Act) can apply to the court seeking relief if an act or omission of the corporation effects a result, the corporation's business is or has been carried on in a manner, or the directors' powers of the directors of the corporation have been exercised in a manner, that is "oppressive" or "unfairly prejudicial" (both of which have been well fleshed out by many courts under other corporations legislation modeled on the CBCA) to any security holder, creditor, director or officer. If a court is satisfied a stakeholder is being oppressed or unfairly prejudiced, it has the power to make any interim or final order it thinks fit to remedy the situation.

Shareholder Proposals. Under the new Act, any shareholder entitled to vote an annual meeting of shareholders can present a proposal to make, amend or repeal a bylaw of the corporation. The current Companies Act doesn't offer shareholders this right.

Shareholder Right of Dissent. Under the new Act, directors require a special resolution to make fundamental changes to the corporation and, in certain situations, a dissenting shareholder may be entitled to require that the corporation acquire their shares at fair market value. The current Companies Act doesn't either restrict directors or protect dissenting shareholders in this manner, requiring only a special resolution for a corporation to apply for a certificate of continuance in another jurisdiction, or for a change of corporate name.

Meeting Called by Court. The new Act will give the court power, on the application of a director or a shareholder who is entitled to vote at a meeting of shareholders, to order that a meeting of the corporation be called. Under the Companies Act there was no mechanism for a shareholder to demand that a meeting be held.

Financial Disclosure. The new Act will require the corporation's directors to send annual financial statements to shareholders no less than 21 days before each annual meeting. A corporation that fails to comply with this provision without reasonable cause is guilty of an offence and liable on summary conviction to a fine not exceeding $5,000.

2. More Liability Exposure For Directors & Officers

The new Act will implement several changes with the effect of increasing the liability to which the directors and officers of a corporation will be exposed and their obligations to shareholders:

Director Liability for Unpaid Wages. Under the new Act, the directors are, subject to certain restrictions, jointly and severally liable with the corporation to the corporation's employees for a maximum of six months' wages owed. The current P.E.I. Companies Act doesn't address this issue, although the P.E.I. Employment Standards Act imposes a similar liability on corporate officers and directors in any event.

Statutory Duty of Care. The new Act imposes a statutory duty of care on every director and officer to act honestly and in good faith with a view to the best interests of the corporation in exercising their powers, and to exercise the care, diligence and skill of a reasonably prudent person. Even though the current Companies Act doesn't expressly impose this duty on directors and officers, they were still subject to it at law. However, by anchoring the duty in the statute itself, the well-developed body of court decisions will now apply to P.E.I. corporations, and offer P.E.I. corporations greater certainty around how P.E.I. courts will likely interpret the conduct of corporate officers and directors.

Personal Liability for Oppression. The new Act's addition of the oppression remedy for shareholders also has the effect of exposing directors to a new personal liability risk: that for oppressive conduct. The wording of the new Act's oppression remedy is similar to that of the CBCA oppression provision, under which the Supreme Court of Canada has stated directors can be held personally liable for oppressive conduct. It's highly likely a court will reach a similar conclusion under the new P.E.I. Business Corporations Act's oppression provision.

3. More Corporate Flexibility

Corporations (particularly start-ups) have many factors to consider when incorporating their business; a key one is deciding where to incorporate. The new Act will also implement several changes that offer P.E.I. corporations greater flexibility, with the effect of making P.E.I. a more attractive place to incorporate:

Unlimited Liability Corporations (ULCs). The new Act, unlike the current Companies Act, will permit ULCs: corporations the shareholders of which have unlimited liability for any liability, act or default of the corporation. ULCs are a favoured vehicle for U.S. expansion into Canada because they are a hybrid entity treated as a corporation for Canadian tax purposes but disregarded for U.S. tax purposes. This change makes P.E.I. only the fourth Canadian jurisdiction – along with Alberta, B.C. and N.S. – to permit ULCs.

Director Residency. The new Act maintains the flexibility in choice of directors that the current Companies Act offers by not imposing residency requirements for directors. This is in contrast to the CBCA and several other provincial business corporation acts; for example, the CBCA requires at least 25% of directors be "resident in Canada" (which includes permanent residents as well as Canadian citizens) and if there is less than four directors, at least one must be a resident Canadian. However, under the new Act, if there aren't any P.E.I. resident directors when articles of incorporation are sent to the province, a lawyer entitled to practice law in P.E.I. must provide a certificate, in the form fixed by the Director of Corporations, for anti-money laundering and anti-corruption purposes.

Prohibited Loans and Guarantees. The new Act will make it easier for corporations to provide loans to affiliated individuals or to provide guarantees on behalf of affiliated individuals for the purposes of securing financing by eliminating the prohibition in the current Companies Act (section 69) of a corporation from providing financial assistance to a shareholder, director, officer or employee of the corporation where there are reasonable grounds to believe that doing so would jeopardize its ability to pay its liabilities. The only other jurisdiction with such a prohibition in its corporations legislation is N.L.

Resolutions in Lieu of Meetings. The new Act allows that a resolution in writing and signed by all the directors entitled to vote on that resolution at a meeting of directors is valid as if it had been passed at a meeting of directors. There's no equivalent provision in the current Companies Act.

Attending Shareholder Meetings via Teleconference. Under the new Act, shareholders may participate in a meeting of shareholders by telephone, electronic or other means unless the bylaws of the company provide otherwise. Under the current Companies Act, shareholders must attend meetings in person.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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