Copyright © 2008 Pearson Education Canada14-1 Chapter 14: Corporations

Copyright © 2008 Pearson Education Canada14-2 The Process of Incorporation  Registration - practice adopted from Britain registering with a government body registering with a government body used in B.C. and Nova Scotia used in B.C. and Nova Scotia  Letters Patent - royal charter approach Letters patent of incorporation granted by Crown Letters patent of incorporation granted by Crown used in Quebec and P.E.I. used in Quebec and P.E.I.

Copyright © 2008 Pearson Education Canada14-3 The Process of Incorporation/2  Articles of Incorporation - adapted from US  filing of articles and granting of certificate  used in rest of Canada and federally

Copyright © 2008 Pearson Education Canada14-4 Registration  Procedure registering ‘memorandum of association’ and ‘articles of association’ with government agency - based on a contractual relationship registering ‘memorandum of association’ and ‘articles of association’ with government agency - based on a contractual relationship paying required fees paying required fees certificate of incorporation issued certificate of incorporation issued registrar has no discretionary right to refuse incorporation registrar has no discretionary right to refuse incorporation

Copyright © 2008 Pearson Education Canada14-5 Letters Patent  Procedure applicant petitions government agency applicant petitions government agency Crown grants a letters patent Crown grants a letters patent sets out constitution, purpose, namesets out constitution, purpose, name share structure, rights and obligations of partiesshare structure, rights and obligations of parties not based on contract, therefore, capacity not limited not based on contract, therefore, capacity not limited

Copyright © 2008 Pearson Education Canada14-6 Articles of Incorporation  Procedure has features of both registration and letters patent systems has features of both registration and letters patent systems not based on contractual relationship not based on contractual relationship articles of incorporation contain constitution, purpose, bylaws controlling day-to-day operation articles of incorporation contain constitution, purpose, bylaws controlling day-to-day operation government body has no discretion to refuse request government body has no discretion to refuse request

Copyright © 2008 Pearson Education Canada14-7 Other Incorporated Bodies  Cities  Public institutions, e.g., hospitals  Universities  Non-profit Societies

Copyright © 2008 Pearson Education Canada14-8 Separate Legal Entity  Incorporation creates a distinct legal entity separate from the people who make it up. Isolates shareholders from business activity Isolates shareholders from business activity Limits liability of shareholders and directors Limits liability of shareholders and directors Provides flexibility for investors to buy and sell shares Provides flexibility for investors to buy and sell shares Courts may “lift corporate veil” to get at managers who commit crimes or avoid regulations Courts may “lift corporate veil” to get at managers who commit crimes or avoid regulations

Copyright © 2008 Pearson Education Canada14-9 Question for Discussion  Because a corporation is a separate legal entity, the shareholders (and that may be a single individual) are protected from liability to the creditors and may in fact be secured creditors as well.  Is it reasonable to give them priority over other creditors if it is their actions that have caused the company to go into debt?

Copyright © 2008 Pearson Education Canada14-10 Capacity  All methods of incorporation now provide for corporations to have all the capacity of a natural person.  Power to contract may be limited in certain situations specified in the legislation

Copyright © 2008 Pearson Education Canada14-11 Role of Agents  All activities of a corporation are carried out by agents actual or apparent authority must be established actual or apparent authority must be established employees may be able to bind the corporation employees may be able to bind the corporation all agents have fiduciary duty to the corporation all agents have fiduciary duty to the corporation

Copyright © 2008 Pearson Education Canada14-12 Funding the Corporation  Shares - means of providing capital from a large number of sources par value - company places a monetary value on the share at issue - may not reflect actual value on the market par value - company places a monetary value on the share at issue - may not reflect actual value on the market no par value - value of share is determined by the market no par value - value of share is determined by the market

Copyright © 2008 Pearson Education Canada14-13 Special Rights and Restrictions  Different classes of shares affect rights of shareholders preferred shares - shareholder gets preference when dividends are declared but no vote preferred shares - shareholder gets preference when dividends are declared but no vote if dividends are not paid - preferred shares convert to voting shares if dividends are not paid - preferred shares convert to voting shares restriction on the transfer and sale of shares often imposed where the company is closely held restriction on the transfer and sale of shares often imposed where the company is closely held

Copyright © 2008 Pearson Education Canada14-14 Borrowing  Bank Loans debentures - an acknowledgement of debt debentures - an acknowledgement of debt secured bond - a debenture secured by a specific assetsecured bond - a debenture secured by a specific asset creates creditor/debtor relationship creates creditor/debtor relationship payment of debts takes priority over payment of dividends payment of debts takes priority over payment of dividends secured creditor has first claim against asset used as security secured creditor has first claim against asset used as security

Copyright © 2008 Pearson Education Canada14-15 Types of Corporations  Closely held corporation - few shareholders shares not sold openly on stock market shares not sold openly on stock market private corporation (non-reporting) private corporation (non-reporting)  Broadly held corporation - public share offering more highly structured and regulated (reporting) more highly structured and regulated (reporting)

Copyright © 2008 Pearson Education Canada14-16 Corporate Officers  Directors/Managers directors elected - accountable to shareholders directors elected - accountable to shareholders owe a duty to the company to be careful - to ‘exercise the care, diligence and skill of a reasonably prudent person.’ owe a duty to the company to be careful - to ‘exercise the care, diligence and skill of a reasonably prudent person.’ fiduciary duty to the corporation - not the shareholders fiduciary duty to the corporation - not the shareholders shareholders can bring a derivative action (representative) action on behalf of the company shareholders can bring a derivative action (representative) action on behalf of the company

Copyright © 2008 Pearson Education Canada14-17 External Obligations  Directors/Managers  Duties imposed by statute Directors may be personally liable for Directors may be personally liable for unpaid wagesunpaid wages breaches of company employment standardsbreaches of company employment standards unpaid taxesunpaid taxes damage to the environmentdamage to the environment causing employees to commit crimescausing employees to commit crimes

Copyright © 2008 Pearson Education Canada14-18 Officers and Senior Executives  Responsible for day-to-day management  Fiduciary duty  Duties of care and competence  Statutorily imposed duties similar to those of directors

Copyright © 2008 Pearson Education Canada14-19 Question for Discussion  The directors of a corporation owe the same kind of obligation to a corporation as a partner does to the other partners but when they make decisions that result in harm, the liability rests with the company.  Should directors and officers be held legally and morally responsible for the decisions they make on behalf of the company?

Copyright © 2008 Pearson Education Canada14-20 Shareholders  Few obligations unless they hold enough shares to be classified as ‘insiders’  Rights and Remedies access to the records and financial reports access to the records and financial reports receive notice of annual general meetings receive notice of annual general meetings right to vote on major changes right to vote on major changes first offer of new shares first offer of new shares derivative (representative) action derivative (representative) action

Copyright © 2008 Pearson Education Canada14-21 Minority Shareholder’s Remedies  Derivative (representative) action  Oppression action  Dissent action

Copyright © 2008 Pearson Education Canada14-22 Advantages of Incorporation  Limited Liability unless directors/officers give personal guarantees for loans unless directors/officers give personal guarantees for loans or courts “lift corporate veil” and hold principals liable for company’s obligations or courts “lift corporate veil” and hold principals liable for company’s obligations shareholders protected from claims against the corporation shareholders protected from claims against the corporation

Copyright © 2008 Pearson Education Canada14-23 Advantages/2  Tax advantages may be gained through incorporation  Succession and Transferability continues to exist after death of a shareholder continues to exist after death of a shareholder shares can be transferred at will shares can be transferred at will

Copyright © 2008 Pearson Education Canada14-24 Advantages/3  Shareholders owe no duty to the company  Shareholders elect directors who appoint managers so are removed from day-to- day operation of company

Copyright © 2008 Pearson Education Canada14-25 Disadvantages  Major changes in company structure or purpose must be reflected in incorporation documents  Position of minority shareholder is weak  Most expensive way to operate a business

Copyright © 2008 Pearson Education Canada14-26 Termination of Corporation  Dissolution of a company can take place in a number of ways. Winding up provisions in incorporation documents Winding up provisions in incorporation documents Voluntarily by the directors Voluntarily by the directors Involuntarily by a creditor Involuntarily by a creditor Failure to file annual report Failure to file annual report