Individuals with Significant Control must be Disclosed beginning May 2020
Each private company governed by the B.C. Business Corporations Act will soon need to maintain a transparency register for individuals with significant control over the company. Amendments to the Business Corporations Act, which received royal assent earlier this year, will enter into force on May 1, 2020.
We recently reported on the purposes and substance of the new transparency register (see our bulletin New Transparency Registry for all Private B.C. Companies in the Offing). With implementing regulations and other resources now having been issued by the B.C. government, further guidance is available to private companies to adopt the new transparency register in a timely manner.
Private B.C. Companies Must Create and Maintain Transparency Register
As of May 1, 2020, every private company governed by the B.C. Business Corporations Act must maintain an up-to-date transparency register. New companies being incorporated in B.C. must establish the transparency register upon incorporation.
Reporting issuers in B.C. and other provinces and companies listed on certain Canadian and international stock exchanges are not considered “private”. Further, corporations extra-provincially registered in British Columbia are not required to maintain a transparency register under B.C. corporate laws.
Private B.C. companies are also required to take reasonable steps to verify and update the information in the register annually and when they become aware of new or different information.
The reasonable verification and updating steps include requesting relevant information from the shareholders of the company. The B.C. Registrar of Companies has published a Template Questionnaire for shareholders or significant individuals (Word Document), which can be used by companies to gather the required information. Shareholders must take reasonable steps to compile the requested information and promptly provide it to the company.
Non-compliance constitutes an offence subject to a maximum fine of $50,000 for individuals and $100,000 for other persons.
Who are “Significant Individuals”?
The transparency register must list all “significant individuals” in respect of a private company. Significant individuals are defined as individuals who:
1. control a significant number of company shares; or,
2. have the right or ability to elect, appoint or remove the majority of the directors of the private company.
Individuals also qualify as “significant individuals” if they have interests, rights, or abilities that, combined with the interests, rights or abilities of others, fall into the above categories.
Qualifying as a Significant Individual through Shareholdings
The first category of individuals who must be disclosed in the transparency register have significant control over a private company based their shareholdings. This includes any individual with rights or interests in either 25% or more of the shares of the company or 25% or more of its voting shares because the individual:
- is the registered owner of such shares;
- is the beneficial owner of such shares;
- indirectly controls such shares; or
- any combination of the foregoing.
An individual has indirect control if they control: an intermediary who is the registered owner of the shares; or a chain of intermediaries, the last of which is the registered owner of the shares. These are terms defined in the implementing regulations and described in more detail below.
Further, individuals who are trustees and personal or other legal representatives in a chain of intermediaries are presumed to exercise indirect control over the shares and must therefore be listed in the transparency register.
Qualifying as Significant Individual through Control of the Company’s Board
The second category of individuals has significant control over the majority of the company’s directors by any of the following means, alone or in combination:
- the right to elect, appoint or remove one or more of the directors;
- indirect control of the right to elect, appoint or remove one or more of the directors; or
- the ability to exercise direct and significant influence over an individual who has the right or indirect control to elect, appoint or remove one or more directors.
Again, an individual has indirect control if they control: an intermediary who has the right to elect, appoint or remove one or more directors; or a chain of intermediaries, in which the last intermediary holds such right. Individual trustees and personal or other legal representatives in a chain of intermediaries are deemed to have indirect control and must be included in the transparency register.
What are Intermediaries and Chains of Intermediaries?
Key concepts for establishing the new transparency register are intermediaries, and chains of intermediaries.
An intermediary is a corporation, partnership, agent, trustee, personal or other legal representative.
A chain of intermediaries involves two or more intermediaries having a hierarchal relationship to each other in which each intermediary controls the intermediary below it. The last intermediary in the chain is either the registered owner of shares in the private company or has the right to elect, appoint or remove one or more directors of the company.
How Do You Know if You Control an Intermediary?
How control over an intermediary is exercised depends on the type of intermediary.
Control of Intermediaries who are Trustees
The implementing regulations establish three rules to determine whether an intermediary trustee is controlled by another person:
- a trustee who is the registered owner of shares in a private company is controlled by the person who, under the terms of the trust, has the power to direct the trustee how to exercise any of the rights attached to the shares;
- a trustee who has the right to elect, appoint or remove one or more directors of a private company is controlled by the person who, under the terms of the trust, has the power to direct the trustee how to exercise such right; and
- a trustee who controls an intermediary is, in turn, controlled by the person who, under the terms of the trust, has the power to direct the trustee how to exercise such control.
Control of Intermediaries who are Personal or other Legal Representatives
The rules for determining control over personal or other legal representatives parallel those for trustees:
- a representative who is the registered owner of shares in a private company is controlled by the person who has the legal authority to direct the representative how to exercise any of the rights attached to the shares;
- a representative who has the right to elect, appoint or remove one or more directors of a private company is controlled by the person who has the legal authority to direct the representative how to exercise such right; and
- a representative who controls an intermediary is, in turn, controlled by the person who has the legal authority to direct the representative how to exercise such control.
Control over other Intermediaries
Finally, control of corporations, partnerships or agents who are not also trustees or personal or legal representatives is determined based on the following three rules:
- a corporation is controlled by the person who has the right to elect or appoint the majority of its directors;
- a partnership is controlled by a person who is a partner in the partnership; and
- an agent is controlled by its principal.
How does a Private Company establish a Transparency Register?
The transparency register may be in electronic, microfilm or paper form, and must be available for inspection or copying by directors, police, certain tax authorities and regulators from the company’s records office. The B.C. Registrar of Companies (the “Registrar”) has provided a Template Transparency Register for download and use by private companies and has also provided useful examples of how to complete transparency registers for several common scenarios.
If a private company is unable to obtain or confirm some or all of the information required, the transparency register must identify the information it was unable to obtain or confirm and summarize the steps taken to obtain the information.
To assist companies in identifying significant individuals in their companies, the B.C. Registrar of Companies has published an online guide.
What is Next?
Private companies and their directors should use the time remaining until May 1, 2020 to gather the information required to prepare their transparency registers and to analyze more complex ownership and control structures. Once transparency register requirements come into force, there will be no additional transitional period.