Two Types of Companies, Incorporation Flashcards
Types of companies (corporations)
Large or Small Corporations
Large Companies
- Dominate type of traded
- Advanced technology leads to
- Owners don’t have specific skills therefore
- rivalry amongst 2 positions
Publicly traded
Role specialization
distinction of managers and owners
Shareholders and Managers
Why do Shareholders and Managers have a rivalry?
what do shareholders want?
what do managers want?
Executive compensation affects shareholders.
Shareholders want capital gains and dividends
Managers want salaries, pension, benefits
Small Companies
- Dominate type of traded
- Owners roles
Privately traded
actively participating in management or labour
Small Companies - Oppression of minority shareholders: Locked in vs frozen out
locked in: can’t sell shares except at discounted price as no one wants to be minority shareholder
frozen out: no influence on management with a minority
How to resolve Oppression of minority shareholders and one example
- Provisions in shareholder agreement
Ex. shotgun clause
Shotgun clause
make an offer to the other party at a price per share, and their choice whether to buy or sell
why is Shotgun clause not always fair and how would price per share be determined
- One party is undercapitalized, can’t buy them out
- determined by someone else so price considered
When would a court ignore the separate entity principle (pierce the corporate veil) (4 -situations)
Taxation, Residency, Agency Principles, Fraud
court ignores the separate entity principle - Taxation Situation
Include tax percentages*
What happens when withdraw money from Corp as personal income
share first $400,000, sole proprietor taxed 45%, corporation is 11%. Money stay in corporation but when withdrawn taxed as personal income
court ignores the separate entity principle - Residence of corporation
not where it is formed but where controlling shareholder resides
court ignores the separate entity principle - Agency Principle and what you need?
whether agency or shareholders, need written agreement
court ignores the separate entity principle - Fraud
What case and what does it say
Patton Case - won’t allow separate entity principle to be instrument of fraud
Methods of Incorporation:
(3)
Royal Charter, Special Act, General Act
Methods of Incorporation: Royal Charter
- how is it created
- what its it used for
- royal prerogatives - residue of unilateral powers of monarch
- Create companies for a fee, how monarchs made money
Methods of Incorporation: Special Act (Statutes)
- what its it used for (2)
- Examples
- major public works and crown corporations
Examples CPR, CNR, MPI
Methods of Incorporation: General Acts (3)
English System of registration
Letter paten system
Certification of incorporation: provincial vs federal
How to incorporate a company in Manitoba Process (3 steps)
- Corporate name search and create unique name 35$
- submit to corporation branch: Articles of incorporation which include name of company, corporate head office, nature of business etc
- Submit fee of $300, $400 for extra service
Component Part of Constitution - Articles of incorporation (constitution of company)
What is required to change
What is entrenched?
want to change, need 2/3 majority of every class of shares.
Entrenched (restriction on business carried on/changed): Name, register office, classes of shares (Max# and restriction), Limitations to transfer, # of directors
Component Part of Constitution - Bylaws
- entrenched or not?
- who changes them
- who first creates and where
not entrenched, changed by shareholders, created by first directors at first meeting
Component Part of Constitution - Bylaws Purpose (6)
Regulation for general governance corporation
1. Changes board of directors
2. Min number for director and shareholder meeting
3. Notice Provisions and votes
4. Officers of corporations: duties assigned
5. Signing authority
6. Fiscal year of corporation
3 big Business Participants of Corporation (3)
Shareholder, Director, Officer
Shareholders
investors, purchase shares with money or capital, given rights to corporation
Share
bundle of rights, privileges against corporation, proportionate ownership in corporation, has risks associated, degree of contorl
Share Basic rights (3)
receive dividends from BOD, on dissolution of corporation, receive property based on priority, right to vote
Shares and voting (2)
vote for directors, approve changes made to corporation (undertaking, changing or amending)
Types of shareholders (3)
voting rights, dividend rights, redemption value rights
Share Redemption
Opportunity for corporation to buy back shares from shareholder
Share Retraction
Force corporation to buy back shares from shareholder
Why have different classes of shares
different amount of income and rights distributed
Common Shares
Can you vote?
Dividend rate
right to vote, no predetermined dividend rate or right
Preferred Shares
Vote?
Dividend return?
How does it rank to common holder?
don’t vote, entitled to dividends to % of return, rank above common shareholders
Directors
What are they in charge of
What can’t they be?
charge with management of corporation and cannot be shareholders
Director duties (3)
- exercise power of corporation
- Adopt by laws
- elect officers
Officers
What do they do (2)
How r they then position?
run corporation on daily basis, delegate management, elected
Public Company vs Private company
- in corporation act
- consensus defintion
no definition
distribute public shares or sales in stock market
Public company under security act, what the act prevents
Not being what is defined for private company and to prevent fraud on potential investors in public trading or share distribution
Private company - security act
Incorporation articles (3)
- transfer shares restricted
- number of shareholders limited to 50
- invitation to public to subscribe is prohibited
Board of directors are __f____ because they are ___a___
fiduciaries, agents
corporate law and apparent authority of agent
agent requires authority from past manner of transacting business by principle or trade custom
trade custom
stocker broker or lawyer, enter contracts on your behalf
corporate law and apparent authority of agent with express authority
circumstance can make it appear to third parties that agent has authority but in fact the agent does not have any real express authority
Apparent Authority Manifested in 3 ways
Effect of publicly filed documents
Indoor management rule
Pre-incorporation contract
Apparent Authority Manifested - effect of publicly filed documents
-> prohibition of certain act
If documents prohibited either corporation or officer from carrying our certain act, third party could not rely upon what otherwise might be officer’s apparent authority to perform acts
Flaws with prohibition rule and what it lead to (2)
- substantial injustice and abolished by statute
- certification of corporation abolished rule of apparent authority
Apparent Authority Manifested - Indoor management rule and example
Requirements in corporation’s constitution and governing act to be performed in specific manner for validation
ex bylaws, all contracts signed by board of directors
Apparent Authority Manifested - Indoor management rule
1. What if contracts don’t meet requirements
- invalid, punishment for people who enter into contracts with corporation
Apparent Authority Manifested - Indoor management rule
- What is the effect upon innocent third party if corporate act performed in irregular manner
1. Case
2. Ratio
- Royal British Bank V Turquand
- in absence of notice of irregularity or of suspicious circumstances everything which appears regular on its face may be relied upon by outsider and will bind company
Apparent Authority Manifested: Pre-incorporation contract
corporation cannot ratify a pre-incorporation contact - made before it came into existence
Apparent Authority Manifested: Pre-incorporation contract: Based on provincial Statutes (2)
corporation is bound by contract and entitled to benefits as if it existed at day of contract
Person who purported act in name of corporation ceases to be bound or entitled to benefits
