Written by Jonathan McCullough, James McClary, Nick Karakochuk and Gordon Cameron
Private equity funds that own British Columbia companies face an onerous, new administrative burden under recent amendments to the province’s Business Corporation Act (BCA). The changes could discourage the use of B.C. companies as a vehicle for private equity investment in British Columbia, at a time when economic recovery from the COVID-19 pandemic is critical for the province.
The cumbersome new rules for PE funds are a result of the deemed control definition for limited partnerships and business trusts and the new corporate requirement for transparency registers for B.C. private companies.
The amendments to the BCA state that where a partnership holds 25 percent or more of a private company's shares or the right to appoint or remove a majority of the directors of such company, each partner of the partnership is deemed a significant individual under the BCA regulations and will require disclosure on the register.
Similarly, where a trustee, on behalf of a trust, holds 25 percent or more of a private company's shares or the right to appoint or remove a majority of the directors of such company, the BCA regulations deem the trustee, as well as any person with the power direct the trustee, to be a significant individual and requires disclosure in the register.
What This Means for Private Equity Funds
These new disclosure requirements will be felt by private funds that own British Columbia companies—whether the funds themselves are based in B.C., elsewhere in Canada or outside of the country.
An example could be a private equity fund manager based in Vancouver that is structured as a limited partnership. If the fund holds more than 25 percent of the outstanding shares of a British Columbia portfolio company, that company will seek the information required to be disclosed in their transparency register. Consider if the fund consists of a general partner and 100 limited partners, each of whom holds a beneficial interest in the fund of less than 10%, and in many cases less than 1%. Under such a scenario, the deemed control provisions would mean that each of the 100 limited partners is considered to control the fund under the BCA and, if an individual, it is required to be disclosed in the transparency registers of the portfolio company.
A further challenge for the fund would arise if its limited partners are corporate entities. The general partner on behalf of the fund, will then need to make inquiries to identify any controlling individuals of each such corporate partner. In addition, and of importance to all PE funds (whether based in Canada or outside of Canada) with investments in Canada, having a BC company in their fund structure will trigger this same analysis.
Responding and Looking Ahead
Bennett Jones has many clients and funds that have a BC corporation in their corporate structures and our Vancouver office acts as the registered office for numerous BC corporations. We are contacting our clients and other impacted groups. In addition, Bennett Jones submitted a response to the B.C. Ministry of Finance Consultation Paper seeking public comment on the BCA amendments. In our submission, we recommended that limited partners and trust beneficiaries be treated in the same manner as corporate shareholders, so that only individuals with beneficial ownership, directly or indirectly, of 25% or more of the equity interests will be 'significant individuals' and required to be disclosed in the transparency register of a British Columbia company. We also expressed our deep concerns that the deemed control definition as it applies to limited partnerships and business trusts will discourage the use of British Columbia companies by private funds in respect of their Canadian holdings.
The effective date for all private companies governed by BCA to maintain a transparency register has been extended to October 1, 2020. Bennett Jones will use the additional time granted by the provincial government to continue to work with our British Columbia clients to prepare and maintain their transparency registers in order to comply with the new requirements.