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Chapter 29

BU231 Chapter 29

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Keith Masterman

1 READING NOTES CHAPTER 29 – External Responsibilities of a Corporation Three External Responsibilities • Creditors • Investors • Public Protection of Creditors • Implications of Limited Liability o In a corporation a creditor’s rights are limited to the assets held by the corporation, if those assets are inadequate then the creditor normally has no further remedy o For this reason, legislatures and courts have evolved some of the following rules to assure creditors that those assets are not wasted o Primary concern of the law has been to ensure that corporations capital is not allocated to shareholder’s before responsibilities to creditors are met • Protection Under CBCA o CBCA solves the above with two kinds of rules:  Prohibit payments to shareholders if it renders a corporations liquid assets insufficient to pay creditors  Restrict dividends even when the corporation might still be left with sufficient liquid assets to pay creditors • Solvency Test o “No paying out dividends etc… unless you have enough $$$” o A corporation can either provide shareholders with dividends or buy back shares o If either of the above are performed when  i) the corporation is insolvent already, or  ii) the above actions will make the corporation insolvent,  …then the directors become personally liable to the corporation for the deficiency • Maintenance of Capital Test o Goes beyond the solvency test, provided for by s.42 of the CBCA  Stipulates that dividends can only be paid if net assets will still exceed stated assets after the dividends are paid out… ie. only pay dividends out of profit or if assets increase in value  Only buy back shares if your assets will still equal or exceed your liabilities and stated capital 2 Protection of Investors • Securities Legislation (Ontario Securities Act) o Objectives of securities legislation  Prevent and punish fraudulent practices in the securities industry  Require full disclosure of financial information in prospectus when dealing with IPO’s o Two devices for achieving this  Licensing (persons engaged in securities industry) • Renew on an annual basis, revoke, suspend • Criminal offence to be unlicensed  Prospectuses • Note merely a formality, commission will refuse a prospectus if they believe it is misleading or omits data • Require: o Full description of securities (voting rights etc…) o Nature of business carried on o Names, addresses, occupations of directors o Recent audited financial statements o Proposed use of proceeds from issue of shares o Continuing disclosure  One of the most important innovations gives securities commission control over stock exchanges  Thus control exists over initial, as well as subsequent trading o Misrepresentation  Investigate for misrepresentations in financial statements etc…, where corporations have civil liability for both primary (ISO) and secondary markets Civil Liability of Corporations • Civil liability o Liability towards plaintiff, typically to pay damages for harms done through committing a tort or breaking a contract, punished by fines • Negligence • Contractual Liability o A director or an officer of a corporation acting within their actual authority binds the corporation to contracts made w/ 3 parties o Indoor management rule 3  Everything that appears regular on its face may be relied upon by an outsider and will bind the corporation  Just an application of the apparent authority principle • Strict Liability o To pay wages and taxes Criminal Liability of Corporations • Criminal liability – Conviction for an offence, typically punished by imprisonment or payment of a fine or both • Regulatory Offences o A corporation can be charged with and convicted of an offence under the Criminal code in the same way as a natural person o Far more common for corporations to be prosecuted for regu
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