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Chapter 14

BUS 393 Chapter Notes - Chapter 14: Legal Personality, Debenture, Floating Charge


Department
Business Administration
Course Code
BUS 393
Professor
Richard Yates
Chapter
14

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Chapter 14 - Corporations
The Process of Incorporation
Developed in response to need to finance large economic projects – needed
to have large number of people participating financially but not playing active
roles
Corporation is a separate legal entity
Three methods of incorporation in Canada: registration, letters patent, and
articles of incorporation
Registration
Only used in Nova Scotia
Must file ‘memorandum of association’ and ‘articles of association’
Memorandum is like a constitution, sets out important matters (name,
authorized share capital)
Articles of association contain internal procedural regulations, operational
rules (eg. how shares are issued, requirements for board of directors and
shareholders, voting procedures, power of officers, dividend requirements)
Registrar does not have discretionary right to refuse incorporation, unless
requirements are not complied with
Letters Patent
Only used in Quebec and PEI
Applicant petitions to government body for granting of letters patent
Letters patent set out constitution – purpose of company, company name,
share structure, rights/obligations of parties, etc.
Articles of Incorporation
Used in other provinces and federal gov’t, developed in the USA
BC has unique system that is close to this approach but retains features of
Registration
oMust file ‘notice of articles’
Must file articles of incorporation and be granted a certificate of incorporation
Articles of incorporation has features of both letters patent and registration
methods
Not necessary to file bylaws
Government body has no general discretion to refuse request for
incorporation
See Table 14.1 for a summary
Other Incorporated Bodies
Cities, universities, and other public institutions are incorporated legal
entities that can sue or be sued
Also, non-profit bodies, or non-share capital corporations – mostly cultural,
social, charitable, and religious organizations (eg. SPCA, Red Cross)
Separate Legal Entity
When incorporation process is completed, there is a new legal person
created: the incorporated company
Corporation does not exist, except on paper, and is ‘legal fiction’ or a
‘corporate myth’

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Shareholders own shares of the corporation, and the corporation (not the
shareholders!) owns its assets
Courts will sometimes ignore this separate legal entity – eg. deem several
corporations to be one person for tax purposes, or ‘lift the corporate veil’ if
fraud is involved
Separate legal entity aspect allows for acquisition of capital without involving
shareholders in operations
Allows purchase/sale of shares without interference with operations
Note: A corporation may join other corporations or individuals in joint
ventures or partnerships
Capacity
Corporations have the capacity and the rights/powers/privileges of a person
Problem of capacity to contract may still arise with corporations created by
special acts of legislature/Parliament – must be careful to check restrictions
on their capacity
The Role of Agents
Corporations must act through agents (directors, employees) – agency law is
important
Funding
Important attraction of corporation: ability to acquire capital from large
number of sources through the sale of shares
Registration and letters patent jurisdictions require authorized share capital
to be set out in incorporation documents, setting upper limit on shares that
can be sold
BC: limitation on share capital not required
Par-Value vs. No-Par-Value Shares
Company can issue shares with a specific value, but the market quickly sets a
value on those shares not reflected in that stated par value; may have tax
advantages
Declining practice of issuing par-value shares, usually issue no-par-value
shares now
Special Rights and Restrictions
Preferred shares – give shareholders preference when dividends are
declared; bears promise to pay specific dividend each year (may be
cumulative), but is not a debt and not an obligation
oNo right to vote, unless sometimes when corporation fails to pay
dividends
oUsually ahead of common shareholders when company is liquidated
Common shares – right to vote, but no right to dividends
Borrowing
Corporation can borrow funds and accumulate debt, either by borrowing from
a bank, or issuing bonds/debentures
Bond – secured by a mortgage or floating charge on all assets of the
corporation not mortgaged
Debenture – more likely to be unsecured
Bondholder has a right to payment, unlike shareholders, but no right to vote –
higher priority when a company liquidates
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