Chapter 7: Corporation Law

Question 1

What is a Corporation?

Answer 1

• Artificial person created by the state which has the power to carry on business, own property, and provide services.
• Its regarded as a separate entity from the people who are responsible for its direction/control, and those who own its shares.

Question 2

7.2 Nature of a Corporation.

Answer 2

• A corporation has legal but no material existence.
• It’s managed by a set of directors (elected by shareholders).
• Shareholder: Person who holds a share in a corporation (part owner of the corporation).
• The directors elect/appoint the president (CEO), treasurer and secretary.
• Executive Committee: Group of directors who manage the corporation.

Question 3

Control & Liability.

Answer 3

• The directors have a duty to make decisions according to objectives, keep shareholders informed (at least annually) of the activities of the company. Shareholders do not participate in decision making or bind the corporation into contracts.
• The liability of shareholders for the debts of a corporation is limited to their investment.

Question 4

Transfer of Interests.

Answer 4

• The transfer of ownership of corporate shares is simple (unlike a partnership where death/retirement/desire to leave a partnership is complex). In a public company, after the sale of a share the only thing involved is a change in the register of the identity of the shareholder.

Question 5

Corporate Name.

Figure 7-1

Answer 5

• The last word in a corporate name must identify it as a corporation using “Limited, Incorporated, Corporation” or their abbreviations.

Question 6

7.3 Forms of a Corporation.

Answer 6

• A corporation is created by statute, either by special act of general act.

Question 7

General Acts Corporations.

Figure 7-2.

Answer 7

• Has the powers of a natural person, although the incorporations may specify restrictions on the company in activities the directors can engage in, third parties dealing with a corporation are entitled to rely on the indoor management rule (outsiders need not verify whether a corporation, or the officers of it have the authority to enter into a specific type of transaction).

Question 8

Special Act Corporations.

Answer 8

• Created by governments when they decide a particular public service would benefit form incorporation, or when the service is delegated to a private sector company but strictly regulated.
• Statutory rights/duties specified must be strictly observed or risk ultra vires arguments.

Question 9

7.4 The Incorporation Process.

Answer 9

• An application for incorporation contains: company name, address of the head office and principal place of business, names of incorporators, objects of the corporation, share capital and any rights/restrictions attached to the shares/activities, must indicate whether its shares are to be sold publicly/privately.
• After the incorporation bylaws and internal operating procedures must be established.

Question 10

7.5 Corporate Securities.

Answer 10

• Issued to raise capital for the corporation.
• Common, voting, preference shares with special rights (priority in payment or a right to fixed rate of return in dividends) are issued.
• Fixed charge securities that create a debt such as a mortgage bond of debenture may also be issued, as well as floating charges that may attach to general assets.
• Fixed Charge: Security interest that attaches to specific assets.
• Floating Charge: Debt security issued by a corporation in which assets of the corporation (stocks) are used as security. Until such time as default occurs, the corporation is free to dispose assets.
• Mortgage bond: issued by a corporation on security of specific assets.
• Debenture: Debt security issued by a corporation that may or may not have specific assets of the corporation pledged as security for payment.

Question 11

7.6 Division of Corporate Powers

Answer 11

• Duties & Responsibilities of Directors
• Liability of Directors
• Director’s Defence of Due Negligence
• Shareholders’s Rights

Question 12

Duties & Responsibilities of Directors.

Answer 12

• Directors have exclusive rights such as decisions of whether or not declare dividends.
• Fiduciary duty to the corporation to place its interests above those of any particular group of shareholders, or making a personal profit at the expense of the company.
• A private corporation requires at least 1 director while a public one requires at least 3.

Question 13

Liability of Directors.

Answer 13

• Directors are liable for corporate negative activity and economic loss that causes plant closures.
• If the corporation declares bankruptcy, directors may be liable for any amount of unpaid wages which sale of corporation assets can’t cover.

Question 14

Director’s Defence of Due Negligence.

Answer 14

• The limits of liability for directors depends on:
  1. Absolute liability, in which case it doesn’t need to be shown that the director knew of the problem in order for liability to attach.
  2. Defence of due negligence, then it must be shown that the director exercised all care/skill meaning the director may not be accountable to an offence committed by others.

Question 15

Shareholders’s Rights.

Answer 15

• Elect directors at the AGM.
• Approve important corporate changes.
• Have a report on the business activity of the corporation and the right to view financial statements.
• Request meetings and statutory right to oppression provisions (that minority shareholder’s shares be purchased at fair market value), a requirement that oppressive conduct cease, or a requirement that an accounting be undertaken.

Question 16

7.7 Considerations in the Purchase/Sale of a corporation.

Answer 16

• Seller’s perspective: a share may be preferable to an asset purchase of a company because the seller may look forward with all of the corporation’s assets at one.
• Purchaser’s perspective: an asset purchase allows the selection of equipment, inventory, customer lists, and intellectual property, but doesn’t requiere him/her to accept undesirables (redundant/obsolete equipment or contaminated land).

Question 17

7.9 Securities Legislation.

Answer 17

• Designed to protect unsophisticated investors and foster confidence in the integrity of the securities marketplace.
• Securities range from documents that demosntrate title of interests in a corporation, to rights that may be issued for sale to the public such (annuities or mutual fund interests).

Question 18

7.10 Securities Regulation.

Answer 18

• Promote appropriate disclosure of corporate information to create protection for investors. It requires registration of investment advisors, and impose a licensing requirement for education and training on them (except Accountants, bankers and lawyers).

Question 19

Prospectus Disclosure.

Answer 19

• Issuers of new securities must provide an acceptable prospectus to a securities commission regulator before any public trading occurs.
• Plain disclosure of material facts regarding the corporation must be provided, including fees associated with the underwriting of the issue.
• Prospectus exemptions exist for trades to accredit investors private issuers and minimum investments amounts of $150,000.

Question 20

7.12 Insider Trading.

Answer 20

• Trading based on information undisclosed to the general public about a security.
• Occurs when an investor is in possession of critical information that could affect the price of the security because he/she is in a special relationship with the company. When he/she trades for personal benefit or tips someone else, both tipper and tippee are liable to prosecution.

Question 21

7.13 Proxy Voting & Proxy Solicitation.

Answer 21

• Proxy: transfer of a voting privilege by a shareholder to an agent based on trust.
• The situation arises because shareholder is unable to attend the annual general meeting to place his/her vote.
• Anyone soliciting proxies is required to distribute an information describing exactly who is soliciting as well as that person’s interest in the corporation.

Question 22

7.14 Take Over Bids.

Answer 22

• Attempt to acquire a controlling interest (20% of voting shares) in the voting shares of a corporation.
• The bid must be made to all holder’s of the class of securities sought, must disclosure the financial terms of the bid, and must disclose what existing interest the bidder has in the corporation.