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Company/Commercial - Canada

Alberta Competes with Nova Scotia with New Unlimited Liability Corporation

Contributed byBorden Ladner Gervais LLP

September 5 2005

IntroductionUnlimited Liability CorporationAULC Versus NSULCComment

Introduction

On May 17 2005 the province of Alberta amended its Business Corporations Act to modernize itscorporate legislation and make it consistent with most other North American jurisdictions. At thesame time, Alberta added a number of provisions to permit the incorporation, continuance and

amalgamation of unlimited liability corporations (ULCs) in Alberta.

This move by Alberta into the ULC area is a direct assault on what has been a bread-and-buttersource of revenue for the province of Nova Scotia and its law firms. Prior to the changes to theAlberta Business Corporations Act, Nova Scotia was the only jurisdiction in Canada that permittedthe creation of ULCs. Therefore, US investors have traditionally used Novia Scotia ULCs (NSULCs)when they wish to have a disregarded entity or partnership for US tax purposes to acquire or hold abusiness, enter into a joint venture or otherwise invest in Canada. In a number of cases ULCs havebeen formed under Nova Scotia law but with the head office in Alberta (due to Alberta's favourabletax environment). US investors and their advisers now have the choice of using either Alberta orNova Scotia to create their ULCs. For an analysis of the tax advantages of ULCs please see"Alberta ULCs Offer New Tax Options to US Investors".

Alberta's new ULC legislation has raised questions as to whether the Alberta ULC (AULC) willreplace the NSULC. This has resulted in advisers on both sides taking strong positions advocatingone form of ULC over the other.

Unlimited Liability Corporation

A ULC is a company in which the shareholders have unlimited liability, much like partners in ageneral partnership. This is different to the common form of a corporation, which is a separate legalentity from its shareholders who are generally not liable for the liabilities, acts or omissions of thecorporation. This is illustrated by the requirement in the Alberta Business Corporation Act that thearticles of a ULC state that "the liability of each of the shareholders of the corporation for anyliability, act or default of the corporation is unlimited in extent and joint and several in nature".

AULC Versus NSULC

The comparison of an AULC to an NSULC requires a comparison of the provisions of the AlbertaBusiness Corporations Act with those of the Nova Scotia Companies Act.

Basis of LegislationIn Alberta, the legislation is based on the modern US-style business corporation statutes, which aremore enabling for corporate planners and less regulatory in nature. This is similar to most otherprovincial statutes. In Nova Scotia, the legislation is based on the UK Companies Act, where a
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detailed memorandum and articles of association are used to create and regulate corporate activity.In Nova Scotia, judicial regulation and approval is more pervasive. Alberta has the advantage in thiscase.

Director residency requirements

In Alberta, one-quarter of the directors of an AULC must be resident Canadians. However, in NovaScotia there are no Canadian residency requirements for directors, giving Nova Scotia theadvantage.

CostIn Alberta, the incorporation fee is C$100 and there is no annual renewal fee. By contrast, in NovaScotia the incorporation fee is C$6,000, with an annual renewal fee of C$2,000. Alberta clearlyholds the financial advantage.

NameIn Alberta, the name of the corporation must end with 'Unlimited Liability Corporation' or 'ULC'. InNova Scotia there is no legal requirement to refer to the company's unlimited liability status in itsname. Therefore, Nova Scotia has the advantage.

Continuance of extra-provincial corporationAn extra-provincial corporation is allowed to continue into Alberta as an AULC regardless ofwhether it was a ULC or a traditional corporation. However, in Nova Scotia a corporation fromanother jurisdiction cannot continue into Nova Scotia as an NSULC. The corporation must continueinto Nova Scotia as a limited company and then implement an amalgamation, winding-up orarrangement to convert to an NSULC. Thus, Alberta has the advantage in this case.

Nature and scope of shareholder liabilityIn Alberta, the shareholder of an AULC has direct liability, on a joint and several basis, for anyliability act or default of the AULC. However, the act is silent on the scope of liability of ashareholder for liabilities either before or after the shareholder obtained or disposed of its shares. In

Nova Scotia, the shareholders of an NSULC are liable for any debts or liabilities only if there is ashortfall after the NSULC has been dissolved. There is no direct liability. Shareholders that cease tobe shareholders more than a year before the commencement of the winding-up of the NSULC arenot liable for any NSULC deficiency. Likewise, prior shareholders are not liable if the existingshareholders can satisfy the shortfall. In addition, a shareholder is not liable for the debts incurredby the NSULC after the shareholder has disposed of its shares. Therefore, Nova Scotia has theadvantage.

AmalgamationsIn Alberta, both short-form and long-form amalgamation procedures are permitted. The short-formprocedure may be used by a parent and its subsidiary, or two or more subsidiaries, and only boardapproval, rather than shareholder approval, is required. The long-form procedure must be approvedby the requisite number of shareholders (usually two-thirds of the votes cast) but there is norequirement for court approval. By contast, in Nova Scotia all amalgamations are long form andmust be approved by the requisite number of shareholders (three-quarters of the votes cast) and bythe court. Alberta has the advantage.

Corporate financeIn Alberta, corporations can issue shares without nominal or par value only. They may issue onlyfully paid shares, and shares cannot be issued in consideration of a debt instrument. In NovaScotia, corporations may issue par value shares in addition to shares without nominal or par value,and they may issue shares that are not fully paid. Shares can be issued in consideration of a debt


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instrument. Thus, Nova Scotia has the advantage.

Financial assistanceIn Alberta, corporations may give financial assistance to any person for any purpose without regardto a solvency test. However, the Nova Scotia act prohibits corporations from providing financial

assistance, whether directly or indirectly, for the purpose of or in connection with a purchase madeor to be made of any shares in the corporation, unless the corporation satisfies a solvency test or anexemption is available. Therefore, Alberta has the advantage

Formative documentsIn Alberta, the articles of incorporation of an AULC must contain an express statement that theliability of each shareholder for any liability, act or default of the AULC is unlimited in extent and jointand several in nature. Each share certificate must display, in a prominent position, a statement thatthe liability of the owner of the shares represented by the certificate is unlimited. In Nova Scotia, thearticles of association do not have to indicate that the liability of the members is unlimited, althoughit is permissible to do so. As a result, Nova Scotia has the advantage

Registered office

In both Alberta and Nova Scotia, the registered office of an AULC and an NSULC respectively mustbe maintained within the province - neither province has an advantage in this case.

Location of meetingsIn Alberta, shareholders' meetings must be held at a place in Alberta stipulated in the bylaws ordetermined by the directors, unless all of the voting shareholders agree to hold meetings outsideAlberta. As Nova Scotia has no requirements regarding where shareholders' meetings take place, ithas the advantage.

Management powerIn Alberta, the power to manage the corporation resides with the directors but may be delegated toshareholders through a unanimous shareholders agreement. In Nova Scotia, power to manage thecorporation rests with the shareholders, which may delegate that power to the directors. Thus,Alberta has the advantage.

Director liabilityThe Alberta act codifies directors' liability by providing expressly for such liability in the case of:

improper issuance of shares;

improper purchase, redemption or other acquisition of shares; and

improper payments to shareholders.

The scope of directors' indemnity is limited to specifically enumerated matters. In Nova Scotia,

directors' liability arises from a fiduciary duty at common law and there is no limitation on the scopeof indemnification that an NSULC can provide to its directors. Therefore, neither province has anadvantage.

Duty of careIn Alberta, there is a statutory requirement for directors to exercise the care, diligence and skill thata reasonably prudent person would exercise in comparable circumstances. In Nova Scotia, there isa common law duty of care for directors, which is a subjective test as determined by the courts.


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Alberta has the advantage.

DividendsIn Alberta, a corporation may declare dividends if the board has reasonable grounds to believe thatthe applicable solvency test is satisfied. There are statutory restrictions related to declaration of

dividends. In Nova Scotia, dividends must be declared and paid out of the profits of the company,and there are no statutory restrictions related to declaration of dividends. Instead, common law rulesapply. Neither province has an advantage in this case.

Holding own sharesIn Alberta, a corporation may hold shares in itself (without cancellation) and permit subsidiaries toacquire its shares for a maximum of 30 days so as to facilitate corporate reorganizations. In NovaScotia, any purchase or other acquisition by an NSULC of its own shares, other than redeemableshares, must have the requisite level of shareholder approval. Therefore, Alberta has theadvantage.

Comment

As can be seen from this analysis, both the NSULC and the AULC have advantages anddisadvantages. The residency director requirement is a distinct disadvantage to an AULC for anyUS business that does not have a Canadian representative who can meet the resident Canadiantest. The scope of shareholder liability with an AULC has been much commented on. However, theimpact of any difference in scope will be reduced or neutralized if a US C corporation, which is aspecial purpose vehicle for this purpose, is used as the shareholder of the ULC. Therefore, lowercosts, along with ease of continuance and amalgamation, will encourage many US investors to useAULCs.

For further information on this topic please contactElinore J Richardson at Borden Ladner GervaisLLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email

([email protected]).

The materials contained on this website are for general information purposes only and are subjectto thedisclaimer.
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