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LAW 603 (75)
Gil Lan (21)
Chapter 22

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Ryerson University
Law and Business
LAW 603
Gil Lan

Chapter 22 – Legal Rules for Corporate Governance MANAGEMENT AND CONTROL OF CORPORATION Power & responsibility allocated amongst different groups: • Shareholders are the residual claimants to the assets of the corporation and elect the directors (entitled to assets after all creditors are paid on its dissolution). - Their powers are to vote for election of directors, appoint auditor, vote on proposals made to them - In most cases, each share=1 vote - Do not participate in managing business of the corporation • Directors 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 • Officers are appointed by the directors of a corp and usually exercise substantial management powers delegated to them by the directors Shareholders  elect  Directors  appoint  Officers Private Corporations – have few shareholders and the same people may be the shareholders, directors and officers Public Corporations – are corporations that have distributed their shares to the public with only a few shareholders involved in the corporation as directors and officers How Shareholders Exercise Power Directors obligated to call annual meetings at least every 15 months - At an annual meeting, shareholders elect directors, appoint auditor, and review annual financial statements are discussed Shareholder meetings may take place at other times to conduct other business Corporate statutes require any business that must be done at a shareholder meeting must be recorded in written resolutions and signed by ALL shareholders. When shareholder cannot attend shareholder’s meeting in person: • PROXY – aka PROXY HOLDER is the person designated by a shareholder to vote at a shareholders’ meeting • Shareholder can participate without attending by appointing a proxy • PROXY NEED NOT BE A SHAREHOLDER • Proxy or Proxy holder has all the powers of shareholder at the meeting, but must vote in accordance with any direction given by shareholder • For all public corps management must send shareholders a form of proxy to appoint a proxy holder – form sent with Management Proxy Circular • Management Proxy Circular is a document sent to shareholders that contains management proposals and information regarding the proxy, the business to be dealt with at the meeting and certain other info • Management proxy circular information enhances shareholders’ ability to ensure management is acting in their interest and to make informed choices regarding how to vote • Dissident Shareholders those who disagree with management proposals – they may try to encourage fellow shareholders to vote against management • Dissident Shareholders entitled to obtain a list of shareholders and addresses from corporation and use info to contact other shareholders • Dissident Shareholders must send out a Dissident Circular – a document sent to all shareholder by shareholders who seek the votes of other shareholders against management • Cost of complying with disclosure docs needed in Dissident Circular often too high Shareholder’s Access to Information Shareholders need info to monitor management and exercise rights as shareholders effectively. Crop must maintain these records and allow shareholders access. They include: • Articles • By-laws • Minutes of meeting of shareholders and shareholders’ resolutions • Share register showing owners of all shares *Shareholders and creditors MAY NOT INSPECT MINUTES OF DIRECTORS’ MEETINGS OR DIRECTORS’ RESOLUTIONS although these too must be maintained Financial statements most important info shareholders receive Statements audited by independent accountant – determines if statements prepared in accordance with generally accepted accounting practices Shareholder’s Agreements If few shareholders, they often use SH agreement to create arrangement for governing corporation different from arrangement under statute, shareholders may; • Change shareholder voting entitlements and the role of shareholders in management • Change shareholder approval requirements • Create rules for share transfers Voting and Management • Shareholders may decide to allocate voting power differently from the level of their investment in the firm • May detail in shareholder’s agreement that they will have equal say • May agree that ALL shareholder decisions must be approved UNANIMOUSLY • Unanimous Shareholders’ Agreement – is an agreement of all shareholders to transfer some or all of the directors’ powers to themselves • Unanimous Shareholder’s Agreement may “restrict, in whole or in part, the powers of the directors to manage the business and affairs of the corporation” – shareholders who are part to this have all the power, duties, liabilities, of director to extent of restriction • Unanimous Shareholder’s Agreement gives Shareholders power to manage directly SHARE TRANSFER • In small corp with few SHs, this is a problem; business can have trouble operating without a SH’s expertise • Hard to sell small corp shares because no market value • Other SHs do not want SHs to be able to sell shares to just anyone – they want restrictions on share transfer so they can control who becomes involved in business as SH • Share transfers often addressed in shareholder agreement by prohibiting transfers except in accordance with specified procedure • Share transfers often permitted upon compliance with RIGHT TO FIRST REFUSAL – the right for shareholders to be offered shares that one shareholder wants to sell FIRST before they are offered to non-shareholders • Must offer price for limited time; if refused, must offer same price to non-shareholder (discourages unfair high price) • Shot-gun buy-sell is a share transfer mechanism that forces one shareholder to buy out the other (may also be in shareholder agreement) • If shareholder A offers shareholder B their shares at a price A specifies, shareholder Bmust either; - Buy all of A’s shares OR - Sell all of their own shares at the same price specified by A • Shotgun clause radical; often used to break a deadlock SHAREHOLDER REMEDIES For situations where shareholders’ interests have been injured by acts of the corporation or its directors Derivative Action An action by a shareholder on behalf of a corporation to seek relief for a wrong done to the corporation • Value of SH’s investment goes down if corporation suffers loss • Action taken if directors breach fiduciary duty and wrongdoing done to corporation • Derivative action one way SHs ensure directors and officers comply with duties to corporation Relief from Oppression Allows a shareholder to claim relief from an act or omission by the corporation or its directors that oppresses or unfairly disregards or prejudices the interests of the shareholder • Relief from oppression obtained directly by SHs • Oppression remedy one of the most flexible and effective SH remedies in the world • Relief is available when REASONABLE EXPECTATIONS of shareholders about management behaviour have not been met • Relief can include: anything court deems necessary to remedy problem; - Ordering corporation to buy oppressed shareholder’s shares - Orders against other shareholders EXAMPLES OF OPPRESSIVE BEHAVIOURS THAT HAVE CALLED FOR RELIEF FROM OPPRESSION: • Approval of transaction lacking a valid corporate purpose that is prejudicial to a particular shareholder • Failure by corp and controlling shareholder to ensure that a transaction between them was on terms that were comparable to the terms that would have been negotiated by parties who were not related to each other • Actions that benefit the majority shareholder to the exclusion or detriment of minority shareholders • Lack of adequate and appropriate disclosure of information to minority shareholders • Planning to eliminate minority shareholders Other Shareholder Remedies Liquidation and Dissolution OR ‘Winding Up’ The corporation’s assets are sold, its creditors paid off, any remaining money distributed to shareholders and the corporation’s existence terminated • Ordered when just and equitable • May be ordered when two equal shareholders cannot agree on how the corporation should carry on business Dissident and Appraisal Right Entitles shareholder who dissent from certain fundamental changes to have the corporation buy their shares • Disagree with a fundamental change when ¾ of other shareholders agree HOW DIRECTORS AND OFFICERS EXERCISE POWER Directors primarily exercise power: • Collectively, at meetings, each director getting 1 vote • Written resolution signed by all directors just as effective as resolution passed at a meeting Work sometimes done by committees in public corps: • Auditing committee – supervise financial reporting by corporation and manage relationships with auditors • Committee to make recommendations to full board regarding officer compensation • Management delegated to officers Officers (CEO, CFO, etc) • Nothing in Canadian corporate law says what officers should have or what are to do • CEO usually has overall responsibility for running the corporations business, while day to day operations are delegated to other who report to the CEO • Corporate Secretary is usually a lawyer, employed by the corp who is senior officer with extensive responsibility for compliance with wide range of legal requirements MANAGEMENT’S DUTIES TO THE CORPORATION Fiduciary Duty Is the most important legal standard of behaviour for officers and directors; each director and officer in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the corporation • Directors and officers cannot defraud the corporation (i.e. stealing assets) • Must try to do what is best for the corporation • Must not put their personal interests ahead of the interests of the corporation • FIDUCIARY DUTY IS OWED TO THE CORPORATION - BEST INTERESTS OF THE CORPORATION: given all circumstances, must be legitimate to consider interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment - All stakeholders must be treated fairly - Act in best interest of the corporation viewed as a good corporate citizen Fiduciary duty main purpose: to prevent directors and officers from benefitting themselves when their personal interests when personal interests and duty to corp conflict It protects investment of shareholders in corporation by prohibiting directors and officers from favouring their interest at the corporation’s expense. CONFLICTS OF PERSONAL INTEREST & FIDUCIARY DUTIES Transacting with the Corporation Ie. Opportunity to sell goods to a corp you are the director of; as director you need to do what is best for the corporation, but your personal interests want you to get the highest price This arises in common manag
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