Chapter 22 Corporations Notes.docx

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Management (MGS)
Professor Rybak

Chapter 22 Corporations Notes Incorporation Process • A corporation is created only when certain documents are filed with the appropriate government office under either federal Canada Business Corporations Act or one of its territorial or provincial counterparts. • Once incorporated, the company is governed by laws of the jurisdiction where incorporation occurred. • Under CBCA and Provincial Acts, the main filings required to incorporate are: o Articles of incorporation o Name search report on proposed name of corporation o The fee • Articles of incorporation set out the fundamental characteristics of the corporation-its name, class and number of shares authorized to be issued, number of directors, any restriction on transferring shares, and any restriction on the business that the corporation may conduct. • A corporation cannot have a name confusingly similar to another business name. • Upon incorporation, a corporation can start doing business. A general by law sets out the arrangements for carrying on the legal business of the corporation. • If a corporation has few shareholders, the final organizational step is the creation of a shareholder’s agreement. A shareholder’s agreement is a contract between shareholders that customizes their relationship by providing rules that are better suited to their particular needs. Characteristics of Corporations • The corporation is a separate legal entity. It carries its own business, owns property, possesses rights, and incurs liabilities. In most ways, it has the same rights, powers, and privileges as a natural person. • Separate legal existence has three implications: o 1. A shareholder can be an employee or a creditor of the corporation. The shareholder and the corporation are two distinct entities that can contract with each other. o 2. The corporation is unaffected if a shareholder dies or withdraws from the business. o 3. Corporation is treated as a separate tax payer for income tax purposes. Income or losses from the corporation’s business are attributed to the corporation, and it is liable for the applicable tax. Shareholders are only taxed when they personally receive something from the corporation such as a dividend. • It is often said that shareholders have limited liability for the obligations of the corporation. Limited liability means that shareholders cannot lose more than they invest in the corporation in return for their shares. • Limited liability effectively shifts the risk of loss from the shareholders to the creditors and other stakeholders of a corporation. Creditors can recover what is owed them only from the assets owned by the corporation. • Sometimes the courts intervene to impose a personal liability on a shareholder for a corporation’s obligation. Piercing the corporate veil occurs when a court disregards the separate legal existence of the corporation to impose personal liability on a shareholder for a corporation’s obligation. For instance, a judge may permit a creditor of a corporation to claim directly against a controlling shareholder if the corporation has insufficient assets to satisfy the creditor’s claim. • Separation of Ownership and Management- By a majority vote, the shareholders elect a board of directors to manage or supervise the management of the corporation. In most cases, the directors delegate the responsibility for managing the corporation to the officers that they appoint. The directors then monitor and supervise the officers’ management of the corporation’s business. Shareholders do not participate in management. • Corporate Finance- Corporations are financed in two ways. Equity: shareholder investment in the corporation. Debt- Loans that have been made to the corporation by creditors. • There is a basic difference between equity and debt. Debt is a claim for a fixed amount. In contrast, shares issued in connection with an equity investment represent a claim to the residual value of the corporation after the debts and all other claims against the corporation have been paid. • There is another critical difference between debt and equity. If a debt is not repaid, there is a breach of contract. The creditor can sue for damages and even force the corporation into bankruptcy. But if an obligation to a shareholder like a dividend payment is not met, the shareholder cannot put the corporation into bankruptcy. • Every corporation must have shares that provide at least three basic rights: o Vote for the election of directors o Receive dividends when declared by board of directors o Receive property that remains after a corporation has been dissolved and all prior claims have been satisfied • These basic rights can be applied to any class of shares, so long as shareholders of a particular class receive the same rights. In practice, most corporations have one class of shares called common shares that include all three basic rights. • A corporation may also have preferred shares. Usually preferred shares are entitled to receive fixed dividends on a regular basis. Those shares enjoy two kinds of preferences: dividends must be paid to them before common shares, and if the corporation dissolves, the investment in preferred shares is repaid before the residual value is distributed to the holders of common shares. Management and Control of the Corporation • Shareholders- entitled to the assets of the corporation remaining after all creditors are paid on its dissolution. Their only powers are to vote for the election of the directors, to appoint auditors, and to vote on proposals made to them. • Directors- Responsible for managing or supervising the management of the business of the corporation and its internal affairs. • Officers- are appointed by directors and usually exercise substantial management powers delegated to them by the directors. How Shareholders Exercise Power • Shareholders must act collectively. How this is done depends on whether the corporation has many shareholders or only a few. • Directors are obligated to call annual meetings at least every 15 months. A the annual meeting directors are elected, auditor is appointed, and financial statements for past year are discussed. • Public corporations are corporations that have distributed their shares to the public. Only a small percentage of shareholders of such corporations attend shareholder’s meetings in person. Shareholders can participate without attending by a proxy. The proxy holder has all the powers of the shareholder at the meeting, but must vote in accordance with any direction given by the shareholder. Shareholder’s Access to Information • Shareholders can access corporation articles, by-laws, minutes of meetings of shareholders and shareholder resolutions, and a share register showing the owners of all shares • The most important information shareholders receive are the annual financial statements of the corporation. For public corporations, these are usually contained in an annual report. Shareholders’Agreements • If a corporation has few shareholders, they often use a shareholders’ agreement to create an arrangement for governing the corporation that is different from the arrangement that occurs under the statute. They may: o Change shareholder voting entitlements o Change shareholder approval requirements o Create rules for share transfers Voting and Management • The CBCA and the statutes modeled on it permit all the shareholders of a corporation to agree to alter the allocation of power between directors and shareholders. Such unanimous shareholders’ agreements may restrict in whole or in part the powers of the directors to manage the business and affairs of the corporation. • Shareholders who are party to such an agreement have all the rights and powers as well as the duties and liabilities of a director to the extent of the restriction. The directors are relieved of their duties and liabilities to the same extent. • This allows a small corporation to organize its structure to reflect the fact that it is the shareholders who are running the business by giving them power to manage directly. Share Transfer • Often transfers are permitted upon compliance with a right of first refusal. It is the right for shareholders to be offered shares that a shareholder wants to sell first before they are offered to non-shareholders. • A shareholder agreement may also contain a shotgun buy sell provision. It is a share transfer mechanism that forces one shareholder to buy out the other. Shareholder Remedies • Derivative Action- An action by a shareholder on behalf of a corporation to seek relief for a wrong done to the corporation. • Oppression- When actions by the directors or the officers have oppressed or unfairly disregarded or prejudiced their interests, shareholders may claim relief under the oppression remedy. In general, relief is available when the reasonable expectations of shareholders about management behavior have not been met. Relief can include anything the court decides is necessary to remedy the problem, including ordering the corporation to buy the oppressed shareholder’s shares and orders against shareholders. • Examples of behaviours that courts have found oppressive: 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 shareholder to ensure that a transaction between them was on terms that were comparable to the terms that would have been negotiated by parties not related to each other. o Other actions that benefit the majority shareholder to the exclusion or the
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