Anonymised, illustrative composite. The buyer had already solved the resident-director problem once, on the same terms as the parent file. This time the target’s own business moved it into a different subsection entirely, and twenty-five per cent stopped being the number that mattered.
At a glance
A foreign media conglomerate agreed to acquire all of the shares of a CBCA-incorporated company that licensed and distributed film and television content into the Canadian market. The buyer’s Canadian counsel, following the same approach that had worked on a board the foreign buyer could not legally fill, recruited two resident Canadian directors for a planned seven-person board and treated the twenty-five per cent threshold as satisfied.
Section 105(3.1) exists precisely to stop that approach from working on certain businesses, and it does so by silently replacing the number rather than adding a separate rule someone might notice. The subsection reads, in relevant part: “a corporation engages in an activity in Canada in a prescribed business sector…then a majority of the directors of the corporation must be resident Canadians.” The word “prescribed” sends the question to the regulations, not to the Act itself — and nobody on the deal team had checked them, because nothing about a routine CBCA share acquisition suggested there was a second document to check.
On the ordinary s.105(3) rule, a seven-person board needed two resident Canadian directors to clear twenty-five per cent — the recruiting and vetting cost the buyer had already budgeted at roughly $38,000. Once s.105(3.1) applied, the same seven-person board needed a majority: at least four. The buyer was two directors short of a threshold it had not known applied, on a board composition it had already announced to the seller.
The Canada Business Corporations Regulations, 2001 answer the “prescribed” question directly, at s.16: “For the purpose of subsection 105(3.1) of the Act, the prescribed business sectors are (a) uranium mining; (b) book publishing or distribution; (c) book sales, where the sale of books is the primary part of the corporation’s business; and (d) film or video distribution.” Four sectors, named exhaustively. The target’s own business — licensing and distributing film and television content — is paragraph (d) by name, not by analogy.
Once a corporation is inside one of those four sectors, s.105(3.1) does not add a second, harder test alongside s.105(3); it replaces the number in s.105(3) outright. Compare the two subsections directly. Section 105(3): “at least twenty-five per cent of the directors of a corporation must be resident Canadians.” Section 105(3.1): “a majority of the directors of the corporation must be resident Canadians.” Twenty-five per cent of seven rounds up to two. A majority of seven is four. The gap between those two numbers is not a matter of degree — on a board the buyer had already structured around holding five of seven seats, a four-person resident-Canadian majority is a different transaction, not a bigger compliance line item.
The clarification subsection makes the point explicit rather than incidental: s.105(3.2) provides that “Nothing in subsection (3.1) shall be construed as reducing any requirement for a specified number or percentage of resident Canadian directors that otherwise applies” — s.105(3.1) is a floor that only ever raises the bar for a sector it reaches, never lowers it. And unlike the OBCA fork in the board seat problem that does not exist once the target continues into Ontario, there is no escape by choice of statute here: this file turns on what the corporation does, not on which Act it is incorporated under, so re-incorporating provincially would not remove a federal ownership-policy rule tied to the activity itself.
The buyer could not close on the board it had announced. It restructured to a seven-person board with four resident Canadian directors — a bare majority — recruiting two additional qualifying candidates on a compressed timeline and giving up numerical composition of the board to its own nominees, though not the buyer’s ability to appoint and remove directors as sole shareholder going forward. The closing date moved five weeks to accommodate the additional recruiting and vetting.
Closing with two of seven resident Canadian directors on a company squarely inside a prescribed sector would have left the corporation offside s.105(3.1) from day one — a defect in the corporation’s own compliance with its constating statute, not merely a contractual risk between buyer and seller, and one that does not cure itself the way an ordinary covenant breach might.
The tell was the word “prescribed” in s.105(3.1) itself — a term that always means check a regulation, never read the Act and stop. A diligence process built entirely around the CBCA’s own text, with no companion check of the Canada Business Corporations Regulations, will clear the ordinary rule and walk straight past the one that actually governs a target in one of four specific sectors.
A 30-minute call is enough to tell you whether AI pays for itself here.
Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
No pitch, no listings. One email when the first report lands.
