MGTC31-Chapter 17

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Management (MGS)
Professor Rybak

MGTC31 Chapter 17-Corporations The Nature of a Corporation A corporation is neither an individual nor a partnership; it is a separate legal entity in the sense that it has an existence at law, but no material existence. Its rights and duties are delineated by law and its existence may be terminated by the state Important Characteristics a) A corporation is separate and distinct from its shareholders, and it acts not through them but through its authorized agents b) A properly authorized agent may bind the corporation in contract with third parties c) The shareholders of a corporation possess limited liability for the debts of the corporation, and the creditors may look only to the assets of the corporation to satisfy their claims The differences between a corporation and a partnership can be outlined under three main headings: control, limited liability and transfer of interests 1. Control: Corporations have shareholder elect the directors. Shareholders do not have the power to bind the corporation in a contract. The directors have control to make all decisions for the corporation unless there is an unanimous shareholders’ agreement 2. Limited Liability: Loss is limited to the investment the shareholders put into the corporation 3. Transfer of Interests: No identity of shareholders needed, transfer is allowed-does not affect the corporation 4. Term of Operation of the Business: unlimited term of operation 5. Operation of the Business Entity: The corporation is governed by the statute under which it was incorporated that sets out the conditions and rules that apply to its operation 6. Separate Existence of the Corporation 7. Corporate Name: Must be clear with a customer that they are dealing with a corporation General-Act (Method of Incorporation) A form of incorporation whereby a corporation may be created by filing specific information required by the statute Relation with Third Parties To ensure that third parties are not affected by restrictions on the powers of General-Act corporations, the doctrine of ultra vires has been abolished insofar as it would apply to corporations incorporated under the Act. As a consequence, third parties dealing with a corporation are not obliged to examine the memorandum of association of the corporation in order to ensure that the powers of the corporation are not restricted with respect to the contemplated transaction. Doctrine of Constructive Notice- Presumption at law that everyone has knowledge of the content of all statutes 1 | P a g e It is because of the doctrine that the concept of ultra vires has been abolished Indoor Management Rule In all cases where a party is dealing with a corporation, the party is entitled to rely on what is known as the indoor management rule for the validity of the acts of the officers of the corporation. The indoor management rule states that a party dealing with a corporation may assume that the officers have the valid and express authority to bind the corporation. The application of this rule is directed to the internal operation of the corporation, of which the party normally would have no actual knowledge. However if a notice is issued then this rule cannot apply. The Incorporation Process Application must include the corporations name, the names of the applicants, and whether it is public or private. If it is public it has to be made clear to outsiders the details of the corporation and the purpose for which the shares are offered to the public. Small corporations that are privately held may restrict the transfer of interests Shareholders’ Agreements An agreement between shareholders of a private corporation concerning management and/or future reorganization of the corporation such as buy-out of interests There are three types of shareholder agreements: 1. One between the shareholder and corporation: a. Shareholders often create agreements with the new corporation to ensure their long term employment in return for accepting minority status 2. One between Shareholder and Shareholder a. How they will vote at meetings and how they will buy out each other’s interest in the event of fundamental disagreements 3. Restricts their behaviour or freedom of action when those shareholders sit in their capacity as directors. a. By law any restrictions placed on shareholders while acting in their capacity of directors must come from a unanimous vote b. Restrictions on directors can also be implemented using the articles of incorporation by including a clause in there that allows that c. Future investors must be made fully aware of any unanimous changes Corporate Securities May issue common or preferred shares, rules to be outlined in the articles of incorporation A corporation may also issue securities in the form of debt 2 | P a g e Floating Charge- A debt security issued by a corporation in which assets of the corporation, such as stock- in-trade, are pledged as security. Until such time as default occurs, the corporation is free to dispose of the assets Debenture- A debt security issued by a corporation that may or may not have specific assets of the corporation pledged as security for payment Division of Corporate Powers Duties and Responsibilities of Directors Every corporation must have at least one director; they are in effect the managers of the corporation Only the directors may bind the corporation. However if a shareholder should assume the powers of a director, the indoor management rule states that they have to assume the responsibilities and liability. Directors have the right to declare dividends and to conduct the business of the corporation fall exclusively to the directors Major changes in the nature of the corporation, although often initiated by directors have to be confirmed by shareholders The difference in powers is to balance out shareholder protection and the need for freedom to manage on the part of directors Directors are responsible for the day-
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