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Management and Organizational Studies 2275A/B Lecture Notes - Due Diligence, Efficient-Market Hypothesis, Securities Commission

Management and Organizational Studies
Course Code
MOS 2275A/B

of 6
Chapter 12: Corporations
The Process of Incorporation
Purpose: finance large projects without limitations associated with sole prop and
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
Deeds of settlement- contract for ordinary citizens who couldn’t incorporate (back in
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
2) Provincial (local restaurant- if wants to incorporate in other provinces must
register in each province )
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
Company is vicariously liable
Limited liability=advantage
o Corporations have capacity of a normal person
Corporations must act through AGENTS
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 shareholderhave 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
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
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
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 for less than the fair value
o Or make transactions that business will not be able to afford (pay liabilities)
“insiders” – cannot disclose info to outside sources
Legally responsible for management