Chpt 26: Corporate Gov

Question 1

What is corporate governance?

Answer 1

The rules governing the organization and management of the business and affairs of a corporation in order to meet its internal objectives and external responsibilities

Question 2

What are the two aspects of corporations activities?

Answer 2

1) The affairs - Internal arrangements for running a corporation between the directors and officers and their main beneficiaries (the shareholders)
2) The business - the external relations between a cororation and those who deal with it as a business enterprise (customers, suppliers, creditors, employees) as well as government regulators and society

Question 3

What are some of the reccomendations by the CBCA based on the SOX

Answer 3

• Majority of directors should be independent
• CEO should not be chair of the board
• Corporation should establish separate committees of the board to address exec compensation and nomination of board members
• Corporation should draft and publish a code of ethics
• Board should perform regular self-assessments

Question 4

What are the three basic components of all corporations?

Answer 4

1) Shareholders
2) Board of directors - governing body of corporation
3) The Officers - High ranking execs of management team

Question 5

What are the three main committees in a corporate governing body

Answer 5

1) The audit committee - responsible for overseeing the audit and preparation of financial statements
2) The Compensation committee - Responsible for setting director and officer pay
3) The Nominating committee - Responsible for proposing and recruiting new directors

Question 6

What are some special rules surrounding an audit committee?

Answer 6

• Public companies must have an audit committee
• Must have at least 3 directors
• Directors must be independent
• Auditors report to the committee, not the BOD

Question 7

What is the general role of the director?

Answer 7

Manage or supervise the management of the business and affairs of the corporation

Question 8

What are the specific duties of a director?

Answer 8

1) Issue shares
2) Declare dividends
3) Adopt bylaws for day-to-day affairs (until voted upon in next shareholders meeting)
4) Call meetings of shareholders
5) Delegate responsibilities (except for appointing officers)

Question 9

Is there a minimum on the number of directors a corporation has?

Answer 9

Yes, for public corporations there is a minimum of 3 directors, at least two of whom must be independent

Question 10

How can the BOD make decisions? Are the obligated to follow what the shareholders say?

Answer 10

BOD makes decision usually by majority vote.

No the BOD is not obligated to do what the shareholders say to do.

Question 11

How do people join the BOD?

Answer 11

Directors will be assigned at the time of incorporation.

Any subsequent directors will be voted in, usually at the annual shareholder’s meeting with a majority or proportional (cumulative) vote necessary

Question 12

What are the conditions of becoming a director

Answer 12

• At least 18
• Sound mind
• Not have declared bankruptcy

Question 13

Can a director be removed before the end of term?

Answer 13

Yes. Shareholders can vote a director out.

Question 14

Where do officers get their power? q

Answer 14

The BOD give them power and responsibilities (usually defined in bylaws)

The BOD can also remove power

Question 15

On what conditions can an officer be appointed?

Answer 15

• Must have full capacity

Question 16

What are the statutory duties of directors and officers?

Answer 16

1) Act honestly and in good faith with best interest of the corporation
2) Exercise care, diligence and skill that you would reasonably expect from person in similar circumstances
3) Ever director and officer will comply with the CBCA, regulations, articles bylaws and shareholder agreement

Question 17

Do directors and officers have a fiduciary duty?

Answer 17

Yes, and this includes to avoid a conflict of interest

Question 18

What is the duty of care held by directors and officers?

Answer 18

Essentially, to act in a way that the average director/officer would in similar circumstances.

Although directors rely on information given to them by officers, they have to duty to read and challenge this.

Question 19

Who do the directors owe a duty of care?

Answer 19

First and foremost they owe a duty and fiduciary duty to the corporation. They must also consider other stakeholders but it is first and foremost to the corporation

Question 20

What defenses are available to directors accused of breach of duty

Answer 20

1) Due Diligence Defense - Establish the required degree of care was taken
2) Good Faith Reliance - Made decisions based on financial statements or expert advice
3) Corporate Indemnity - Agreement made beforehand that the corporation will reimburse the director/officer for any costs associated with breach of duty
4) Liability Insurance - Corporations may purchase directors/officer’s liability insurance

Question 21

What is the business judgement rule?

Answer 21

If given that the defendant made the appropriate due diligence/prudence, courts will give a benefit of the doubt that they made a good business decision (unless broke legal obligations)

Question 22

In what circumstances is a director strictly liable?

Answer 22

1) If issue dividends that force the corporation to be unable to make its liabilities
2) If corporation becomes insolvent, directors are personally liable for wages
3) If case 2 happens, directors may also be personally liable for employee income tax deductions

Question 23

What conflict of interest cases must a director be aware of?

Answer 23

1) Contracts with other corporations - if not done so, corporation can rescind contract
2) Interception of Corporate opportunity - If you buy shit you were supposed to buy for company, it owns it and any profit
3) Corporate Information - Purchasing stuff off info given during duty is a breach of duty
4) Competing - If you do, corporation can force you to stop and take your money

Question 24

What happens if a director is found guilty of insider trading?

Answer 24

• Compensate buyer/seller for any loss suffered by transaction
• Account to corporation for any benefit or advantage obtained

Question 25

Are there restrictions on the amount of shares a person may own?

Answer 25

Yes, typically in a public company no single person can have more than 5% of voting shares

Question 26

In the context of transferring shares, what does being locked-in mean?

Answer 26

A minority shareholder will have difficulty selling shares unless it is for a fraction of the price he/she thinks it is worth

Question 27

What are the reasons for being locked-in?

Answer 27

1) Transferring shares in a private company usually requires the approval of the BOD, who will usually only let it happen to a person of their choosing
2) People not in the company are averse to purchasing minority shares in private companies

Question 28

How can a minority shareholder be frozen out of a private company?

Answer 28

1) Gets fired
2) Remove from BOD
3) Reduce profits by increasing BOD salaries or not issuing dividends

Question 29

Where do shareholder rights come from?

Answer 29

1) Articles of corporation

2) Corporate legislation

Question 30

What shares are given to shareholders if there is only one class?

Answer 30

1) Vote in any shareholder meetings
2) Receive any dividend that is declared
3) Receive remaining assets of corporation during dissolution after debtors

Question 31

How can shareholders voice their opinion?

Answer 31

At general shareholders meeting where they can vote on stuff

Question 32

Are corporations mandated to hold shareholder meetings?

Answer 32

Yes, at least one annual meeting.

Question 33

Can shareholders call meetings?

Answer 33

Yes, if a large proportion of shareholders want, they can call a special meeting

Question 34

What matters must be approved by a shareholder vote?

Answer 34

1) Altering articles of incorporation => special resolution
2) Merging or selling of a lot of property => SR
3) Amending bylaws => Ordinary resolution
4) Selection of auditor => OR
5) Election/Removal of directors => OR

Question 35

What information must be disclosed to shareholders before the annual meeting

Answer 35

Financial statements including:

• Balance Sheet
• Income Statement
• Statement in changes of financial position
• Statement of retained earnings
• Statement of contributed surplus

Question 36

What other documents must corporations keep track

Answer 36

Documents of record:

• Minutes of meetings
• Transfers of shares
• Copy or charter, bylaws, special resolutions, register of shareholders
• register of directors

Question 37

Why are the documents of record important?

Answer 37

Used as evidence to prove misconduct or ineffectiveness of directors

Question 38

Auditor stuff???

Answer 38

Annual reports and financial statements must be reviewed by an auditor. The auditor must be registered by the Canadian Public Accountability Board

Question 39

If the shareholders want, can they get an inspector?

Answer 39

Yeah, shareholders can get courts to appoint an inspector with large inquiry rights to investigate matters of mismanagement

If they want, this person can be a government inspector

Question 40

Do shareholders have duties?

Answer 40

No

Question 41

What remedies are available to minority shareholders who are at risk of being frozen out?

Answer 41

1) Appraisal - Have shares bought out by the corporation
2) Derivative Action - Minority shareholders sue wrongdoers for exploiting corporate opportunity
3) Winding Up - Dissolution of a corporation when just and equitable. Usually used when someone frozen out or relationships have deteriorated
4) Oppression Remedy - Personal remedy if unfairly treated

Question 42

In what situations can a minority shareholder seek appraisal remedy

Answer 42

1) Changing restriction on issue, transfer or ownership of shares
2) Changing restrictions on business that corporation can do
3) Merging with other companies
4) Selling/leasing/exchanging all assets of corporation
5) Going Private/Squeezing out

Question 43

What must be proved for Oppression remedy?

Answer 43

1) Complainant’s expectations on how his interests would be managed are reasonable
2) Conduct was unfairly or oppressively disregards or prejudices his interests

Generally, this will be viewed in regards to the best interest of the corporation as a whole

Question 44

Why would shareholders form a shareholder agreement?

Answer 44

To approximate the power of a partnership without having to rely on the courts judgment in the case of oppression.

Question 45

Are shareholder agreements legal?

Answer 45

Yes, as long as they do not interfere with their jobs within the corporation.

This document btw is seperate from the corporation charter

Question 46

What are the main parts of the shareholder agreement?

Answer 46

Right to participate in management - Promise to only nominate and vote for each other in BOD elections

Right to fair price for share interest - Regular valuation of shares

If breach, force to sell shares

Only allowed to share to outsiders if notice and approval

Question 47

Are unanimous share agreements allowed?

Answer 47

Yes, but directors are relieved of their rights and duties