Sponsors of private equity and venture capital funds (Sponsors)
should consider the applicability of the reporting requirements,
due on May 31, 2024, under the Fighting Against Forced Labour
and Child Labour in Supply Chains Act (the
Act, sometimes referred to as the Modern Slavery
Act), which came into force on Jan. 1.
Generally, the Modern Slavery Act is intended to
support Canada’s commitment to address forced and child labour
in our supply chains and, as such, is targeted at the production,
sale or distribution of goods in Canada or elsewhere,
or the importation of goods into Canada.
As Sponsors, requirements with respect to goods may not
immediately register as being impactful from a compliance
perspective. The reporting obligations under the Act, however, may
well be relevant, and they are part of the wider spotlight being
shone on environmental, social, and governance-related matters.
There are legal, operational, and potentially significant
reputational risks to non-compliance. These risks include fines
against affected businesses, and their directors and officers, of
up to $250,000.
Sponsors may trigger reporting obligations under the Act by
virtue of controlling an entity that produces, sells, distributes
or imports goods in Canada and/or by virtue of selling, importing,
or distributing goods into Canada – such as office equipment.
The thresholds for both the concept of control and the quantum of
goods sold, produced, distributed, or imported are not clearly
delineated in the Act, so we encourage each Sponsor to assess their
own situation well in advance of the latest reporting deadline of
May 31.
Threshold applicability
There are two stages of assessing applicability of the Act.
First, entities that have a business presence in Canada (or that
are listed on a Canadian stock exchange), and that meet at least
two of the following conditions in their two most recent financial
years, are required to report if they also meet the second
part of the test, which is a reporting applicability (see next
section):
- Entities with at least $20 million in assets
- Entities that have generated at least $40 million in
revenue - Entities that employ at least 250 employees
Reporting applicability
There are two ways that a Sponsor, general partner or manager
might attract reporting obligations under the Act:
- selling, producing, or distributing goods in Canada or
elsewhere, or importing goods into Canada; and/or - having control over an entity that sells, produces, or
distributes goods in Canada or elsewhere, or imports goods into
Canada.
Guidance issued in Dec. 2023 from the minister of Public Safety
Canada (the Minister) explains that control under the Act includes
“direct and indirect control and extends down the
organizational chain”. The term control is undefined under the
Act, though the Minister’s guidance says that the concept
should be applied broadly in a manner consistent with the Act.
Accounting standards may be helpful, though not determinative, in
making this assessment. In the case of private equity or venture
capital funds, taking a controlling interest in a portfolio
company, and/or participating actively in the management and
direction of a portfolio company, would trigger the Sponsor’s
reporting obligations under the Act, in respect of each such
portfolio company. The Act was not necessarily drafted with
Sponsors and the relationship they have with portfolio companies in
mind. The nature of the Sponsor’s relationship to portfolio
companies that trigger a report under the Act requires a
fact-specific analysis of how the Sponsor can gather and assess the
required information needed to submit the report. This exercise
will differ from the process that would be undertaken by a parent
company with respect to a subsidiary.
Additionally, even if a Sponsor determines that a fund does not
control another entity, the Sponsor will need to assess whether the
fund, general partner and/or the manager is an importer of goods
into Canada. There is no de minimis amount of imported
goods that would be exempt from the reporting requirement, though
the Minister recently clarified that the Act is not meant to
capture “very minor dealings.” Common examples of
imported goods Sponsors may wish to catalogue include computer
equipment, office supplies and branded merchandise.
Publicly available reports under the Act are a source of
information and risk
Reports required to be made under the Act must be published on a
reporting entity’s website, filed with the Minister and, for
federally incorporated issuers, provided to shareholders; see our
previous article on how to prepare a “Modern Slavery Report”
in Canada.
Sponsors that are subject to the Act will have to file publicly
available reports detailing their actions taken in the previous
fiscal year to prevent and reduce the risk of forced or child
labour being used in the production of goods. The public nature of
these reports will heighten transparency and, potentially, legal
and reputational risk, for firms not otherwise accustomed to making
public disclosure about such matters.
About BLG
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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