Alberta Legislation Aimed at Limited Liability for Holders of Trust Units Receives Royal Assent
May 28, 2004
Barclay A. Laughland
John S. Osler
Bill 34 of the Alberta legislature, entitled Income Trusts Liability Act, received royal assent on May 19, 2004, and will become law once proclaimed in force by the government. The bill is aimed at providing unitholders of Alberta income trusts with similar immunity from liability as that held by shareholders of a corporation. The bill is intended to protect holders of trust units of an income trust from liability for any act, default, obligation or liability of a trustee of such income trust, provided that such act, default, obligation or liability arises after the bill becomes law. In addition, in order for unitholders of a given income trust to obtain the limited liability protection benefits afforded by the legislation, that income trust must (i) be created by a trust instrument governed by the laws of Alberta; and (ii) be a "reporting issuer" for the purposes of the Securities Act (Alberta) which, in general, means that the income trust (or its predecessor) has offered its securities by a prospectus.
The bill also proposes certain amendments to the Securities Act (Alberta) in order to expand both the definition of what constitutes "control" for purposes of the Act and the categories of persons who are, or may be determined by the Alberta Securities Commission to be, "insiders" in respect of an issuer. In general, the amendments will have the following impact:
(a) Deemed Insider: Every manager and operating entity of an Alberta income trust will now be deemed an insider of such income trust. Also, if the operating entity or manager are not reporting issuers then every person or company who would be an insider of the operating entity or the manager, if those entities were reporting issuers, will each be deemed an insider of such income trust.
(b) Discretionary Insider Designations: The Alberta Securities Commission will have the power to designate a person or company as an "insider," either by order (where it is in the public interest to do so) or by enactment of a regulation.
(c) Control: The definition of "control" will be amended so that a person or company will be considered to control another person or company if they directly or indirectly have the power to direct the management or policies of such other person or company by virtue of:
(i) ownership or direction over voting securities;
(ii) a written agreement or trust instrument;
(iii) being a general partner or controlling a general partner of the other person or company; or
(iv) being the trustee or the other person or company.
The amendments expanding the definition of "insider" are intended to address the concern of the Alberta Securities Commission that the current definition of "insider" may not, in certain circumstances, capture certain entities and persons within an income trust structure who, on a policy basis, ought to be subject to the rules pertaining to insiders of an issuer. These amendments are generally consistent with the approach of the Canadian securities administrators concerning insiders of an income trust, as reflected in proposed National Instrument 41-201 Income Trusts and Other Indirect Offerings.
The amendment to the concept of "control" is significant as it changes the existing definition of control contained in securities law from a clear "bright-line" test for determining control (where control is determined on the basis of owning securities carrying more than 50 per cent of the votes to elect directors, where the votes carried by such securities are sufficient to elect a majority of the directors) to a test which is more subjective.