Unlimited liability corporation

Unlimited Liability Corporations exist in two of Canada's 10 provinces - Alberta (AULCs for Alberta Unlimited Liability Corporation) and Nova Scotia (NSULCs for Nova Scotia Unlimited Liability Company).

Alberta Unlimited Liability Corporations (AULCs)

On May 17, 2005, Bill 16 – "Business Corporations Amendment Act, 2005", was proclaimed in force in Alberta.

The Bill makes Alberta the second jurisdiction in Canada (after Nova Scotia) to provide for the creation of unlimited liability corporations under its business corporations legislation.

ULCs have commonly been used by US companies investing in Canada on a greenfield basis or through corporate acquisitions of Canadian entities or assets, especially if those Canadian assets or operations are expected to generate business losses.

This is the case because following the January 1, 1997 introduction of the “check-the-box” rules in the US Internal Revenue Code which provided specific exceptions in certain cases such that “ [w] ith regard to Canada . . . any . . . company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law” will not be treated as a corporation (Reg. Section 301.7701-2(b)(8)(ii)(A)), US parent companies have generally been able to consolidate the activities of a Canadian ULC (heretofore only a Nova Scotia ULC) for US income tax purposes. In essence, the ULC acts as a “flow-through” or “disregarded” entity for US tax purposes as the US tax rules “look through” the ULC to its shareholder(s) .

Accordingly, the Alberta ULC (AULC) will be of particular interest to US oil and gas firms with aspirations to grow through acquisition in Alberta, although the AULC should also enjoy application generally throughout all of Canada.

The wording of Bill 16 with respect to the creation of the AULC is as follows:"“The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.”"

The result of this wording is a broadening of the liability for shareholders of an AULC as compared with either the traditional limited corporation or the Nova Scotia ULC (NSULC) . The AULC’s shareholders’ liability for “any liability, act or default” of the ULC is unlimited in extent and joint and several in nature. This broader liability will likely necessitate interposing a US limited corporation between the AULC and the US parent corporation in those states where corporate groups can prepare consolidated tax returns or a single-member LLC in those states where consolidation is not available.

The difference in shareholder liabilities notwithstanding, the creation of the AULC provides an excellent opportunity for US companies to benefit from Alberta’s corporate-friendly legislative and tax regimes. In particular, there are several key differences between the Nova Scotia Companies Act (NSCA) and the Alberta Business Corporations Act (ABCA), many of which make AULCs a more attractive alternative to the NSULC, as the following table illustrates (Nova Scotia vs. Alberta).

General

Nova Scotia Companies Act, R.S.N.S. 1989, c. 81 (NSCA) is based on UK Companies Act and adopts only some of typical modern US business corporation statute concepts

vs. Alberta Business Corporations Act (ABCA) based very closely on modern US corporations statutes.

Registered Office

NSULC must have a registered office in Nova Scotia

vs. AULC must have a registered office in Alberta. This is facilitated through an Alberta law firm.

Director's Residency Requirement

No Canadian residency requirements for directors of a NSULC

vs. as amended by Bill 16, an ABCA corporation must have ¼ of all directors be Canadian residents (formerly ½).

Director Liability

Liability of directors to a NSULC arises mainly from a fiduciary duty at common law (no statutory outline).

vs. ABCA expressly codifies director liability (improper issuance of shares, improper payments to shareholders, unpaid wages, etc.).

Director’s Duty of Care

Common law duty of care subjectively decided by the Supreme Court of Nova Scotia.

vs. Statutorily bound to exercise “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (s. 123(3) as amended by Bill 16).

Shareholder Liability on Dissolution

Under section 135 of the NSCA, shareholders are liable for all debts and liabilities of the NSULC upon winding up. This liability is unlimited for past or present shareholders (but for past shareholders it is extinguished one year after he ceases to be a shareholder).

vs. Shareholder liability is unlimited for obligations of the AULC arising from actions and proceedings commenced by or against the AULC before its dissolution or within 2 years.

Management of the Corporation

NSCA gives shareholders power to manage the corporation (and the authority to delegate that power to directors).

vs. As amended by Bill 16, the ABCA charges directors to manage “or supervise the management” of the business and affairs of the corporation (with authority to delegate that power to shareholders through a USA).

Amalgamations

Only long-form amalgamations requiring approval of ¾ of shareholders AND approval of Supreme Court of Nova Scotia are available.

vs. Both short-form: - parent and subsidiary amalgamation with only board approval requiredAND long-form: - 2/3 shareholder approval are available. No court approval is necessary.

Reductions in Stated Capital

¾ of shareholders and Supreme Court approval required

vs. 2/3 shareholder approvalNo court approval necessary

Dividends

Dividends must be declared and paid out of the profits of the company

vs. ABCA allows a corporation to declare dividends if the board has reasonable grounds to believe that a corporate solvency test is satisfied.

Financial Assistance

NSCA prohibits a corporation from providing financial assistance in connection with a purchase of any shares of the corporation unless the corporation satisfies a solvency test or another exemption is available

vs. There are no restrictions on an ABCA corporation from providing financial assistance to anyone.

Purchase of Corporation’s Own Shares

Other than redeemable shares, any acquisition by an NSCA corporation of its own shares must have requisite shareholder approval

vs. As amended by Bill 16, without shareholder approval, any ABCA corporation may hold shares in itself and allow subsidiaries to hold its shares for a maximum of 30 days (without cancellation). This greatly eases corporate reorganizations.

Continuance

A NSULC can amalgamate with a AULC in Nova Scotia under the ABCA, but the onerous approval requirements (shareholder and court) make the process undesirable in light of Bill 16

vs. Bill 16 will allow a NSULC to continue into Alberta as a AULC as if it were incorporated in AlbertaAll property of the NSULC will become property of the AULC upon continuance.

Conversion

Under the NSCA, a limited corporation cannot convert into a ULC (unless it is an NSCA corporation and amalgamates with a NSULC – subject to shareholder and court approval)

vs. AULCs may convert to limited corporations and limited corporations may convert to AULCs