Chapter 12 Notes.docx

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Department
Management and Organizational Studies
Course Code
Management and Organizational Studies 2275A/B
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Prof

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Chapter 12: Corporations The Process of Incorporation  Purpose: finance large projects without limitations associated with sole prop and partnerships  Separate legal entity  Shareholders change while company remains intact  Eg. Royal charters created early corporations and Hudson’s Bay  If venture were important to parliament they became incorporated –“special-act companies”  Deeds of settlement- contract for ordinary citizens who couldn’t incorporate (back in day)  Three methods of incorporation in Canada: 1) Registration (from British) 2) Letters patent 3) Filing of articles of incorporation (from U.S)  Can incorporate at: 1) Federal level (chain of restaurants/internet- can incorporate in any business) 2) Provincial (local restaurant- if wants to incorporate in other provinces must register in each province )  Registration o Only Nova scotia uses it o Accomplished by filing memorandum and articles o Memorandum is like constitution –sets out name of company, objectives, share capital o Articles – operational rules (internal)  Eg. how shares should be issued, voting procedures, regulations o Less flexibility in changing internal procedures after registration  Letters Patent o Declining o Based on monarch granting royal charter o Ordinary rules are included in separate bylaw o Quebec and P.E.I  Articles of incorporation o Features letters to patent and registration o Incorporation is accomplished through granting certificate of incorporation  Societies are also incorporated – (universities, non-profit bodies) can sue or be sued  Corporation= legal fiction  Two legal persons: the shareholder and an unincorporated company  “a one- man company” can incorporate- no responsibility for debts  Shareholders do NOT own assets of business (corporation does)- but they have right to share liquidation of assets o Sears Canada is separate from its stores or shareholders (shareholders don’t own the stores)  If fraud is main purpose to incorporate courts will ignore the “separate entity fact”  Company is vicariously liable  Limited liability=advantage  Capacity o Corporations have capacity of a normal person  Corporations must act through AGENTS Funding  Acquire capital through issuance of shares  Authorized share capital=# of shares that can be sold  Common to issue no-par –value shares (no value on shares- market place determines value)  Common shareholder—have right to vote and control over corporation  Preferred shares collects dividends before common shareholders o Can be cumulative o Right to vote only when company fails to provide dividends o Must include these restrictions when shares are issued  Special shares used in estate planning  BORROWING o Borrowing funds=accumulation of debt o Can borrow from a single creditor (bank) OR issuing of bonds/debentures (secured or unsecured) o Failure to pay debt=breach of corporations legal obligation- creditor can seize assets o Bond: secured o Debenture: unsecured o Bond holders have no right to vote and no part in managerial decisions o Bondholder has right to demand payment o Risk vs return= shares v. bonds o Secured- in a better position to get money back when company is in financial trouble  Closely held and broadly held corporations o A.k.a public and private companies o Closely held= few shareholders (managers), usually small corporations o Broadly held= more closely government regulated  Distributing corporations  more than 15 shareholders and distribute shares to public o Comply to most stringent legislative requirements  To conclude: o shareholders BUY shares (preferred vs. common)  Corporations NOT obligated to declare dividends  Control corporation  Share liquidation of assets o Creditors LEND money (secured vs. unsecured)  Corporations obligated repay loans  Paid before shareholders  No control Corporate Directors, Officers and Shareholders Directors (managers): Within the Corporation  Shareholders choose directors  Director cannot be bankrupt or have been convicted of crime/fraud  Director duty to corporation to be careful (to creditors as well)- must act as a “reasonable person” when exercising powers and duties  Fiduciary duty to corporation, NOT shareholders o Only corporation can sue director (decision made by directors)  Can not take personal advantage of opportunities that arise because of their positions of directors  Cannot compete  Any gains must be paid to corporation  Any losses are borne by director alone  Very HIGH STANDARDS to be a director  Derivative or representative action: since only corporations can sue directors, this jurisdiction gives shareholders the right to bring this action against them  Can face personal liability o Eg. allow shares to be sold f
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