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MGSC30H3 Study Guide - Improper Conduct, Financial Statement, Correlation Does Not Imply Causation

Management (MGS)
Course Code
Professor Rybak

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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
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
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

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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
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
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
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