November 7, 2011
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There has been a lot of buzz recently around the Quebec Business Corporations Act ("QBCA"). As corporations require more flexibility to govern themselves — and directors, officers, and shareholders demand a greater voice — the QBCA delivers a host of changes which will certainly shake up and transform the corporate scene in Quebec.

The new act came into force on February 14, 2011, in response to criticism that its predecessor, the Companies Act– almost three decades old—was too inadequate and inflexible to meet the modern needs of corporations. In order to bring Quebec corporations into the 21st century, the QBCA accepts e-filings of corporate documents, and allows for remote participation in meetings, as well as external meetings outside of the province.

Since it came into force, the QBCA automatically governed approximately 300,000 existing corporations in Quebec, many of them small and medium enterprises. These corporations, governed by Part IA of the Companies Act, were not required to file any articles of continuation. In five years, the QBCA will also govern joint stock companies, provided they file their articles of continuation.

The QBCA takes its inspiration from various North American sources, including the Canada Business Corporations Act (CBCA) and the Delaware Statute. At least a hundred or more innovative provisions in the act permit it to exceed the scope of the CBCA. This is why the QBCA is being lauded as the most progressive corporate legislation in Canada.

The QBCA fundamentally changes the way that corporations govern themselves. Directors and officers now not only have a “duty of care to act with prudence and diligence”, but they also owe a duty of loyalty to the corporation. However, if ever their decisions come into question, directors and officers can limit their liability by relying on the due diligence defence for decisions taken in good faith.

The greatest area of change for corporations now governed by the QBCA is that shareholders—especially minority and sole shareholders – have extensive rights. Shareholders are now lawfully entitled to bring derivative actions; that is, where they act in the name of the corporation. Affected shareholders are now protected against squeeze-out transactions when their shares are cancelled, and can vote on these transactions even when their shares carry no voting rights. Minority shareholders also benefit from the right of dissent: to have their shares purchased at fair market value. Unique to the QBCA, and in contrast to the CBCA, is the ability of sole shareholders to withdraw all the powers of the Board of Directors and not appoint any directors.

The only restrictions in the QBCA respecting shares are that they must be registered, and bearer shares are no longer permitted. Apart from that, the issuance of uncertificated shares is permitted, as are separate classes of shares with identical characteristics. Subsidiaries are now permitted to hold the shares of its parent corporation for thirty days, and this is especially helpful for corporate reorganizations.

What is of interest to corporations outside of Quebec is that the new provisions on inter-jurisdictional continuance allow a corporation constituted outside of Quebec to continue under the QBCA, and vice versa. While the director of a QBCA corporation can be a non-Canadian resident, the head office of a QBCA-governed corporation must be located in the province of Quebec. Operating a business in Quebec entails its own concerns; namely, respecting the province's Charter of the French Language. This mandates that French is the only official language of Quebec and that business in the province must be conducted in the French language.

Apart from language considerations, a comprehensive understanding of tax implications will be essential in determining if constituting a corporation under the QBCA is right for a business outside of Quebec. While the "balance sheet test" has been replaced with a more relaxed approach, stricter tax rules have deflated some of the optimism surrounding the QBCA. The province has adopted measures to curb tax avoidance schemes, and is imposing greater penalties for taxpayers found using those schemes. The province has also redefined the scope of bona fide transactions to make them less permissive, thereby allowing the province to wield greater power in determining whether a transaction falls under the General Anti-Avoidance Rule.

There are many benefits to incorporating under the QBCA, but just as many pitfalls if consideration is not given to relevant factors. Consult with your lawyer to determine the best legislative vehicle for incorporating your business.

Author: Sonal Modi, © Nelligan O'Brien Payne LLP 2011

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Business Law