20 March 2023
⚠ Bill 78 Modifications to the Act Respecting the Legal Publicity of Enterprises
Subject: Imminent coming into force of Bill 78’s provisions – An Act mainly to improve the transparency of enterprises
On March 31, 2023, various modifications to the Act respecting the Legal Publicity of Enterprises (the “Act“) will come into force to impose new obligations on registrants to disclose their ultimate beneficiaries to the Registraire des entreprises du Québec (“REQ“), and to provide for new obligations relating to the directors of registrants.
By “registrants“, we mean corporations and other entities that register or are required to register with the REQ.
WHAT IS AN ULTIMATE BENEFICIARY?
An ultimate beneficiary is an individual (almost always a natural person, with rare exceptions) in a position of control over a registrant or over the conduct of its business activities. A registrant may have several ultimate beneficiaries, all of whom must be declared to the REQ.
Specifically, an ultimate beneficiary is anyone who:
- holds at least 25% of the votes in the registrant or of its fair market value;
- controls at least 25% of the votes in the registrant or of its fair market value;
- has sufficient influence to exercise de facto control over the registrant or over the conduct of its business activities.
De facto control over a registrant exists primarily where an individual can change the board of directors of the registrant, can influence its affairs, or can influence the shareholders of the registrant for the previous purposes. The determination of whether de facto control exists in a given situation depends on circumstances and will have to be examined on a case-by-case basis.
Whether an individual owns or controls shares directly or indirectly is irrelevant to him/her being an ultimate beneficiary. For example, an individual who controls 25% or more of the shares of a registrant through a holding company or under a nominee agreement will still be an ultimate beneficiary of the registrant.
Also, if several individuals jointly hold or control 25% of the votes in a registrant, each will be deemed an ultimate beneficiary even if each of these individuals, taken alone, does not exceed the 25% threshold. The joint exercise of voting rights is mainly applicable in two scenarios:
- Where several shareholders sign a voting agreement among themselves to exercise their voting rights in the registrant through block voting (en bloc);
- Where several shareholders jointly appoint a proxy to exercise their voting rights as a block (en bloc) according to their instructions.
Note that the Act provides specific mechanisms to identify ultimate beneficiaries of limited partnerships and trusts that are required to register or that voluntarily register (most trusts that don’t operate a business, such as testamentary trusts, are not currently required to register and will not be required to register once the modifications to the Act come into force). However, you should be aware that the general partner of a limited partnership and the trustee of a trust will almost always be presumed to be an ultimate beneficiary of a registrant.
WHAT INFORMATION WILL BE REQUIRED TO BE DECLARED IN RESPECT OF ULTIMATE BENEFICIARIES?
After the coming into force of the modifications, all registrants will have to declare, for each of their ultimate beneficiaries, the following:
- name, home address and date of birth;
- any other name by which a given beneficiary identifies himself/herself in Quebec;
- reason for which they qualify as ultimate beneficiaries;
- if it is by holding or controlling shares of the registrant, the tranche of shares held or controlled (more than 25%, 50% or 75%);
- date upon which each became an ultimate beneficiary and (where applicable) the date upon which each ceases to be one.
These new obligations apply to all registrants, regardless of their place of incorporation (Quebec, Canada or abroad). However, certain types of legal entities will be exempt from declaring their ultimate beneficiaries; that is notably the case for non-profits, syndicates of co-ownership, and certain financial institutions.
Despite the obligation to declare the information mentioned above, certain information will not be accessible to the public at the REQ. The information regarding each ultimate beneficiary that will not be publicly available is such individual’s the date of birth, home address (if the registrant declares a business address for him/her), as well as most of the information where the ultimate beneficiary in question is a minor.
MODIFICATIONS WHICH CONCERN DIRECTORS AND BUSINESS ADDRESSES
In addition to the changes pertaining to ultimate beneficiaries, it should be noted that registrants will now be required to:
- provide a copy of an identification document for each one of its directors;
- declare the date of birth of its directors; and
- declare the home address of its directors.
On the other hand, registrants will be allowed to declare a business address for their directors which, like for ultimate beneficiaries, will be the address shown on the register.
It should be noted, however, that only one business address may be declared per natural person, in any capacity whatsoever. This address must be the same for all the registrants for which the individual appears in the register, whether as director, ultimate beneficiary or otherwise. An individual related to several companies will not be permitted to declare different business addresses from one registrant to another.
In other words, wherever an individual appears in the registry of the REQ, his/her business address must always be the same.
PUBLIC ACCESS IN 2024
The new declaration requirements are intended to allow, as of March 31, 2024, a search by name of natural persons in the REQ. This way, the public will be able to see all registrants in respect of which an individual is a shareholder, director, officer or ultimate beneficiary. This is in accordance with the government’s objective of improving transparency and combating fraud and tax avoidance.
We understand, however, that the government’s work as regards the information and results that will be returned and the modalities of the search functions at the REQ is still in progress. We know that it will be possible to conduct searches by first and last name of natural persons, but no other modality has been publicly announced yet.
PENALTIES AND FINES
Faced with a registrant’s failure to submit the information required by the Act, the REQ will first send the registrant a notice of non-compliance that will allow the registrant to remedy its default within 30 to 60 days, depending on the default’s nature.
It should be noted that penalties such as deregistration and fines of up to $25,000 may be imposed on registrants that fail to comply with the Act.
These penalties will only be applied in the most serious cases, such as where:
- a registrant fails to comply inside the specified period despite having received a notice of non-compliance;
- the registrant has declared false or misleading information to the REQ; or
- the registrant obstructed an inspection or investigation led by the REQ.
COMING INTO FORCE AND DEADLINE FOR COMPLIANCE
Most of the changes described above will come into force on March 31, 2023.
Concretely, this means that as of that date, a registrant will have to ensure that it is compliant with these new provisions when filing an annual declaration or an updating declaration to the REQ.
For example, if a registrant is required to file its annual declaration between July 1, 2023 and December 31, 2023, the registrant will be required to comply with the new obligations when filing that annual declaration (or an updating declaration, if applicable).
KRB’s Corporate/M&A department can help you to understand and comply with these changes. Please feel free to contact Maxime Cloutier, Laurie Meitin, Laurie McQueen or Chris Karambatsos with any questions you may have. You will find their contact information below.
Me Maxime Cloutier: (514) 360-7915 | email@example.com
Me Laurie Meitin: (514) 360-3925 | firstname.lastname@example.org
Me Laurie McQueen: (514) 360-7916 | email@example.com
Me Chris Karambatsos: (514) 360-0100 | firstname.lastname@example.org
* NOTE: The present does not constitute a legal opinion and we encourage you to contact us with any questions you may have.