12) Closed Corporations Flashcards
What is a closed corporation?
A CC is a hybrid form of a business structure that borrows from principles of company law and partnership.
Unique features that are foreign to companies and partnerships.
Why was a new type of legal structure created?
- Desire to encourage small business
- Private co. structure regarded as unsuitable for small business
- Less complicated, less formal and inexpensive than a company
Members in principle both own and manage a CC
CC has no share capital - merely members contribution
Member holds an interest, not shares ( interest is out of 100)
What are the characteristics of a closed corporation?
Separate juristic person
If gross abuse:
- Can lift corporate veil.
- More abuse necessary than that of companies.
Members not liable for CC debts: since a CC is a separate legal person capable of having its own assets and liabilities, its members are generally not liable for its debts.
Perpetual succession:
- Change in membership does not affect business existence.
Limited membership (Simplicity?):
- Only natural persons can be members of a CC
- A CC may have only 1 member; number of members limited to 10
What are the principles relating to a CC founding statement?
An existing CC founding statement contains:
- Full name of the corporation, principal business (in order to change need permission from members) to be carried on
- Postal address and address that is the office of the corporation
- Full name of each member, ID number and residential address
- Size (%) of each member’s interest
- Amounts of money and description and fair value of any property or services contributed
- Name of person consented to appointment as accounting officer
- Date of end of financial year of corporation
Everything else regarding how it is run is in Close Corporations act
Amendments:
- If any change is made in respect of any matter, the particulars of which are stated in a founding statement of a corporation, the corporation must lodge amended founding statement with the Registrar
- Signed by or on behalf of every member of the corporation and by or on behalf of any person who will become a member (unanimous agreement)
Inspection
- Corporation must keep copy of founding statement and proof of registration at registered office of CC
- No constructive notice: No person deemed to have knowledge of any particulars merely because such particulars are stated in founding statement or other document regarding a corporation registered by the Registrar or kept at registered office of corporation.
What are the principles relating to members contributions and interests?
Contribution:
- Every person who is to become a member of a corporation upon its registration, shall make to the corporation an initial contribution of money, of property whether corporeal or incorporeal), or of services rendered.
- Contribution must be included in founding statement
Interest:
- Intangible moveable property giving rise to a bundle of rights (distributions & voting) and obligations (fiduciary duties)
- Interest expressed in % (must always be 100%).
- Two or more persons shall not be joint holders of the same member’s interest in a corporation.
What are the principles regarding membership in a CC?
Limit on number of members:
- A corporation may at its incorporation have one or more members, but at no time shall the number of members exceed ten.
Who may be a member?
- Only natural persons.
- Juristic persons (Co or CC) cannot hold interest in CC directly or indirectly
- Trusts (inter vivos or mortis causa) provided:
o Trustee who is a NP can be a member of CC in capacity of trustee, with 2 restrictions:
- juristic person not beneficiary of such trust;
- total number of members including trust beneficiaries does not exceed 10.
What are the principles related to the transfer or disposal of members interests?
General position:
- In accordance with the association agreement (if any); or
- With the consent of every other member of the corporation
Court will order membership to cease if:
- Member permanently incapable, because of unsound mind or any other reason, of performing part in the carrying on of the business of the CC;
- Member guilty of conduct likely to have prejudicial effect on carrying on of the business;
- Member so conducts him/herself in matters relating to the corporation’s business that it is not reasonably practicable for the other member or members to carry on the business of the corporation with him/her; or
- Circumstances have arisen which render it just and equitable that such member should cease to be a member of the corporation.
What are the principles relating to distributions to members?
Any payment by a CC to any member by reason only of his or her membership, may be made only if:
- after such payment is made, the cc’s assets, fairly valued, exceed all its liabilities;
- the CC is able to pay its debts as they become due in the ordinary course of its business; and
- such payment will in the particular circumstances not in fact render the CC unable to pay its debts as they become due in the ordinary course of its business.
Majority of members must just agree to give distribution
What are the principles relating to the re-acquisition of members interest by the CC?
A closed corporation may buy back a members interest only if:
- Previously obtained written consent of every member (unanimous) other than member whose interest is being acquired;
- After payment made assets fairly valued exceed liabilities;
- CC able to pay debts as due in ordinary course of business; and
- Payment will in the particular circumstances not in fact render the cc unable to pay its debts as they become due in the ordinary course of its business
What are the principles relating to financial assistance given by the CC?
CC may give financial assistance for the purpose of acquisition of a member’s interest in that CC by any person, only if:
- Previously obtained written consent of every member other than member whose interest is being acquired;
- After payment made assets fairly valued exceed liabilities;
- CC able to pay debts as due in ordinary course of business; and
- Payment will in the particular circumstances not in fact render the corporation unable to pay its debts as they become due in the ordinary course of its business.
What are the principles relating to the conversion of a Closed Corporation?
A CC may convert to a company
Notice of conversion
- Written statement of conversion -
Approved by at least 75% of those holding members interest
- MOI
Effect of conversion
- Juristic personality continues
- All assets, liabilities, rights of CC vest in Co
- Any legal proceedings before conversion may be continued against the new company
