All private corporations under the Business Corporations Act (Ontario) (the “OBCA”) are now required to maintain “a register of individuals with significant control” (clause 140(1)(f)) (in this article, a “Register”). A corporation and its directors commit an offence if they fail to create and maintain a Register. A director who is convicted of such an offence is liable “to a fine of not more than $200,000 or to imprisonment for a term of not more than six months, or to both” (258.1(4)) (all statutory references are to the OBCA unless otherwise noted).
Identifying individuals with significant control
A “significant number of shares”
An individual has significant control over a corporation if the individual is the registered or beneficial owner of a “significant number of shares” or if the individual has “direct or indirect control or direction” over the shares (1.1(2)1).
A “significant number of shares” means shares having 25% of all votes or value of the issued shares of the corporation (1.1(1)).
The trustee of a trust, as the registered holder of shares, will be an individual with significant control, if the trust holds a significant number of shares. It is likely that, if the trust has more than one trustee, each trustee will be considered an individual with significant control, if the trust holds a significant number of shares.
The beneficiary of a non-discretionary trust would likely be considered a beneficial owner of shares of a corporation. It is unclear whether the beneficiary of a discretionary would be treated as such.
“Indirect control or direction”
The rules refer to “direct or indirect control or direction” over shares. The intention is to “look through” holding companies. If Ms X owns all of the issued shares of Parentco, which owns all of the issued shares of Holdco, which owns all of the issued shares of Opco, then Ms X will be an individual with significant control whose name and personal information must appear in the Register for each of Holdco and Opco.
Suppose, however, that Mr Y, who is not related to Ms X and deals with her at arm’s length, owns 35% of the issued shares Parentco. Suppose also that Ms X has legal and exclusive de facto control of Parentco. Is Mr Y an individual with significant control of Holdco or Opco? Arguably, Mr Y is not an individual with significant control of either corporation because he cannot control how Parentco votes the shares of Holdco or the shares of Opco. Contrast this with the look-through rules in the Income Tax Act (Canada) that apply for determining whether two corporations are associated. Under those rules, Mr X would be deemed to own 35% of the issued shares Opco. See paragraph 256(1.2)(d) of the Act.
Joint holders of a significant number of shares are all considered to be individuals with significant control (1.1(4)(a). Individuals who own a significant number of shares together that are subject to the terms of an “agreement or arrangement under which the right or rights are to be exercised jointly or in concert by those individuals” will all be considered individuals with significant control (1.1(4)(b)). Query, then, whether an individual who owns only 10% of the issued shares of a corporation will nevertheless be treated as an individual with significant control, if a unanimous shareholder agreement governs the affairs of the corporation.
An individual who is a registered or beneficial owner of shares and who is related (1(1) “related person”) to an individual with significant control will also be an individual with significant control (1.1(4)(c)). Suppose that Mother owns all of the issued shares of Opco. Suppose that Mother undertakes a freeze, and her three children subscribe for non-voting Common Shares with a nominal value immediately after the freeze. The children do not own a significant number of shares, but they are related to Mother, who does, and so each of them will be an individual with significant control.
De facto control
An individual who has rights or influence that, if exercise, would give the person control in fact of a corporation will be treated as an individual with significant control (1.1(2)2). A determination of de facto control “shall take into consideration all factors that are relevant in the circumstances” (1.1(5)(a)). The ability to control the board of a corporation need not be such a factor (1.1(5)(b)). The Legislature did not think it necessary to provide further guidance on “all [the] factors” despite that directors and corporations can be liable for criminal penalties for failing to maintain an accurate Register.
It is clear, however, that an individual can have “de facto” control corporation without being a shareholder. Suppose that Ms X does not hold any shares of Opco but she does hold a demand note issued by Opco. Suppose also that Opco would be forced into insolvency if Ms X demanded payment of the note. In that case, Ms X would likely be considered an individual with significant control in respect of Opco even though she is not a shareholder.
Creating and Maintaining the Register
Contents of the register
A corporation’s Register must contain the following information about each individual with “significant control”
(a) the individual’s name, date of birth and last known address;
(b) the individual’s tax residence;
(c) the day on which the individual became and ceased to be an individual with significant control;
(d) a description of how the “individual is an individual with significant control, including, as applicable, a description of their interests and rights in respect of shares of the corporation”;
(e) “any other prescribed information”; and
(f) a description of the steps taken to verify the accuracy of the information in the Register. (subsection 140.2(1))
Regarding paragraph (e) above, regulations have not yet been released for the new rules. It’s not clear if and when they will be.
The corporation must takes steps annually to verify the Register, and the steps taken must be recorded in the Register. The corporation must also update the Register within 15 days of becoming aware of information that would require an amendment of the Register.