Alberta's provincial flag flies on a flagpole in Ottawa on July 6, 2020.Adrian Wyld/The Canadian Press
Brad Schneider, Jason Giborski and Paul Blyschak are lawyers at Fasken. This article reflects the opinions of the authors and not of their firm.
Somewhat surprisingly, a recent and relatively significant move by Alberta to attract more venture capital and private equity investors has flown largely under the radar. Specifically, following the lead of Delaware, the most popular jurisdiction for incorporation in the United States, Alberta has made several key amendments to its business corporations law for the express purpose of attracting sophisticated investors.
The move is notable for venture capital and private equity funds, as it’s aimed at accommodating their corporate governance preferences (how they control the companies they invest in). The move is also noteworthy for company founders and startups, as it effectively allows them to grant more favourable terms to investors; it thus offers a valuable tool in their fundraising strategy.
Perhaps most important, however, is that this development is not limited to investment into Alberta, because any Canadian company, regardless of its jurisdiction of incorporation, can freely conduct business nationwide. In this regard, founders can choose any corporate statute (federal, provincial or territorial) when incorporating their business, even without a physical presence in that jurisdiction, and a company initially incorporated in one jurisdiction can migrate, or continue, into another jurisdiction with relative ease.
The benefits of Alberta’s efforts are thus equally available to founders and investors with businesses or investments elsewhere in the country. Alberta’s aim to be Delaware North therefore deserves more widespread attention than it has received so far, as it could mark the start of real competition among Canadian jurisdictions at the business statute level.
Canada, like the U.S., allows for competition among its internal jurisdictions at the corporate law level. In brief, each province and territory is generally free to draft its corporations legislation as it sees fit.
In the U.S., such competition has led to Delaware’s popularity as a jurisdiction for incorporation, including for the so-called “private ordering” it allows around corporate governance (that is, the flexibility for companies to set certain internal rules). Canada, by contrast, hasn’t seen the same level of variation in corporate legislation, as most provincial and territorial statutes closely resemble the federal Canada Business Corporations Act (CBCA).
Nor has Canada seen the emergence of a clear favourite corporations statute similar to Delaware’s down south. While it is not unusual for the CBCA to be chosen as the incorporating statute by businesses in Quebec and elsewhere, many Canadian companies incorporate under their local statute without giving much thought to the issue.
This knee-jerk impulse to incorporate either locally or federally should not be the case, however. It’s therefore significant that Alberta has recently made a relatively unprecedented and concerted effort to stand apart from the crowd and take advantage of Canada’s allowance for corporate statute competition to try to become Delaware North.
The key point is that, in a deliberate move to attract and accommodate sophisticated investors such as venture capital and private equity funds, the Alberta Business Corporations Act (ABCA) now includes several additional investor-friendly features. These features include corporate opportunity waivers, which loosen conflict-of-interest protection for the company, but also reduce litigation risk and facilitate deal-making by investors.
And the ACBA grants companies enhanced ability to indemnify their directors from potential legal liability associated with acting in that role. These additions build on several existing investor-friendly features such as the ability of nominee directors to give special consideration to the interests of their nominating shareholder in deciding the best interests of the company.
In aggregate, the investor-friendly features of the ABCA have passed a tipping point where we believe it’s the optimal choice among Canada’s various available corporations statutes for investors.
For example, if a venture capital or private equity fund is considering investing in a business incorporated federally, they can make it a condition of their investment that the company continue into Alberta and adopt a corporate opportunity waiver.
On the other hand, founders can integrate the ABCA into their fundraising strategy to make themselves more attractive to investors. And again, this isn’t limited to founders in Alberta; it’s a fundraising strategy equally available to startups elsewhere in Canada.
Canada’s wider business community should therefore take note. Corporate governance is among the most complex issues faced by venture capital and private equity. In the U.S., a solution historically has been to turn to Delaware and rely on the private ordering around corporate governance the state allows.
Alberta has not gone quite as far, but the accommodations made for investors and their nominee directors remain significant. These allow investors to mitigate risk. They also present a fundraising opportunity for company founders who are willing to accept the trade-offs. Finally, they mark the potential start of real competition among Canadian jurisdictions at the business statute level.