Alberta Unlimited Liability Corporations

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Dallas Droppo & Doug Richardson

On March 9, 2005, Bill 16, providing for numerous amendments to the Business Corporations Act (Alberta) (the ABCA), was given first reading in the Alberta legislature. Included in the Bill is the long-awaited introduction of the Alberta unlimited liability corporation (the AULC).

Although the concept of an unlimited liability corporation dates its origins to the U.K. Companies Act, it was largely a forgotten entity for commercial purposes in Canada until relatively recently when certain amendments to the U.S. tax law enabled an unlimited liability corporation (ULC) incorporated under federal or provincial law to be eligible for “hybrid” tax treatment – as a “look-through” or ignored entity for tax purposes in the U.S., although it is a corporation for tax purposes in Canada.

The reasons for using a ULC are varied. The most common is to ensure that the activities of the ULC are consolidated with the U.S. parent for U.S. income tax purposes. Achieving this consolidation means the deductions of the ULC, including interest expense, can be treated as having been incurred by the U.S. parent. ULCs have also been used for foreign tax credit planning of a U.S. group.

Until now, the Nova Scotia Companies Act (the NSCA) has been the only corporate statute in Canada that allows for the incorporation of an unlimited liability corporation (the NSULC). As a result, the NSULC has become a common entity for many U.S. corporations investing in Canada either on a start-up basis or as the result of an acquisition of an existing Canadian business.

The introduction of Bill 16 will undoubtedly cause many U.S. corporations to consider the desirability of using Alberta to incorporate a ULC or to move an existing NSULC to Alberta. This Bulletin describes in general terms some of the material distinctions between the corporate law prevailing under the ABCA and under the NSCA.

General
The NSCA is based upon the historical U.K. Companies Act and adopts some, but not all, of the corporate law concepts typically found in a modern U.S. style business corporations statute. The ABCA is based upon the U.S. style business corporations statute (and is similar to corresponding corporate statutes used federally and in Ontario). The modern statute in Alberta, as well as the fact that Alberta is generally a more accessible location, will undoubtedly be important considerations to a U.S. company considering the choice of jurisdiction for a ULC. There are many differences between the two jurisdictions affecting the rights of shareholders, the rights, powers and obligations of directors and the power and authority of the corporation generally.

Powers and Duties of Directors
The ABCA, as amended by Bill 16, specifically charges the directors with managing, or supervising the management of, the business and affairs of the corporation. Directors of an ABCA corporation are subject to a statutory requirement to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The NSCA places the power to manage the company with the shareholders who may delegate that power. In Nova Scotia, the common law duty of care, which is a subjective test, applies although the Supreme Court of Nova Scotia has the discretion to relieve a director in certain instances if he has acted honestly and reasonably.

Director Residence and Liability
The ABCA codifies director liability in an organized fashion. The ABCA provides expressly for director liability in the case of the improper issuance of shares, the improper purchase, redemption or other acquisition of shares and improper payments to shareholders. Under the ABCA, as amended by Bill 16, at least one-quarter of the total number of directors of a corporation (including an AULC as proposed) must be resident Canadians.

Under the NSCA, the liability of a director to a company largely arises from the directors’ fiduciary duty at common law. There are no Canadian residency requirements for directors for an NSULC.

Amalgamations and Returns of Capital
The ABCA provides for both a short-form and a long-form amalgamation procedure. The short-form procedure may be used by a parent and subsidiary, or by two or more subsidiaries, and only board approval, rather than shareholder approval, is required. Under the ABCA, a long-form amalgamation must be approved by the requisite number of shareholders (usually 2/3rds of the votes cast) and there is no requirement for court approval. The NSCA provides that all amalgamations are long-form and must be approved by the requisite number of shareholders (3/4ths of the votes cast) and by the Nova Scotia Supreme Court.

Similar to amalgamations, both shareholder (3/4ths of the votes cast) and court approval is required under the NSCA for a company to reduce its share capital. In Alberta, a corporation may reduce its stated capital by obtaining the requisite level of shareholder approval (usually 2/3rds of the votes cast) and by meeting the applicable solvency test.

In many internal reorganizations, the necessity for court approval introduces an additional element of risk and may either delay or, in rare cases, impede the timely completion of the reorganization. The more streamlined process available under the ABCA for amalgamations and returns of capital is preferable.

Dividends and Distributions
Dividends of an NSCA company must be declared and paid out of the profits of the company. Under the NSCA, a company may not redeem or purchase its shares if the company is, or after the payment, would be, unable to meet the applicable solvency test. Further, any purchase or other acquisition by an NSCA company of its own shares, other than redeemable shares, must have the requisite level of shareholder approval. The NSCA also prohibits companies from providing financial assistance, whether directly or indirectly, for the purpose of, or in connection with, a purchase made or to be made of any shares in the company unless the company satisfies a solvency test or an exemption is available.

An ABCA corporation may declare dividends if the board has reasonable grounds for believing that the applicable solvency test is satisfied. Similarly, an ABCA corporation may redeem or purchase its shares provided a solvency test is satisfied. An ABCA corporation, upon enactment of Bill 16, may hold shares in itself (without cancellation) and permit subsidiaries to acquire its shares, for a maximum of 30 days. Previously such shareholdings were prohibited, other than in narrow circumstances, and this new provision will facilitate corporate reorganizations in Alberta. An ABCA corporation may give financial assistance to any person for any purpose, without regard to a solvency test.

Continuance
Once Bill 16 is enacted, it will be possible to move or “continue” an NSULC into Alberta. When an NSULC is continued into Alberta as an AULC, the property of the NSULC will be property of the AULC and the former NSULC will be treated as having been incorporated under the ABCA.

The ABCA contemplates the amalgamation of an Alberta corporation and an extraprovincial corporation (such as a Nova Scotia company) where one is the wholly-owned subsidiary of the other with approval of the directors of the Alberta corporation. However, the more onerous requirements for any amalgamation under the NSCA (shareholder and court approval) would likely result in an Alberta-based parent desiring to amalgamate with an NSULC to first continue the NSULC into Alberta, and then amalgamate using the short-form procedure under Alberta law.

Once Bill 16 becomes law, the AULC will become a viable, and in many circumstances preferable, alternative to the NSULC.

For further information on Alberta unlimited liability corporations, please contact: