Unlimited Liability Corporation - Alberta Unlimited Liability Corporations (AULCs)

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.

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 corporation between the AULC and the US parent corporation in those states where corporate groups can prepare consolidated tax returns or a single-member limited liability company in those states where consolidation is not available.

There are several key differences between the Nova Scotia Companies Act (NSCA) and the Alberta Business Corporations Act (ABCA):

• Alberta Business Corporations Act (ABCA) based very closely on modern US corporations statutes.
• A NSULC must have a registered office in Nova Scotia vs. AULC must have a registered office in Alberta.
• There are no Canadian residency requirements for directors of a NSULC vs. an ABCA corporation must have ¼ of all directors be Canadian residents
• 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.)
• In Nova Scotia, the directors' duty of care is determined by the common law, whereas in Alberta directors are 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).
• 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). In Alberta 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.
• NSCA gives shareholders power to manage the corporation (and the authority to delegate that power to directors), whereas in Alberta, 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 corporation or LLC).
• In Nova Scotia, only long-form amalgamations requiring approval of ¾ of shareholders AND approval of Supreme Court are available, whereas in Alberta no court approval is necessary (both short-form: - parent and subsidiary amalgamation with only board approval required, and long-form: - 2/3 shareholder approval are available)
• Reductions in Stated Capital: in Nova Scotia ¾ of shareholders and Supreme Court approval required, whereas in Alberta 2/3 shareholder approval is needed and no court approval necessary
• Dividends must be declared and paid out of the profits of the company in Nova Scotia vs. ABCA allows a corporation to declare dividends if the board has reasonable grounds to believe that a corporate solvency test is satisfied.
• 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, whereas there are no restrictions on an ABCA corporation from providing financial assistance to anyone.
• Other than redeemable shares, any acquisition by an NSCA corporation of its own shares must have requisite shareholder approval. In Alberta, 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 shareholder and court approvals are required. Under the ABCA a NSULC can continue into Alberta as a AULC as if it were incorporated in Alberta. All 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). AULCs may convert to limited corporations and limited corporations may convert to AULCs