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Chapter 18

Chapter 18 - Corporation Law


Department
Management (MGS)
Course Code
MGSC30H3
Professor
Professor Rybak
Chapter
18

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Chapter 18 – Corporation Law
Introduction
-Corporation – a type of legal entity created by the state
-It is also separate from those who from time to time possess shares in it, or who are
responsible for its direction and control
-principal uses is as a vehicle by which large amounts of capital may be accumulated for
business purposes
Historical Development of the Corporation
-Most of the early corporations were formed for the purpose of carrying out public or quasi-
public functions or to provide essential services or goods to the community
-legislation at both the federal and provincial levels was introduced to provide for the
incorporation and control of corporations
-legislation, unfortunately, was not uniform, and so considerable variation existed from
province to province
The Nature of a Corporation
-possess attributes of a natural person but it is artificially created and never dies in the
natural sense
-important characteristics of a corporation:
oa) a corporation is separate and distinct from its shareholders - A person who
holds a share interest in a corporation; a part owner of the corporation., and it acts
not through them but through its authorized agents
ob) a properly authorized agent may bind the corporation in contract with third
parties
oc) 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
-director – under the corporation law, a person elected by the shareholders of a
corporation to manage its affairs
-officer – a person elected or appointed by the directors of a corporation to fill a particular
office
-directors are obliged to report to shareholders to keep them informed
-shareholders normally do not participate in the management of the corporation, except
when major changes in the corporation are proposed
-Shareholders’ liability is limited to the amount that they paid or agreed to pay for the
shares that they purchased from the corporation
Control
-In a partnership, every partner is an agent of the partnership, partners have input into
how the business may be operated, and on important matters all parties must agree
before a change can be made
-In a large partnership, these particular rights of each partner often render decision-making
awkward and time consuming, and make general control difficult
-In a corporation, management is delegated by the shareholders to an elected group of
directors, directors have the authority to make all decisions for the corporation
Limited Liability
-In a partnership, every partner has unlimited liability, careless act of one partner may
affect all
-Corporate form eliminates this risk for shareholders, their losses limited to their
investment
-Creditors only have claim on the corporation’s assets
Transfer of Interests
-Partnership, right to transfer their interests is difficult, if one wants to retire or death of a
partner, other partners must acquire the retiring partner’s share or wind up the business
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-shareholder should desire to transfer the share to another, it has no real effect upon the
corporation except for a change in the identity of the person holding the share
-shares may be freely transferred in a public company, thus overcoming one of the main
drawbacks of the partnership
Term of Operation of the Business
-partnership’s existence is limited by the life of its members
-A corporation, on the other hand, theoretically has an unlimited term of operation
-corporation’s existence is not affected by the fortunes of the shareholders a corporation is
free to accumulate or acquire large amounts of capital — either through the issue of
shares, or by the issue of bonds and debentures
Operation of the Business Entity
-A partnership is governed by an agreement that establishes the rights and duties or by the
Partnership Act in its absence
-the corporation is governed by the statute under which it is incorporated
-rights and duties of the shareholders and directors with respect to the corporation are
statutory rather than contractual
Corporate Name
-an asset of the business, must use word in name to distinguish from partnership/sole
proprietorship
-corporation must clearly indicate its name and its place of business on all printed
letterhead and business forms
-The authorized officers of the corporation impress this seal upon all written documents
that require the formal “signature” of the corporation
Methods of Incorporation
Royal Charter
-Issue of the charter was for the purpose of creating a legal existence for the entity, to
permit it to either operate as a monopoly or to own land
-The royal charter was an exercise of the king’s prerogative, and the issue of the charter
gave the entity all the rights at law of a natural person (subject to certain exceptions)
-charter did not, however, generally give those persons connected with the corporation
limited liability if the corporation was a trading company
Letters Patent – a gov’t document that creates a corporation as a legal entity
-acquires all powers of a royal charter corporation and has all the usual rights at law of a
natural person
-If the officers of the corporation, with apparent authority to bind the corporation, enter
into a contract of a type prohibited by the objects or by-laws of the corporation, the
corporation would still be bound
Special-Act – a corporation created by an act of parliament or a legislature for a specific
purpose
-Only have the power specifically granted to it by the statute
-Cannot use words limited, incorporated or their abbreviations in the corporate name
-If the corporation should attempt to perform an act that it is not authorized to do under
the statute, the act is ultra vires (beyond the powers of) the corporation and a nullity
General-Act – a form of incorporation whereby a corporation may be created by filing specific
information required by the statute
-Canadian business corporations may be incorporated under either letters patent (in some
provinces) or two forms of general-Act incorporation
-In Ontario, the document filed is called the articles of incorporation and the document
issued by the government is referred to as a certificate of incorporation - a gov’t
certificate creating the corporation
-The general-Act corporation, like the special-Act corporation, is a creature of statute, and
its powers are limited to those powers specifically granted under the Act
-Unlike the royal charter and letters patent corporations, it does not necessarily have all
the powers of a natural person, but only those powers set out in the statute and its
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