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LAW 603 (120)

Chapter 22.docx

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Ryerson University
Law and Business
LAW 603
George Ellinidis

Chapter 22 – Legal Rules for Corporate Governance Introduction  Without sufficient accountability, shareholders will not invest  Set out by Canada Business Corporations act (CBCA) Management and Control of the Corporation  Shareholders – the residual claimants to the assets of the corporation and elect the directors o Appoint the auditor, vote on proposals made o Do not manage the business  Directors – responsible for managing or supervising the management of the business of the corporation and its internal affairs o Issue shares, declare dividends, call shareholders meetings  Officers – appointed by the directors of a corporation and usually exercise management powers delegated to them by the directors How Shareholder Exercise Power  Shareholders must act collectively  Directors obligated to call annual meetings at least every 15 months  Annual Meeting – shareholders elect directors, appoint an auditor, and review the annual financial statements  Business that is done in meetings must be recorded in written resolutions and signed by all shareholders  Public Corporations – corporation that has distributed its shares to the public  Shareholders can participate in a shareholder’s meeting without attending by appointing a proxy  Proxy/ Proxy Holder – a person, designated by a shareholder to vote at the shareholders’ meeting o Has all the power of the shareholder at the meeting, but must vote in accordance with directions  In all public corporations management must send the shareholders a form of proxy allowing them to appoint a proxy holder, along with a management proxy circular o Management Proxy Circular – document sent to the shareholders that contains management proposals and other information related to shareholder meetings  Enhances shareholder participation and shareholders’ ability to ensure that management is acting in their best interests o All corporations incorporated under the CBCA with more than 50 shareholders have to  Dissident Shareholders – disagree with management proposals o May try to encourage their fellow shareholders to vote against management o Entitled to obtain a list of shareholders and their addresses to contact to influence vote o Must send out a dissidents’ circular  Dissidents’ Circular – document sent to all shareholders by any shareholder who seeks the votes of other shareholders against management  Rare in Canadian marketplace – cost too high to comply with disclosure needs  Voting usually shown by a show of hands, but ballots may be requested  Ordinary majority vote usually determines approval Shareholders’ Access to Information  All shareholders have access to certain information to enhance their ability to monitor management and to exercise their rights as shareholders o Articles o By-laws o Minutes of meetings of shareholders and shareholder resolutions o Share register showing the owners of all shares  These may be examined and copied by shareholders and creditors during business hours  Minutes of directors’ meetings and directors’ resolutions must be maintained, but they cannot be inspected by shareholders or creditors  Most important shareholder information – annual financial statements of the corporation  Annual statements must be audited by an independent accountant  Shareholders may unanimously agree to dispense with the audit requirement Shareholders’ Agreements  Corporations with few shareholders often use a shareholders’ agreement to create an arrangement for governing the corporation that is different from the arrangement under the statute o Change shareholder voting entitlements o Change shareholder approval requirements o Create rules for share transfers Voting and Management  Shareholders may want to allocate decision-making power differently, done by addressing issue in shareholders’ agreement o Ex: all shareholder decisions must be unanimous to be approved  CBCA and statutes allow all shareholders of a corporation to agree to alter power allocation between directors and shareholders  Unanimous Shareholders’ Agreement – agreement of all shareholders to transfer some or all of the directors’ powers to themselves o Restricts in part or whole, the powers of the directors to manage the business o Shareholders who participate in agreement have all rights and powers, as well as all liabilities and duties of a director Share Transfer  Share transfer may be a problem in corporations with few shareholders o Business may have trouble operating without previous shareholder expertise o Interests in small corporations are hard to value, so hard to find a buyer o No market to establish prices (like Toronto Stock Exchange) o Do not want just anyone gaining so much control – control who becomes involved o Shareholders want minimal restrictions on selling their shares  Shareholders’ agreements usually deal with transfers by prohibiting them except in accordance with specified procedures  Right of First Refusal – right for shareholders to be offered shares that a shareholder wants to sell first before they are offered to non-shareholders o Limited time offer, and must be offered at the same price to the remaining shareholders, and then non-shareholders to discourage unfair pricing  Shotgun Buy-Sell Provision – share transfer mechanism that forces one shareholder o buy out the other o Either buy all shares at set price, or sell all your shares at the same price o Either way, one person ends up with all shares o Used to break dead locks Shareholder Remedies Derivative Action  If corporation suffers a loss, o Shareholders may seek a court’s permission to pursue relief on the corporation’s behalf for breach of fiduciary duty or other wrong done to the corporation if a director fails to o If director responsible for wrong, may not act o When action commenced by shareholders, called derivative action  Derivative Action – An action by a shareholder on behalf of a corporation to seek relief for a wrong done to a corporation o Way for shareholders to ensure that directors and officers comply with their duties Oppression  Shareholders can obtain relief directly against management and corporation when management fails to act in their interests  When actions of the directors or the corporation have oppressed or unfairly disregarded or prejudiced their interests, shareholders can claim relief under the oppression remedy o Oppression Remedy – allows a shareholder to claim relief from an act or omission by the corporation or its directors that oppresses the interests of the shareholder o Relief available when the reasonable expectations of shareholders about management behaviour has not been met o Courts may order corporation to buy oppressed shareholder’s shares, orders against shareholders etc.  Oppressive behaviour examples: o Approval of a transaction lacking a valid corporate purpose that is prejudicial to a particular shareholder o Failure by the corporation and its controlling shareholders to ensure that a transaction between hem was on terms that were comparable to the terms that would have been negotiated by parties that were not related to each other o Other actions that benefit the majority shareholders to the exclusion or the detriment of minority shareholders o Lack of adequate and appropriate disclosure of info to minority shareholders o Planning to eliminate minority shareholders  Creditors and anyone else can seek permission to bring an oppression action Other Shareholder Remedies  Court order that directs compliance with the governing statute or the rectification or corporate records that contain errors  Liquidation and Dissolution/ Winding Up – the corporation’s assets are sold, its creditors paid off, the remaining money distributed to the shareholders, and the corporation’s existence terminated  Dissent and Appraisal – entitles shareholders who dissent from certain fundamental changes to have the corporation buy their shares o Allows a change approved by most shareholder to go ahead, and those who strongly disagree to exit the corporation o Ex: specific major amendment to article, sale of all, or substantially all of the assets of the corporation outside of the ordinary course of business, mergers and acquisitions How Directors and Officers Exercise Power Directors  First directors of the corporation are those named in the articles of incorporation o Hold office until the first meeting of shareholders (within 18 months of incorporation) o At meeting, shareholders must elect directors  Some corporate statute impose Canadian residency requirements for some portion of directors o 25% for most corporations under CBCA  Directors exercise power collectively, usually at meetings o Written resolution signed by all directors is just as effective Officers  Canadian corporate legislation does not set out what officers a corporation should have, or what they are to do o Common: CEO, President, secretary  CEO usually has overall responsibility for running corporation’s business o Day-to-day operations delegated to other employees  Directors designate officers and specify their duties through by-law passed by directors and approved by shareholders just after incorporation  Issuing shares, declaring dividends, repurchasing shares cannot be delegated to officers Management’s Duties to the Corporation Fiduciary Duty  Most important legal standard of behaviour  Fiduciary Duty – duty of officers and directors to act honestly and in good faith with a view to the best interests of the corporation o Cannot defraud the corporation, steal assets etc. o Cannot put personal interests ahead of the corporation’s interests o Owed to the corporation, not the shareholders, employees, suppliers, creditors, public  Courts treat the interests of the corporation as the interests of shareholders o Whatever maximizes shareholder investment in shares  Main purpose is to prevent directors and officers from benefitting themselves when their personal interests, and the corporation’s interests conflict Transacting with the Corporation  Conflict of interest arises when officer or director contracts with the corporation o Even if you are not in a direct negotiating position, you may influence the decision directly by being on the board for approval, or indirectly through your relationship with the personnel and the corporation  Arises in corporations with common ownerships that do business with each other  CBCA provides solution: transaction permitted if procedural safeguards are observed: o Director/ officer must give adequate notice of interest and may not vote on the contract  Recorded in minutes of board meetings o Contract must be fair and reasonable to the corporation  If scheme not complied with, corporation mat refuse to complete the transaction Taking Corporate Opportunities  Conflict may arise between personal interest and fiduciary duty when the fiduciary considers taking advantage of some project/opportunity in which the corporation has an interest  If fiduciaries allowed to invest personally in projects considered by the corporation, there’s a risk that they would take valuable investment opportunities that they should be obtaining for the corporation  If they breach their duty, any personal profit from the opportunity must be paid to corporation  Factors indicating opportunity belongs to corporation: o Specific Nature of Opportunity – it was a specific opportunity that the corporation has been actively pursuing rather than one that was simply in the same area of business o Maturity of Opportunity – the corporation has done extensive work to prepare for it o Significance of Opportunity – opportunity would have represented a major component of the corporation’s business if acquired; or was a unique opportunity rather than one of many considered by the corporation o Private Opportunity – opportunity was not publically advertised or otherwise widely known, but was one the fiduciary gad access to only by virtue of position in corporation o No Rejection – opportunity was not rejected by corporation before fiduciary acquired it  If the board rejects the opportunity, a board member can take the opportunity Competi
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