Overview: Attracting Venture Capital & Private Equity Investment
Businesses in Canada enjoy flexibility regarding what jurisdiction they incorporate in. Simply put, incorporation in one jurisdiction does not impede doing business outside that jurisdiction, and it is not uncommon for a business incorporated in one Canadian province to have most – or even all – of its operations in another Canadian province.
This gives business owners options when deciding where to incorporate, including to strategically select among the different federal, provincial and territorial statutes available based on which best serves their goals. Nor does this optionality end upon initial formation: operating businesses can “continue” from their original jurisdiction of incorporation into another jurisdiction.
Perhaps most importantly, different business statutes offer different advantages and disadvantages in terms of attracting investors. In particular, business statutes can be tailored specifically with the investment practices and preferences of sophisticated financial investors in mind, including venture capital and private equity. The Alberta Government recently did exactly this with the Alberta Business Corporations Act (“ABCA”), making several investor-friendly amendments to an already business-friendly statute.
The Investment-Friendly Aspects of the ABCA in Detail
The following points detail, at a high level, numerous of the advantages of the ABCA relative to other Canadian statutes (federal, provincial and territorial), including as relates to accommodating venture capital and private equity investment.
- No Shareholder / Transparency Register: Unlike
most other Canadian statutes, the ABCA does not require a register
of individual(s) who “significantly control” the
corporation.
- Such registers can be burdensome administratively and impose
significant penalties on both the corporation and its officers and
directors.
- Such registers can be burdensome administratively and impose
significant penalties on both the corporation and its officers and
directors.
- No Director Residency Requirements: Unlike
under federal statute, the ABCA doesn't impose any director
residency requirements. This allows for board appointments
unrestricted by place of residence.
- Corporate Opportunity Waivers: Neither
Canada's federal statute nor any other provincial statute
allows for corporate opportunity waivers.
- This is a significant risk mitigation tool for both investors
and their nominee directors offered only by the ABCA, and is
derived from a similar and very popular feature under US (Delaware)
law.
- This is a significant risk mitigation tool for both investors
and their nominee directors offered only by the ABCA, and is
derived from a similar and very popular feature under US (Delaware)
law.
- Special Consideration to Nominating Shareholder
Interests: Unlike under federal statute or any other
provincial statute, the ABCA permits a nominee director to give
special (although not exclusive) consideration to the interests of
their nominating shareholder.
- This is a significant and widely underappreciated advantage of
the ABCA for both investors and their nominee directors, including
in particular in the venture capital and private equity
contexts.
- This is a significant and widely underappreciated advantage of
the ABCA for both investors and their nominee directors, including
in particular in the venture capital and private equity
contexts.
- Director Self-Interested Transactions: Unlike
under other statutes, the ABCA permits a director to vote on
agreements in which the director may have a material interest, but
where the director's interest may benefit the corporation
(e.g. guaranteeing a loan).
- Expanded Director Due Diligence Defence:
Unlike under other statutes, ABCA directors can rely in good faith
on:
- “Interim financial statements” in addition to the company's audited financial statements.
- Reports or opinions of company employees in addition to
lawyers, accountants, engineers and appraisers.
- Expanded Indemnification of Directors: Recent
amendments to the ABCA have markedly improved the ability of
Alberta corporations to indemnify directors in connection with
potential liability associated with that role.
- Whereas indemnification was previously limited to “civil, criminal and administration” proceedings, indemnification now also extends to “investigative” and “other” proceedings.
- Whereas indemnification was previously limited to proceedings where the director is a direct “party”, indemnification now extends to proceedings where the director is merely “involved”.
- 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…”
- Facilitation of Voting by Written Resolution:
The threshold for approval of a written shareholder resolution has
been reduced from unanimity to 2/3rds of the shareholders entitled
to vote.
- Greater Flexibility Calling Shareholder
Meetings: The mandatory minimum notice period for
reporting issuers has been reduced from 21 days to 7 days and the
maximum notice period has been extended from 50 days to 60
days.
- Facilitation of Dispensing with Appointment of
Auditor: The threshold for passage of a resolution
dispensing with the appointment of an auditor (and waiving the
requirement of audited financial statements of privately-held
corporations) has been reduced from unanimity to 2/3rds of the
shares entitled to vote.
- Greater Flexibility During Arrangements / Exits: Court
discretion during arrangements has been increased, with the court
now able to make any order “it thinks fit” in
connection with an arrangement.
- This allows for potentially significantly more flexibility
structuring and implementing exits.
- This allows for potentially significantly more flexibility
structuring and implementing exits.
- Facilitation of Electronic Signatures /
Delivery: Numerous changes have been made facilitating
electronic signatures and electronic document delivery, including:
(a) security certificates can be issued in electronic form; (b)
financial statements can be signed by electronic means; and (c)
documents can be sent to shareholders, directors and the
corporation electronically.
- Instantaneous Filings: Alberta's CORES
registry doesn't require any government approval for certain
filings (e.g., incorporation of a limited corporation and
amendments to a limited corporation's articles) and such that
they are processed instantaneously. By comparison, other corporate
registries involve processing times based on their workload and/or
or charge additional fees for expedited (but still not
instantaneous) service.
- Extended Revival Period: The revival period
for dissolved corporations has been extended from 5 to 10 years,
facilitating the revival of dormant businesses.
Summary: The Benefits of the ABCA Go Beyond Alberta
The Alberta government's goal in revising the ABCA was to grant Alberta-incorporated corporations “every competitive advantage”, including by reducing administrative burdens and approvals, matching modern communications and business methods, and either matching or exceeding the business and investment friendly aspects of competing legislation.
The aggregate result is what is now arguably Canada's most investor-friendly corporate statute. Moreover, it is important to underscore that the advantages offered by the ABCA are not limited to businesses in Alberta and are also available (including by “continuation”) to companies doing business elsewhere in Canada. Lastly, for founders and other management seeking to attract investment (whether by venture capital, private equity or otherwise), a final point meriting emphasis is that several advantages of the ABCA are specifically designed to accommodate the investment practices and preferences of sophisticated financial firms. Adoption of the ABCA can therefore be a key component of a business' fundraising strategy.
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.
