Ch 9-13, 15 Flashcards
Describe the structure of a for profit corporation (management and capital structure)
Capital Structure
Equity interests are divided into shares, holders of shares referred to as shareholders
Shareholders invest for return, their liability is limited to the amount of their investment
Three essential shareholders’ rights: voting, dividend and liquidation
Voting right: Right to elect directors who will manage the corporation
Dividend right: Right to receive distributions out of the profits of the corporation
Liquidation right: Right to receive what remains when the assets of the corporation are sold and liabilities are paid off
Management Structure
Board of directors – Elected by shareholders
Responsible for managing the corporation
Directors appoint officers to manage day-to-day operation
Officers can engage others to carry out managerial tasks
Org structure can be complex, hierarchical, or can be simple
Describe the structure of a non profit corporation (capital and management)
Capital Structure
Members, instead of shareholders
Members pay fees to provide capital
Members have rights including voting rights (elect directors of board)
Management Structure
Executive Board – Elected by members
Responsible for managing the corporation
Directors appoint officers to manage day-to-day operation
Officers can engage others to carry out managerial tasks
Org structure can be complex, hierarchical, or can be simple
Legal nature of the corporation + policy behind it
Separate legal entity (salomon)
Three key features:
Limited liability
Separate personality
Perpetual existence
Policy: No statute requires the key features, they are arguably policy choices. For additional policy, see limited liability.
Basis for the legal nature of a corporation
Salomon decided they were separate legal entities (1897). Before this, the companies act of england 1844 didnt recognize them as separate persons. May have been implicitly assumed, though.
Implications of the corporations legal nature
Shareholder can be a creditor (salomon) and can rank equally with other creditors for debt or even ahead of them if they have security held for debt.
Shareholder can be officer, director or employee (Lee’s)
Corporation itself owns assets, not the shareholders (Macaura)
But shareholders might have an insurable right (kosmopolous) but doesnt mean they own company assets (sparling). … shares are a bundle of rights.
Problems:
Shareholders may cause the company to become indebted to the shareholders when company is about to become insolvent, may be able to defeat interests of creditors/tort claimants… how should law deal with this?
Company may make payouts to shareholders when insolvent, leaving creditors with no assets to take since it has been distributed to shareholders prior to bankruptcy.
company is liable to its creditors but it might have very few assets left if it had already distributed - and cant go after shareholders
Company may enter into unfair contracts with shareholders (from POV of other shareholders or creditors)
Persons might set up a company with little capital and thus defeat the interests of creditors who act in reliance of minimum amount. Creditors usually check… but can affect tort claimants
Third parties may be deceived into thinking they are dealing with an individual or partnership when they are dealing with a corporation (eg. events in Solomon)
Persons may incorporate a company to avoid personal obligations or restrictions
Rationale/Purpose of Limited liability
Pressure to accumulate capital in industrial revolution mixed with costs of unlimited liability causing investor reluctance –> desire for limited liability
Limited liability increases cost of credit, so why do they still do it?
Benefits:
(1) Valuation Costs
(2) Monitoring costs
(3) Diversification
(4) Liquidity (less restrictions on sale of interests)
(5) Optimal investment decisions
(6) Market price impounding info (more reliable and stable, doesnt take partner wealth into account)
(7) economies of scale
(8) asset partitioning –> shields assets, reduces cost of creditors looking into personal assets
Can also be shareholder and creditor, employee, avoid restrictions against you personally, avoid personal tort liability.
Identify the basis for and scope of federal powers to incorporate companies
S.91 Federal power to make laws in relation to all matters not exclusively assigned to the provinces (POGG power)(Parsons)
can make laws for incorporation of companies with objects other than “provincial objects”
Federal Power
Wharton (1914) and Duck (1914): Feds residual power to incorporate companies meant federally incorporated companies had power and right to operate through Canada
Registrar could refuse licenses but would be contrary to the constitutional right of fed incorporated companies to do business through Canada
Leg. prohibiting a company from judicial action in province without a license could not be applied to a federal company Great West Saddlery (1921)
A federally incorporated company need not carry on business in more than one province to be valid (CBI Association)
Provincial (securities) statute could not be applied to federally incorporated companies AG Can v. AG Man (1929) → applied wharton/duck logic
The Federal scope was reigned in
Lymburn (1932): Provincial (securities) statute could be applied to a federally incorporated company since it did not prevent the company from raising necessary funds to carry on business
John Deere Plow: Incorporation does not confer immunity from provincial regulatory laws
Canadian Indemnity (1977 SCC): Provincial public automobile scheme prohibits sales of automobile insurance by anyone other than ICBC
Effectively overturns John Deere Cases
McCutcheon (1982 SCC): Provincial legislation identical to legislation in the federally incorporated legislation could still be applied to the federal company
Re: the Constitution Act (1991): Provincial Legislation regulation requiring registration of corporate name is valid
Re: Royalite Oil (1931) Provincial legislation imposing penalties for failing to obtain extra-provincial licence before carrying on business can be applied to a federally incorporated company
Federally incorporated companies can concern matters outside enumerated federal powers listed in s.91 Constitution Act
Note: Several cases have upheld provisions of federal corporate law that might fall within Provincial power with respect to property and civil rights → ancillary to federal power to legislate
THUS: Both provinces and government can pass valid legislation for company incorporation
One can choose to incorporate either under Federal or Provincial statute and still carry on business anywhere
Corporation incorporated under a provincial statute can carry on business through Canada (and the rest of the world) so long as they permit it to do so
Federally incorporated companies can operate in one or more provinces
Provincial legislation requiring federally incorporated companies obtain licenses to carry on business is valid and can be imposed through fines
Federal incorporation provides a higher protection of the corporate name
Provincial registrar cannot refuse the extra-provincial registration of a federally incorporated company
Note: Prov business can still sue a federally incorporated company for trying to pass off
Identify the basis for and scope of PROVINCIAL powers to incorporate companies
s.92(11) Provincial power to incorporate companies with provincial objects Bonanza Creek (1916): Province could confer powers to companies to carry on business within and outside the province but could not give a company the right to operate in another jurisdiction (had to get permission)
Implications:
Both provinces and government can pass valid legislation for company incorporation
One can choose to incorporate either under Federal or Provincial statute and still carry on business anywhere
Corporation incorporated under a provincial statute can carry on business through Canada (and the rest of the world) so long as they permit it to do so
Federally incorporated companies can operate in one or more provinces
Provincial legislation requiring federally incorporated companies obtain licenses to carry on business is valid and can be imposed through fines
Federal incorporation provides a higher protection of the corporate name
Provincial registrar cannot refuse the extra-provincial registration of a federally incorporated company
Note: Prov business can still sue a federally incorporated company for trying to pass off
Explain reincorporation and continuance
Extraprovincial means selling it elsewhere but you are still from same place, corporation still in same jurisdiction, just allowed to operate elsewhere (main gets sued)
Reincorporation you have new corporation, go through the procedures for incorporating (new gets sued)
Continuance you take the form to allow you to be a legal entity elsewhere (each individual corp sued?)
What do you do to incorporate under CBCA
Who may incorporate a corporation under the CBCA
One or more individuals or bodies corporate (s.5)
Individuals cannot be under 18, have unsound mind as found by a court, or be bankrupt (s5(2))
What documents must be filed and what steps must be taken to incorporate under the CBCA
s.7: Articles of incorporation must be signed and sent to the Director with documents required by ss. 19 and 106 in compliance with the requirements of s.7
Articles are the primary constitutional document of the corporation. Must set out:
Name of corp
Restrictions,
Classes of shares (and if 2 or more classes of shares the rights, privileges and restrictions attaching)
Province the registered office is in
Restrictions on the transfer of shares
Number of directors
May include other things as well→ Putting additional items in the articles is uncommon because it is difficult to change provisions in the articles and the amended articles must be filed (additional filing fee)
Steps to take
(1) File/Sign articles of incorporation (s5, 6, form 1)
(2) File a notice of registered office (s 7, 19, form 2)
s.19(2): Notice of the registered office of the corporation be sent to the Director
(3) File a notice of directors (s7, 106, Form 2)
s.106(1): Notice of the directors of the corporation be sent to the Director (must follow form 1 and comply with s6)
Director: Administrator of the CBCA
directors: directors of corporations
No individual power unless specifically granted by the group
(4) Pay filing fee (s.97 and sched 5 - 200$)
(5) If corporation has a non-numbered name, it must file a NUANS Name Status Report
The name cannot be confusingly similar to the name of another corporation or business
Director shall issue a certificate of incorporation, including the acceptability of the corporate name.(granted as a right, not a privilege).
A corporation comes into existence on the date shown in the certificate of incorporation.
What do you do to incorporate under BCBCA
Who may incorporate a corporation under the BCBCA?
One or more “persons” (ie individuals or corporations)
administrator of the BCBCA is the “registrar”
What documents must be filed/ steps taken to incorporate under BCBCA
The steps for incorporating a company under the BCBCA are:
(i) reserving the company name if it is to be other than a number
(ii) entering into an incorporation agreement (s10 BCBCA)
Each incorporator agrees to take one or more shares of the company in their own name.
(iii) filing an incorporation application (which includes a “notice of articles”);(s10(1))
–> S10(3)- incorporation application must be set out in the form established by the registrar and the incorporation application must:
(i) set out full names and addresses of the incorporators;
(ii) contain a completing party statement ;
Completing party examines articles/ incorp agmt to ensure properly endorsed. Files in record office.
(iii) set out the name of company; and
(iv) contain a notice of articles. (filed with registrar)
- -> S11 sets out the content of the “notice of articles” that must be included with the incorporation application. Must be in the form established by the registrar and :
(i) set out the name of company;
(ii) set out the name and address of each of the directors;
(iii) identify the registered office and its mailing address and delivery address;
(iv) identify the records office of the company by its mailing address and delivery address;
(v) describe the authorized share structure; and
(vi) set out any special rights or restrictions attached to the shares.
(iv) setting out articles for the corporation;
Section 12 provides that the company must have “articles”.
Must set out:
(i) the rules for the conduct of the company;
(ii) any restrictions on the business or powers of the company; and
(iii) for each class or series of shares, all the special rights or restrictions attached to those shares.
Must be filed in records office(along with the incorporation agreement) by the person who signed the “completing party” statement in the incorporation application
(v) paying the prescribed fees (incorporation fee, name fee)
S13(1) company is incorporated on the date /time the incorporation application is filed. Registrar must issue a certificate of incorporation (BCBCA s. 13(2)).
S19 notice of articles and the articles are binding on the company and its shareholders
What are the required post-incorporation steps and their rationale under the CBCA
s.104: After the issue of certificate of incorporation a directors meeting SHALL be held where they may: Make by-laws, adopt security certificates, authorize issuance of shares, appoint officers, appoint auditor to hold office until first shareholder mtg, (unless no public shares) make banking arrangements, transact other business etc.
Why? s.20: Company must maintain certain records,
First meeting can establish bylaws for
procedures at directors meetings,
Notice for and procedures with respect to shareholder meetings
Procedures for the allotment and issuance of shares,
Procedures for appointment of officers
Procedures for declaration and payment of dividends and
Common:
pass a resolution adopting forms in which records that are required for the company to maintain under s20 are to be kept
pass a resolution as to the bank with which the corporation will deal and to indicate who will have signing authority for the account
adopt a corporate seal to be used in executing certain documents binding the corporation, although seal no longer required (see s. 23)
outline limits or procedures for the directors power to borrow money on behalf of corp.
pass a resolution allotting/issuing shares to persons they intend to have as shareholders
pass a resolution adopting a form of share certificate (since s49 of CBCA entitles security holders to written acknowledgement of their right)
What are the required post incorporation steps under the BCBCA
Dont need to make bylaws since they must adopt articles which are equivalent to bylaws of CBCA corp
1st meeting of directors - company may adopt forms for security certificates and corporate records. Agree to issue shares. Consider banking arrangements
Describe the different approaches of the CBCA and the BCBCA to corporate names
CBCA
s. 12(1) a corporation may not be incorporated under a name that does not meet prescribed requirements.
Reg 19- Director can refuse to register the name of a corporation that is prohibited or causes confusion with a trade-mark, official mark or trade-name. Or can order a corporation to change its name (S12)
(1)Names which are outright prohibited (in the regulations) - ex swearing, referring to government affiliation w/o consent
(2)Names which are too general (see reg 30)
Only descriptive of the business of the corporation or of its goods or services
Only describes a quality, function or other characteristic of goods or services
Primarily or only the name of an individual
Primarily a geographic name
(3)Names which cause confusion with other names (corporate names, business names, or trade names - reg 18) - NUANs helps identify names which may be confusingly similar
(4)Names which are misdescriptive (reg 31)
likely to mislead the public
Essential Elements of most corporate names
Created with a descriptive part, a distinctive part and the suffix
If using business name other than own corporate name → must register that business name
s. 11: You can reserve corporate names for 90 days, or use a numbered name and switch
s. 29 Incorporation Act: A corporation using a business name other than its corporate name must have it registered
BCBCA approach to corporate names
Application for approval of a non-number name must be made ahead of time and the name,
If approved, can be reserved for a period of up to 56 days (s. 22)
indicate up to three names in order of preference.
Must comply w prescribed requirements for company names
Note: provincial registrar cannot refuse the extra-provincial registration of a CBCA corporation even if a corporation with a similar name is already registered in that province (ie less name protection under BC leg)
Explain the difference btwn CBCA and BCBCA
Why prefer Canadian Business Corporations Act (CBCA) over BCBCA
Name Protection
Provincial registrar cannot refuse the extra-provincial registration of a CBCA corporation even if there is another similar name in the province
No restriction on maintaining an action
Can be a concern regarding uncertainty with respect to carrying on business
Lawyers and shareholders in other provinces are familiar with it - provincial often modelled after it
Why prefer British Columbia Business Corporations Act (BCBCA) over CBCA
Local lawyers tend to be more familiar with it
Easier to deal with Victoria than Ottawa (few hours to communicate with Ottawa)
Cheaper (CBCA has one more extra provincial registration than incorporation in BC does)
