Part 5 Corporate Finance (clauses 23-27)

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The principal amendment proposed in this Part is the repeal of the current financial assistance provisions (s. 44), together with consequential amendments necessary to give effect to this change.

Other amendments include the following:

• The provision relating to stated capital account would be amended to provide for more flexibility in the adjustment of the stated capital account in respect of arm's length transactions (s. 26).
• The section pertaining to the issuance of shares in series (s. 27) would be clarified to provide that the articles may authorize the issue of any class of shares in one or more series and also fix the number of shares in, and determine the designation, rights, privileges, restrictions and conditions attaching to the shares of each series.
• Amendments providing a number of limited exceptions to the general rule prohibiting subsidiaries from acquiring shares of the parent corporation (s. 31(3) to (6)).
• The addition of a new provision prohibiting a corporation which holds shares in itself or in its holding body corporate to vote or permit those shares to be voted, subject to certain conditions.
• An amendment clarifying the financial tests relating to payments to shareholders by way of dividends, acquisition of shares and reduction of stated capital (ss. 35(3) and 36(2)), in order to avoid double counting as a result of changes to section 3860 of the CICA Handbook.
• A number of technical changes are proposed to update and clarify the wording of the Part and to reconcile the English and French versions of the Act.

Briefing Book
An Act to amend the Canada Business Corporations Act and the Canada Cooperatives Act

Bill Clause No.: 23
CBCA Section No.: 38(6)
Topic  :Corporate Finance(Technical Amendments)

Sources of Proposed Law 
N/A

Changes From Present Law 
Repeal s. 38(6).

Purpose of Change 
This technical change clarifies the wording and application of the Act by removing a subsection that is unnecessary.

Similar Provincial Laws 
N/A

Current Wording 
38. (6) This section does not affect any liability that arises under section 118.

Proposed Wording 
N/A

Bill Clause No.: 24
CBCA Section No.:39(12)
Topic :Corporate Finance(Technical Amendments)

Sources of Proposed Law
N/A

Changes From Present Law 
Amend the French version to replace the words "gage pour garantir" with the words "garantie de", and the word "gage" with the word "garantie".

Purpose of Change 
This technical change clarifies the wording and application of the Act.

Similar Provincial Laws 
N/A

Current Wording 
39. (12) La société qui acquiert ses titres de créance peut soit les annuler, soit, sous réserve de tout acte de fiducie ou convention applicable, les réémettre ou les donner en gage pour garantir l'exécution de ses obligations existantes ou futures; l'acquisition, la réémission ou le fait de donner en gage ne constitue pas l'annulation de ces titres

Proposed Wording 
39. (12) La société qui acquiert ses titres de créance peut soit les annuler, soit, sous réserve de tout acte de fiducie ou convention applicable, les réémettre ou les donner en garantie de l'exécution de ses obligations existantes ou futures; l'acquisition, la réémission ou le fait de donner en garantie ne constitue pas l'annulation de ces titres.

Bill Clause No.: 25
CBCA Section No.: 40
Topic :Corporate Finance(Technical Amendment)

Sources of Proposed Law
N/A

Changes From Present Law 
Replace the words "section 34 or 35" with "any of sections 34 to 36" in subsection 40(1).

Subordinate the rights of a shareholder who has contracted with a corporation for the purchase of shares to the rights of any class of shareholders whose rights were in priority to the rights given to the class of shares which he/she contracted to sell to the corporation, but in priority to the rights of the other shareholders.

Section 40 is also reworded to combine s. (2) and (3).

Purpose of Change 
(A) & (B) As the law now stands, a corporation can unilaterally redeem or be forced to redeem "redeemable" shares at the request of their holders, without making payment for such shares if it does not meet the solvency tests set out under section 36. The holders of these shares would therefore arguably become ordinary creditors because section 40 does not make reference to s. 36. This could result in the priority of holders of redeemable shares being increased relative to other shareholders, to the detriment of the creditors of the corporation and the holders of shares whose rights were in priority to the rights given to the holders of the class of shares being purchased. The proposed amendment would ensure that s. 36 shareholders are treated in the same manner as s. 34 and 35 shareholders.

Subsection 40(3) currently provides:

Until the corporation has fully performed a contract referred to in subsection (1), the other party retains the status of a claimant entitled to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors but in priority to the shareholders. [Emphasis added]

Therefore, in a liquidation, the rights of the shareholder who has contracted with the corporation are subject only to the rights of creditors. The shareholders under subs. 40(3) rank ahead of other shareholders, even shareholders of a class of shares which would normally have priority on liquidation.

The proposed amendment would preserve the rights of higher ranking shareholders. Accordingly, the purchaser would have priority only over shareholders of that class or a class of lower priority. The priority of creditors would remains unaffected.

Similar Provincial Laws 
N/A

Current Wording 
40. (1) A contract with a corporation providing for the purchase of shares of the corporation is specifically enforceable against the corporation except to the extent that the corporation cannot perform the contract without thereby being in breach of section 34 or 35.

(2) In any action brought on a contract referred to in subsection (1), the corporation has the burden of proving that performance thereof is prevented by section 34 or 35.

(3) Until the corporation has fully performed a contract referred to in subsection (1), the other party retains the status of a claimant entitled to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors but in priority to the shareholders.

Proposed Wording
40. (1) A corporation shall fulfil its obligations under a contract to buy shares of the corporation, except if the corporation can prove that enforcement of the contract would put it in breach of any of sections 34 to 36.

(2) Until the corporation has fulfilled all its obligations under a contract referred to in subsection (1), the other party retains the status of claimant entitled to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors and to the rights of holders of any class of shares whose rights were in priority to the rights given to the holders of the class of shares being purchased, but in priority to the rights of other shareholders.

Bill Clause No.:26
CBCA Section No.:44
Topic : Corporate Finance(Financial Assistance)

Sources of Proposed Law 
N/A

Changes From Present Law 
Repeal section 44

Purpose of Change 

The CBCA restricts the provision of loans, guarantees and other kinds of financial assistance to directors, officers, employees and shareholders by a CBCA corporation where there are "reasonable grounds for believing that" either the corporation is or would become insolvent or the corporation's assets are or would be less than all of its liabilities and stated capital.

This wording causes legal and accounting practitioners considerable difficulty in providing clients with unqualified opinions. In 1988, the Canadian Institute of Chartered Accountants issued an opinion that accounting practitioners should not provide an opinion on matters related to solvency. As a result, the solvency test and the potential liability that can arise from not meeting it can impede legitimate financial transactions that directors would otherwise be willing to consider and that may be supportive of the competitiveness and long-term viability of CBCA corporations.

Directors approving financial assistance transactions are subject to statutory fiduciary duties to act in the best interests of the corporation, and they can be sued for failure to do so. This provides adequate safeguards.

Similar Provincial Laws 
N/A

Current Wording 
44. (1) Subject to subsection (2), a corporation or any corporation with which it is affiliated shall not, directly or indirectly, give financial assistance by means of a loan, guarantee or otherwise

(a) to any shareholder, director, officer or employee of the corporation or of an affiliated corporation or to an associate of any such person for any purpose, or

(b) to any person for the purpose of or in connection with a purchase of a share issued or to be issued by the corporation or affiliated corporation, where there are reasonable grounds for believing that

(c) the corporation is or, after giving the financial assistance, would be unable to pay its liabilities as they become due, or

(d) the realizable value of the corporation's assets, excluding the amount of any financial assistance in the form of a loan and in the form of assets pledged or encumbered to secure a guarantee, after giving the financial assistance, would be less than the aggregate of the corporation's liabilities and stated capital of all classes.

Proposed Wording 
N/A

Bill Clause No.:27
CBCA Section No.: 45(1) and (2)
Topic :Corporate Finance(Technical Amendments)

Sources of Proposed Law
N/A

Changes From Present Law
Change the cross reference in s. 45(1) by adding a reference to s. 118(4) and (5) and 226(4).

Purpose of Change 
Subsection 45(1) limits the liability of shareholders. Certain exceptions to limited liability are specified. Substantive liability is imposed on shareholders under s. 118(4), (5) and 226(4) and therefore s. 45(1) should refer to them.

Similar Provincial Laws 
N/A

Current Wording 
45. (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under subsection 38(4), 146(5) or 226(5).

(2) Subject to subsection 49(8), the articles may provide that the corporation has a lien on a share registered in the name of a shareholder or his legal representative for a debt of that shareholder to the corporation, including an amount unpaid in respect of a share issued by a body corporate on the date it was continued under this Act.

Proposed Wording 
45. (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation except under subsection 38(4), 118(4) or (5), 146(5) or 226(4) or (5).

(2) Subject to subsection 49(8), the articles may provide that the corporation has a lien on a share registered in the name of a shareholder or the shareholder's personal representative for a debt of that shareholder to the corporation, including an amount unpaid in respect of a share issued by a body corporate on the date it was continued under his Act.

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