Textbook Notes (367,974)
Canada (161,538)
BUS 393 (52)
Chapter 14

Chapter 14 - Corporations

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Business Administration
BUS 393
Richard Yates

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 o Must 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’ • 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 o No right to vote, unless sometimes when corporation fails to pay dividends o Usually 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 Closely Held and Broadly Held Corporations • Closely held corporation – few shareholders, shares cannot be sold to public openly or on the stock market, usually small corporations used to operate a family business, usually managed by shareholders, less government regulation Corporate Officers Directors (Managers)  Within the Corporation • Shareholders elect directors, who run the corporation until the next election • Directors must be adults of sound mind, not bankrupt, not convicted of fraud, sometimes must be a Canadian resident (not in BC) • Director owes duty of care not to be negligent, must exercise the care, diligence, and skill of a ‘reasonably prudent person’ • Director owes fiduciary duty to act in best interests of the corporation, to be loyal, avoid conflicts of interest, act honestly and in good faith, cannot take personal advantage of opportunities • Note that fiduciary duty is to the corporation, NOT to shareholders, but a duty of care is owed to other stakeholders • In most circumstances, only the company can sue the director. Many jurisdictions give shareholders the right to bring a derivative action against the directors • Derivative (representative) action – lawsuit where shareholders are given right to launch a civil action against directors on behalf of injured company • Directors may face personal liability when they make certain prohibited decisions (sell stocks for less than fair market value, making company insolvent, not calling required annual shareholders’ meetings) • Directors prohibited from using ‘insider knowledge’ to their own advantages  External Obligations • Directors can be personally liable for: o Owing workers unpai
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