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Chapter 27

BU231 Chapter Notes - Chapter 27: Market Manipulation, Criminal Negligence, Fiduciary

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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
-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
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

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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
3. Regulating continuous disclosure by public corporations
4. Setting standards of corporate governance for public corporations
The Securities Industry
-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
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