Overview
Does any Canadian jurisdiction, provincial or federal, hold an advantage over the others as a destination for venture capital (VC) or private equity (PE) investment? Or, put more broadly, is any one Canadian business corporations statute more attractive than the others for the incorporation of a Canadian company?
Recent amendments to the Alberta Business Corporations Act (ABCA) make a very strong case for the province, particularly as relates to nominee directors. Moreover, these changes build on several VC and PE-friendly provisions already within the ABCA.
We first review what VC and PE investors need to know regarding the amended ABCA. We then provide key practical takeaways. While doing so we also consider guidance from Delaware, from which certain of the ABCA's amendments borrow. Finally, while we discuss these issues from the perspective of nominee directors, the business-friendly nature of the ABCA is an important consideration for anyone looking to incorporate in Canada and regardless of where in Canada the business' operations will be.
Corporate Opportunity Waivers
The duty of loyalty has been called "a cornerstone of Anglo-American corporate law" as well as the "most demanding and litigated fiduciary obligation" imposed on directors.1 This being the case, the most important amendment to the ABCA is likely the new allowance for the advance "waiver of business interests", also know as "corporate opportunity waivers" (COWs).2
Under the duty of loyalty and the "corporate opportunity doctrine" that flows from it, directors are prohibited from appropriating new business opportunities for themselves (or their affiliates) without first offering them to the company. New s.16.1(1) changes this equation under the ABCA by allowing the company to pre-emptively "waive any interest or expectancy... in or to, or in being offered an opportunity to participate in... business opportunities" offered to any of its officers, directors or shareholders.
Interestingly, the text of the amendment follows that added to the Delaware General Corporate Law in 2000 near verbatim. Also noteworthy is that, just as in Delaware, Alberta has adopted COWs for the express purpose of encouraging greater VC and PE investment in the province.3
Delaware was addressing the "conundrum of allocating corporate opportunities between a parent and its partially owned subsidiary, both operating in a similar industry and sharing common board members and offices."4 Similarly, Alberta seeks to accommodate VC and PE investors who often "choose to invest in corporations in the same line of business", who "frequently... sit on the boards of corporations they have invested in", and who "may be reluctant to invest in a company if it means they will never be able to invest in another similar venture in the future."5
Other Amendments to the ABCA Advantageous to Nominee Directors
The other amendments to the ABCA advantageous to VC and PE nominees directors are threefold.
First, the ABCA has expanded the "due diligence defence" available to directors.6 Directors can now escape liability for good faith reliance on "interim financial statements" in addition to the company's audited financial statements. Moreover, directors can now also rely in good faith on reports or opinions of company employees in addition to lawyers, accountants, engineers and appraisers.
Second, a broader exception has been made to the rule requiring directors to abstain from voting on proposed material contracts or material transactions in which they have an interest. Whereas previously the exception was limited to "an arrangement by way of security for money lent to or obligations undertaken by the director", the exception now extends to any transaction where the director "undertakes an obligation or obligations for the benefit of the corporation..."7
Third, the ability of corporations to indemnify directors has been enhanced in several ways. These include expanding the scope of proceedings in respect of which directors may be indemnified. Whereas previously, indemnification was limited to "civil, criminal and administration" proceedings, indemnification now also extends to "investigative" and "other" proceedings.8 Furthermore, whereas previously indemnification was limited to proceedings where the director is a direct "party", indemnification now extends to proceedings where the director is merely "involved".9 Also significant is the lower standard directors must satisfy to establish entitlement to indemnification. Previously directors had to be both "substantially successful on the merits" as well as prove they were "fairly and reasonably" entitled to indemnification. Now they must only have not been "judged by a court... to have committed any fault or omitted to do anything that [they] ought to have done..."10
Pre-Existing Provisions of the ABCA Advantageous to Nominee Directors
The foregoing ABCA amendments join several pre-existing provisions advantageous to nominee directors.
Among these was Alberta's removal of Canadian residency requirements in 2020. In particular, prior to the amendment the ABCA required at least 25% of the directors of an ABCA company to be residents of Canada or, if the corporation had less than four directors, at least one director to be a resident of Canada. Therefore, since 2020 the ABCA has allowed for an entirely non-resident board of directors.
A second and often overlooked section of the ABCA favourable to VC and PE investors is s.122(4). This provides that, in deciding whether a transaction or other course of action is in the best interests of the company, a director "appointed by the holders of a class or series of shares... may give special, but not exclusive, consideration to the interests of those who... appointed the director."
Practical Takeaways and Guidance from Delaware
What are the key practical takeaways for VC and PE investors and their nominee directors?
One is a clear and express effort by the Alberta government to both attract and accommodate VC and PE investment, with the adoption of COWs being the centrepiece. Among other things, studies show an "enormous appetite" for such waivers by Delaware companies since 2000.11
Another is that Alberta now stands apart from the crowd. The Yukon is the only other Canadian jurisdiction that allows COWs. Moreover, no other province or territory offers the full slate of nominee director-friendly provisions Alberta does as relates to (1) directors' ability to vote on self-interested transactions where they benefit the company, (2) enhanced director indemnification, (3) no director Canadian residency requirements, and (4) the ability of nominee directors to give "special" consideration to the interests of their nominating shareholder. Lastly, with its expansion of a director's due diligence defence, Alberta has caught up to certain other provinces on this front.
A third is that the Delaware experience offers certain guidance regarding the adoption of COWs. An example here is the possibility of a "back door" breach of fiduciary duty. Specifically, Delaware recognizes that "if an interested director, officer or shareholder were to use her domination of the board to force through a self-serving [COW], then courts could invalidate the promulgation of the waiver itself as self-dealing."12
This issue may be of less concern in Alberta where, unlike in Delaware, a COW cannot be adopted at the board level but only in the company's articles or in a unanimous shareholders agreement (USA). Nonetheless, risk remains where a USA restricting the powers of the directors has transferred the directors' fiduciary duties to the shareholders. Alternatively, an influential shareholder may exercise sufficient control over the company so as to qualify as a de facto director.
A fourth is for VC and PE investors and their Alberta directors to take appropriate caution. Some of the ABCA's amendments strike a delicate balance. For example, while COWs by the company are now allowed, no corresponding limitation on a director's duty of loyalty has been made.13 Some of the amendments also raise inconsistencies somewhat difficult to reconcile. In particular, while the amendments now permit the company to purchase insurance not limited to situations where the director acted "honestly and in good faith with a view to the best interests of the corporation", the director is still required to have acted "honestly and in good faith with a view to the best interests of the corporation" to be entitled to indemnification by the company.14
A fifth is to remember that the ABCA and its amendments only go so far. Where their limits are reached, travelling further will require bespoke arrangements, typically within a USA. For example, a sensitive issue in the VC and PE context is the treatment of the company's confidential information. A nominating shareholder will typically expect its director(s) to share much data regarding the company's performance and prospects. However, directors have very limited ability to share the company's confidential information absent an express agreement. The USA could therefore provide that the nominee is able to share confidential company information with its nominating shareholder, but also that the shareholder can only disclose the information internally to a select group. And, importantly, this is not only to protect the company and the nominee director but also the nominating shareholder. For example, the nominating shareholder will want to be careful that the confidential information does not reach internal personnel who trade in the shares of the company so as not to go offside insider trading rules.
In total, VC and PE investors in Canada should take notice and, where possible, take advantage of the red carpet rolled out by Alberta. Moreover, the even more business-friendly nature of the amended ABCA is not only significant for VC and PE, but also for anyone else looking to do business in Canada. Simply put, incorporation in one province or territory does not impede doing business in other provinces or territories, and it is not uncommon for a business incorporated in one Canadian jurisdiction to have most – or even all – of its operations in other Canadian jurisdictions.
Footnotes
1. G. Rautenberg & E. Talley, "Contracting Out of the Fiduciary Duty of Loyalty" (2017) 117 Columbia Law Review 1075 [Columbia Law Review] at page 1076 (emphasis added).
2. Business Corporations Act, RSA 2000, c B-9 [ABCA] s.16.1(1).
3. Government of Alberta, Service Alberta, "Business Corporations Act Fact Sheet " (PDF) (2022).
4. Columbia Law Review at page 1076.
5. Alberta Business Corporations Act Fact Sheet.
6. ABCA s. 123(3).
7. ABCA s. 120(6)(a) (emphasis added).
8. ABCA ss. 124(1) and 124(3).
9. ABCA s. 124(3).
10. ABCA s. 124(3).
11. Columbia Law Review at pages 1075 and 1079.
12. Columbia Law Review at page 1083. See also pages 1097-1098.
13. Note also that the Alberta Government has yet to release the additions to the ABCA's regulations corresponding to ABCA s.16.1(1).
14. Compare ABCA s. 124(4) and previous s. 124(4) set out in Bill 84, Business Corporations Amendment Act, 2021, Legislative Assembly of Alberta, Second Session, 30th Legislature.
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.
