Chapter 7 - Corporations – Creation, Organization, and Shareholders’ Rights

Question 1

Shareholders’ rights, obligations, and powers are derived from three sources:

Answer 1

• The legislation defining shareholders’ basic rights
• A company’s articles of incorporation
• Shareholder agreements

Question 2

The shareholders’ meeting is the first general meeting of the provisional directors, at which the company’s ___ are approved. The first shareholders’ meeting is also the time to ___

Answer 2

articles and by-laws
elect directors and appoint an auditor

Question 3

The directors must be given at least five days’ notice stating the time and place of the first general meeting.
The following items must appear on the meeting agenda: (6)

Answer 3

• Accept the certificate of constitution.
• Make general by-laws.
• Make banking arrangements.
• Issue shares
• Appoint the officers.
• Appoint an interim auditor.

Question 4

In a small corporation, the same person or two people may be a director, officer, and shareholder, and there will not necessarily be

Answer 4

a shareholder’s meeting

Question 5

A director for a company can hold a term for up to __ _ years under federal jurisdiction, and they may be reelected ___

Answer 5

three
indefinitely

Question 6

Shareholders must appoint an __ at the first meeting and every annual meeting thereafter

Answer 6

auditor

Question 7

Under the CBCA, the ___ must be restricted if a business is to be a private corporation and to escape the formalities applying to securities (e.g., prospectus filing and registration requirements). The number of
shareholders must also be limited to 50 or less, and shares may not be offered to the public

Answer 7

transfer of shares

Question 8

each share confers on its holder the following basic rights: (3)

Answer 8

• The right to vote
• The right to dividends (if they are declared by the board of directors)
• The right to share in the distribution of assets if the corporation is wound up

Question 9

A unanimous vote by shareholders, including holders of non-voting shares, is required in the following situations: (5)

Answer 9

• Merging or selling the business
• Selling, leasing, or exchanging goods outside the normal course of business
• Making changes to the capital structure that affect shareholders’ rights
• Winding up the corporation
• Deciding not to appoint an auditor

Question 10

The rights, privileges, and restrictions relating to ___ must be identical for all the shares in a given class.
It is possible to get around this rule, however, by creating ___ within a given class;

Answer 10

a class of shares
various series

Question 11

any other classes of shares that bear certain privileges or restrictions are called

Answer 11

preferred shares

Question 12

Preferred shareholders generally have priority rights to ___ .

Answer 12

dividends

Question 13

A pre-emptive right or right of first refusal gives shareholders of a class of shares the right to ___ , prorated to the number of shares they already hold

Answer 13

subscribe to any new issue of shares in that class.

Question 14

Unpaid dividends on cumulative shares accumulate until ___

Answer 14

the company can pay them entirely

Question 15

Participating shares entitle the holder to receive the stipulated dividends as well as ___ , for an amount specified in the company’s articles of incorporation.

Answer 15

a share of the company’s profits

Question 16

Fully participating shares give the holder the right to ___ , after common shareholders have received a dividend corresponding to a yield equivalent to that of participating preferred shareholders,

Answer 16

share in the company’s profits with common shareholders

Question 17

Shares are partially participating when there is

Answer 17

a limit on the dividend that preferred shareholders receive because of their preferred status

Question 18

A conversion privilege allows shareholders to exchange the shares they hold for ___

Answer 18

a determined number of other securities of the same company

Question 19

shares that are deemed retractable allow shareholders to

Answer 19

oblige the company to buy back their shares at the agreed price.

Question 20

Redeemable refers to the option of the ___ , while retractable refers to the option of the ___

Answer 20

corporation
shareholder

Question 21

Having a well-defined shareholder agreement allows each shareholder to

Answer 21

understand their involvement and limitations in the organization

Question 22

There are two kinds of shareholder agreements. They are:

Answer 22

• Unanimous agreements among shareholders
• Other agreements between two or more shareholders

Question 23

unanimous shareholder agreement transfers all or some of ___

Answer 23

the directors’ powers to the shareholders.

Question 24

other agreements among shareholders are specific to each company and its shareholders, most deal with the same basic issues: (3)

Answer 24

• exercising voting rights
• managing the corporation
• transferring shares

Question 25

purpose of a unanimous shareholder agreement is to limit ___ and increase ___
concerning the management of a company

Answer 25

directors’ powers
shareholders’ input

Question 26

To be valid, an agreement must be ___ and must have the consent of ___ , including those holding ___. additionally, it must contain ___ If just one shareholder refuses, the agreement will not be unanimous and so cannot
validly limit the directors’ powers.

Answer 26

in writing
all shareholders
non-voting shares
a clause that in restricts the directors’ powers in some ways

Question 27

It is not usually in the shareholders’ interest to have all these agreements subject to the same legal regime as a unanimous agreement. Any clauses concerning the management of the company and other clauses should be set out in ___

Answer 27

two different documents

Question 28

buy and sell agreement generally restricts the right to ___, and keeps control of the
company in the hands of a small group of shareholders.

Answer 28

transfer shares to outsiders

Question 29

The buy and sell agreement makes it possible to ___ to the shares of a private company

Answer 29

assign a value

Question 30

Share transfers may be restricted, as follows: (3)

Answer 30

• Granting a right of first refusal to the other shareholders, means that any shareholder wishing to sell shares must first offer them to other shareholders before selling them to a third party.
• A shotgun clause forces the shareholder who made the offer to sell (or buy, depending on the provisions of the agreement) to instead purchase the shares of the other shareholders, at the price set for their own shares.
• A mandatory offer to sell, generally at a price determined in advance or established according to a formula may be put in place.

Question 31

Although financing by share issues is costlier than by loans, many companies choose to issue shares, and particularly preferred shares, because of the advantageous tax treatment for dividend income: (2)

Answer 31

• Dividends received by individuals are taxed at a reduced rate.
• A corporation does not pay income tax on the dividends it receives, provided that it issues dividends to its
  shareholders.

Question 32

The first shareholders’ assembly serves to: (3)

Answer 32

• Approve the company rules and by-laws.
• Elect the board.
• Appoint an auditor.

Question 33

What is Nominal value (or par value) per share?

Answer 33

value per share set by the founders of the corporation and determined in the articles of incorporation. established arbitrarily and may vary from one company to another. It does not reflect the market value of outstanding shares.

Question 34

What is stated value?

Answer 34

the total amount that a corporation receives on issuing shares

Question 35

example of stated vs nominal value (read)

Answer 35

if a corporation issues 100 shares with a nominal value of $10 for $12 each, it will record an amount
of $1,000 in the Capital Stock account and $200 in the Contributed Surplus – Premium on the Issue of Common Shares account.

The stated value for each share will be $10. On the other hand, if the shares have no nominal value, the total proceeds of the share issue, $1,200, will be recorded in the Capital Stock account. The stated
value of each share will be $12.

Question 36

If the shares have no nominal value, the total proceeds of the share issue will go to __
account. If they do have a nominal value, the excess of the proceeds of the share issue will go to __

Answer 36

the Capital Stock
the Contributed Surplus account.

Question 37

Shareholders meetings must be held not later than __ after the corporation is constituted and
subsequently, not later than __ after the last preceding annual shareholders meeting.

Answer 37

18 months
15 months

Question 38

The shareholders elect the company’s directors by adopting an ordinary resolution by simple majority vote, that is __ plus one of the votes cast by shareholders.

Answer 38

50%