LAW 603 Chapter Notes - Chapter 22: Toronto Stock Exchange, Corporate Liability, Accounting
Chapter 22: Legal Rules for Corporate Governance
Management and Control of the Corporation
In Canadian corporate statutes, power and responsibility in the corporation are
allocated amongst different groups of people
oShareholder: are entitled to the asset of the corporation that remain after all the
creditors are paid in its dissolution. Their only power is to vote for the election of
directors, to appoint the auditor, and to vote on proposals made to them. In
most cases, each share has one vote. As shareholders, they do not participate in
managing the business of the corporation
oDirectors: are responsible for managing or supervising the management of the
business of the corporation and its internal affairs, including issuing shares,
declaring dividends, and calling shareholder meetings
oOfficers: are appointed by directors and usually exercise substantial
management powers delegated to them by the directors
Private corporations: corporations with few shareholders, the same people may be the
shareholders, directors, and officers – often the scale of their business is small – as the
scale of the corporation’s business increases these groups are less likely to overlap
Public corporations: in larger corporations that have distributed their shares to the
public, the directors and officers are usually shareholders, but most shareholders are
other people not involved in the corporation’s business
Public corporations are subject to burdensome requirements under provincial securities
law
How Shareholders Exercise Power
For most purposes, shareholders must act collectively – how this is done depends upon
whether the corporation is a public corporation or a private one
Usually shareholder actions take place at meetings
Directors are responsible for calling shareholder meetings
Directors are obligated to call annual meeting at least every 15 months
At an annual meeting, (1) directors are elected, (2) the auditor is appointed for the
coming year, and (3) financial statement for the past year are discussed
find more resources at oneclass.com
find more resources at oneclass.com
Directors must ensure that shareholders receive advance notice of the meeting, along
with information regarding these three items and any other business
Shareholder meetings may take place at other times to conduct other business
In public corporations, meetings are an important opportunity to question and criticize
management, as well as to discuss and vote on proposals made to shareholders
In private corporations where most shareholders are also directors, shareholder
meeting may be only a formality
Corporate statutes permit any business that must be done at a meeting to be recorded
in written resolutions and signed by all shareholders – such signed resolutions are
commonly used as an alternative to meeting in corporations with few shareholders and
are just as effective as actions taken at a meeting
Only a small percentage of shareholders of public corporations attend shareholder’s
meetings in person
Shareholders can participate without attending by appointing a proxy, who need not be
a shareholder to represent them at the meeting and vote their shares
Proxy (or proxy holder): has all the power of the shareholder at the meeting, but must
vote in accordance with any direction given by the shareholder
For all public corporations, management must send the shareholders a form of proxy
allowing them to appoint a proxy holder – the form is sent along with a management
proxy circular: a document that contains management proposals and information
regarding the proxy, the business to be dealt with at the meeting, and certain other
information – the information provided by the circular enhances shareholders’ ability to
ensure that management is acting in their interests and to make informed choice
regarding how to vote
Dissident shareholders: are those who disagree with management proposals – they
may try to encourage their fellow shareholders to vote against management
oare entitled to obtain a list of shareholders and their address from the
corporation and to use this information to contract other shareholders
oDissident shareholders must send out a dissidents’ circular: document sent to all
shareholders by shareholders who seek the votes of other shareholders against
management - with information on their identity, their relationship to the
corporation, and their interest in the proposal
oDissidents’ circulars are rare in the Canadian marketplace – the cost of complying
with the disclosure requirements are often too high
At the meeting, voting is usually by a show of hand, but any shareholder may require
that each vote be recorded on a ballot that is collected and counted – approval is usually
by an ordinary majority vote
Shareholders’ Access to Information
Shareholder need information about the corporation to monitor management and to
exercise their rights as shareholders effectively
A corporation must maintain these records and allow shareholders access to them
oArticles
oBy-laws
find more resources at oneclass.com
find more resources at oneclass.com
oMinutes of meetings by shareholders and shareholders’ resolution
oA share register showing the owner of all shares
Shareholders as well as creditors may examine and copy these records during business
hours. Minutes of directors’ meetings and directors’ resolutions must be maintained as
well, though these records cannot be inspected by shareholders or creditors
The annual financial statement of the corporation prepared by management are the
most important information shareholders receive
oFor public corporations, these are usually contained in an annual report
oAnnual statements must be audited by an independent accountant who
determines whether the statements were prepared in accordance with generally
accepted accounting principles and fairly present the financial results of the
corporations for the year
oThe auditor bases their opinion on an evaluation of financial records of the
corporation
oShareholders may be unanimously agree to dispense with the audit requirement
– commonly done in small private corporations where the shareholders are
closely involved in its business and don’t consider the protection of an
independent assessment of the corporation’s financial statements to be worth
the expense
Shareholder’s Agreements
If 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:
oChange shareholder voting entitlement and the role of shareholders in
management
oChange in shareholder approval requirements
oCreate rules for share transfer
Voting and Management
oShareholders may want to allocate decision-making power amongst themselves
in a way that is different from the allocation that would result from the number
of shares each holds
oEllen and Phillipe decide to set up a corporation to carry on a business of
distributing computer software – Phillipe will contribute the $100000 needed to
set up the business and will be the sales manager – Ellen will contribute some
software she has developed – Because of his large financial contribution, Phillipe
will get 80% of the shares, while Ellen will get 20%
oIF each share has one vote, Phillipe would have enough votes to determine who
will be on the board. He does not have to include Ellen. But what if Phillipe and
Ellen consider themselves to be in a relationship in which each should have each
should have an equal say and each wants to be on the board?
oThey could address this in shareholders’ agreement. Both could agree that they
will vote their shares to elect both of them as directors. Ellen and Phillipe may
also agree that all shareholder decisions must be approved unanimously
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
In canadian corporate statutes, power and responsibility in the corporation are allocated amongst different groups of people: shareholder: are entitled to the asset of the corporation that remain after all the creditors are paid in its dissolution. Their only power is to vote for the election of directors, to appoint the auditor, and to vote on proposals made to them. In most cases, each share has one vote. Public corporations: in larger corporations that have distributed their shares to the public, the directors and officers are usually shareholders, but most shareholders are other people not involved in the corporation"s business. Public corporations are subject to burdensome requirements under provincial securities law. For most purposes, shareholders must act collectively how this is done depends upon whether the corporation is a public corporation or a private one. Usually shareholder actions take place at meetings. Directors are responsible for calling shareholder meetings.
