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Chapter 26

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Valerie Irie

BU231 Chapter 26 – Corporate Governance: The Internal Affairs of Corporations What is Corporate Governance? -Corporate governance – the rules governing the organization and management of the business and affairs of a corporation in order to meet its internal objectives and external responsibilities -The Canada Business Corporations Act (CBCA) and the corresponding provincial statutes draw a broad distinction between two aspects of a corporation’s activities: -The affairs – internal arrangements among those responsible for running a corporation – the directors and officers – and its main beneficiaries, the shareholders -The business – the external relations between a corporation and those who deal with it as a business enterprise – its customers, suppliers, creditors, and employees – as well as government regulators and society as a whole Corporate Governance of Publicly Traded Corporations -Publicly traded corporations – corporations that issue shares to the public, also known s public corporations, widely held corporations, reporting issuers, and issuing corporations -Recommendations: -A majority of directors should be independent -The CEO should not also hold the position of chair of the board -The corporation should establish separate, independent committees of the bard to address executive compensation and nomination of board members -The corporation should adopt and publish a “code of ethics” -The board should perform regular self-assessments -Many privately held corporations choose to comply with the higher standard of corporate governance in order to meet their ethical responsibilities and in preparation for a public offering in the future -Public offering – selling shares to the public, which must be done in compliance with provincial securities regulations The Structure of the Modern Business Corporation -Board of directors – the governing body of a corporation, responsible for the management of its business and affairs -Officers – high-ranking members of a corporation’s management team as defined in the by-laws or appointed by the directors, such as the president, vice-president, controller, CEO, CFO, general counsel, and general manager -Audit committee – a group of directors responsible for overseeing the corporate audit and the preparation of financial statements. The committee has wider responsibilities in a distributing corporation -Compensation committee – committee responsible for setting director and officer pay -Nominating committee – committee responsible for proposing and recruiting new directors -Board of directors consists of the audit committee, compensation committee, and nominating committee Directors The Role of the Directors -To issue shares -To declare dividends -To adopt by-laws governing the day-to-day affairs of the corporation BU231 Chapter 26 – Corporate Governance: The Internal Affairs of Corporations -To call meetings of shareholders -To delegate responsibilities and appoint officers -A corporation is required to have one of more directors Appointment and Removal of Directors -A director of a corporation must be a minimum of 18 years of age, be of sound mind, and not have declared bankruptcy -Directors are elected, re-elected, or replaced on a regular basis -Cumulative voting – a method of electing directors by a form of proportional representation -If shareholders are dissatisfied with current directors, a special meeting may be called to vote on the removal of a director before the expiration of the term Officers -Officers are responsible for the day-to-day “hands on” management of the corporation -Officers may be removed by the directors -The responsibilities of officers of public corporations are attracting more attention from provincial regulators, which now require CEOs and CFOs to certify contents of a corporation’s audited financial statements and annual reports Duties of Directors and Officers 1. Every director and officer of a corporation in exercising their powers and discharging their duties shall a. Act honestly and in good faith with a view to the best interests of the corporation; and b. Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances 2. Every director and officer of a corporation shall comply with this Act, the regulations, articles, by=laws and any unanimous shareholder agreement What Duties are Owed? Fiduciary Duties -Must “act honestly and in good faith with a view to the best interests of the corporation” -Imposes a high standard of conduct involving loyalty, integrity, and trust -Avoid any conflict of interest with their corporation and act in the corporation’s best interests Duty of Care, Diligence, and Skill -They must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances -Many corporations have code of ethics and conduct that set standards of behaviour for directors and employees To Whom are Directors’ and Officers’ Duties Owed? To the Corporation -The interests of the corporate legal entity, present and future BU231 Chapter 26 – Corporate Governance: The Internal Affairs of Corporations To the Shareholders and Other Stakeholders -The conduct of a corporation’s business affects not only shareholders but many other sectors of the public as well -Creditors, employees, and the public in general have a stake in good corporate management The Peoples vs. Wise Distinction -The Supreme Court extended the director’s duty of skill and care to other stakeholders including shareholders, creditors, and employees -A corporation that promotes good labour relations by considering the welfare of its employees, enjoys good customer and community relations, and is perceived as socially responsible and responsive to environmental concerns is likely to prosper better in the longer term than one that does not Defences to Breach of Duty -Reasonable diligence, aka the due diligence defence – establishing that an acceptable standard of care and skill was exercised by a director or officer – by establishing that the required degree of care was taken, directors and officers can defence themselves against claims of breach of the articles, by-laws and the Act -Good faith reliance – good faith reliance on audited financial statements or expert reports is a defence to breach of fiduciary duty or duty of skill and care -Corporate indemnity – an agreement with the corporation to reimburse a director or officers for any costs associated with liability for breach of duty is enforceable provided that the director acted honestly, reasonably, and in good faith -Directors’ and officers’ liability insurance – A corporation may purchase directors’ liability insurance on behalf of its board -Business judgment rule – courts will defer to the business decisions of directors and officers provided they are arrived at using an appropriate degree of prudence and diligence Strict Liability -The CBCA and corresponding provincial statutes make directors liable to their corporation when they vote at meetings of the board on specified maters that cause financial losses to the corporation, such as the improper redemption of shares or the payment of a dividend in circumstances that leave the corporation unable to meet its liabilities -If the corporation becomes insolvent, the directors are personally liable to all employees of the corporation for unpaid wages while they were directors, up to the amount of six months’ wages Specific Conduct Involving Conflicts of Interest Contracts with the Corporation -Duty to disclose any interest that the director may have in contracts made with the corporation -A director who has an interest in a contract must disclose this fact at a meeting of the board of directors hat considers the contract, and must not vote on the matter Interception of Corporate Opportunity -A different situation arises when it is a director’s duty to acquire a particular item of property for the corporation or to give the corporation the chance of first refusal, and instead she acquires the property for herself BU231 Chapter 26 – Corporate Governance: The Internal Affairs of Corporations -In that case, she has intercepted an opportunity belonging to the corporation and has committed a breach of duty -If she buys the property for herself, she has breached her duty -The property is deemed to be held in trust for the corporation, as is any profit made Corporate Information -A different situation arises when a director received information about a profitable venture or an opportunity to buy property at an advantageous price – she may be under no duty to acquire the property for the corporation, but if the information is received in her capacity as a director o the corporation, then it is her duty to give the corporation first chance of acquiring an interest in the venture or property Competing with the Corporation -A director may not carry on business competing with that of her corporation, except with the permission of the corporation Related Party Transactions I
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