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Chapter 27

Chapter 27 BU231.docx

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Valerie Irie

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BU231 Chapter 27 – Corporate Governance: External Responsibilities Liability Arising from Business Responsibilities -The business activities of a corporation affect many external groups -Stakeholders – groups affected by the business activities of a corporation Types of Liability -Some of the protective requirements are proactive, such as requiring disclosure of information or licensing of professionals; these are designed to prevent problems before they occur -Other legislative measures are punitive, such as imprisoning for insider trading: these are designed to punish bad behaviour and deter others -Regulatory offences – less serious offences created by government regulation through specialized legislation, agencies, and tribunals -Regulatory offences resemble traditional criminal law because, in order to protect the public interest, they punish those who ignore the rules; however, their penalties are usually less serious The Requirement of Mens Rea -For most offences, the prosecution must prove beyond a reasonable doubt that not only did the accused actually commit the act described in the offence but also that he had the intention to do it – that is, the “intent” -Mens rea offence – an offence where the prosecution must establish a “guilty mind” on the part of the defendant -Strict liability offence – an offence where there is a presumption of guilt unless the defendant can show that he or she took reasonable care -Absolute liability offence – an offence where the absence of fault is no defence Protection of Creditors Implications of Limited Liability -A creditor’s rights are limited to only the assets held by the corporation itself -If those assets are inadequate, the creditor normally has no further remedy against the owners: the shareholders Preservation of Capital -There are no minimum issued capital requirements for corporations -The primary concern of the law has been to ensure that a corporation’s stated capital is not improperly reduced by preferring the rights of shareholders over those of creditors The Solvency Test -Insolvency – having liabilities in excess of the realizable value of one’s assets or being unable to pay one’s debts as they fall due -A corporation is deemed insolvent if the realizable value of its assets has become less than its total liabilities, or if it is unable to pay its debts as they become due The Maintenance of Capital Test -Applies in the following cases: -Dividends – provides that a corporation may not pay a dividend if there are reasonable grounds for believing that the corporation would be unable to pay its liabilities thereafter, and the realizable value of the corporation’s assets would thereby e less than the aggregate of its BU231 Chapter 27 – Corporate Governance: External Responsibilities liabilities and its stated capital of all classes -Return of capital – A corporation may repay capital to its shareholders provided that it will be able to satisfy the solvency and maintenance of capital tests Loans to Shareholders, Directors, and Employees -There are income rules that include the loan as income to the borrower Protection of Employees -Human Rights legislation and tribunals create civil liability and regulatory offences to promote non- discriminatory work environments Protection of Consumers and Competitors -The Federal Competition Act addresses unfair conduct among competitors an improper marketing and advertising strategies Protection of Investors Securities Legislation -Securities commission – the statutory authority appointed to supervise the issue of securities to the general public, the operation of the securities industry, and the stock exchange -Operates as the regulating, licensing, and enforcing agency charged with ensuring that the requirements of the Act are complied with Objectives of Securities Legislation -The goals of the legislation are to ensure the integrity, fairness, and efficiency of the market and promote investor confidence in it -To accomplish these goals there are three key areas of responsibility: -the securities industry -the corporations offering their shares to the public -the stock exchanges within the provinces -Canadian securities legislation employs several devices to achieve the objectives: 1. Registering or licensing those engaged in various aspects of the securities business 2. Requiring the issuer of securities to the public to file a prospectus with the securities commission 3. Regulating continuous disclosure by public corporations 4. Setting standards of corporate governance for public corporations The Securities Industry Licensing -Each securities commission has authority to revoke, suspend, or refuse to renew the license of anyone when, in its opinion, such action is in the public interest -Operating without a license is a criminal offence BU231 Chapter 27 – Corporate Governance: External Responsibilities The Public Corporation: Public Offering Corporate Governance -Requirements: -Independence: decision-makers should be free of conflicts -Transparency: decisions should be made through an open process -Disclosure: information should be available to the public -Accountability: decision-makers should be responsible for their conduct -Checks and balances: internal structures should bring irregularities to light Prospectus -Prospectus – the document that a corporation is required to publish when inviting the public to subscribe for its securities -Must include the following: -a full description of the securities to be offered, with a statement of their voting rights, preference, conversion privileges, and rights on liquidation -the nature of the business carried on -the names, addresses, and occupations of the directors -the proposed use of the proceeds from the issue of securities -details of any share options to be given by the corporation -the remuneration of the underwriter -the dividend record of the corporation -the particulars of property and services to be paid for out of the proceeds of the issue -recent audited financial statements -a certificate of accuracy signed by the CEO, CFO, the promoter, and two directors -The prospectus must contain full, true, and plain disclosure of all material facts -Non-pubic purchasers – purchasers that are not members of the general public, such as banks, insurance companies, and municipal corporations Continuing Disclosu
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