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Chapter 28

BU231 Chapter 28

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Keith Masterman

1 READING NOTES CHAPTER 28 – Internal Affairs of Corporations Structure of the Modern Business Corporation • Power originates with the general meeting of shareholders • The shareholders appoint a board of directors to manage the corporation o The board of directors are responsible for the management of a corporations business (outside) and affairs (inside) • Directors in turn appoint a CEO who is in charge of the day-to-day running of the corporation • In closely held corporations shareholders are often directors, blurs distinction • In widely held corporations, there may be as many as fifteen members Directors • Section 102 of CBCA outlines that the most important powers given to director for internal affairs are: o Issue Shares o Declare dividends o Adopt by-laws o Call meetings of shareholders • A corporation is required to have one or more directors • Publicly held corporations must have more than three directors, two of whom must be outsiders o At least 25% of the directors must be resident Canadians • Directors are elected by simple majority, once shareholders have elected the BOD they have virtually no say in the management of the corps. Business and affairs with small exceptions discussed later Duties of Directors • According to Section 122 a) of CBCA: o “Every director and officer of a corporation in exercising his powers and discharging his duties shall”:  Act honestly and in good faith (best interest of corporation)  Exercise care, diligence and skill in comparable situations  Must comply with the CBCA, by-laws, unanimous shareholder agreement o Ultimately, they owe a fiduciary duty • To the Corporation o Directors must act with a view to the best interest of the corporation • To Shareholders o The interests of the corporation are normally taken to mean the interests of the general body of shareholders, present and future o Directors generally owe no duty to individual shareholders under corporate law • To the public o Apart from statutory obligations, the courts have generally resisted the notion that directors owe a duty to the public o But, it often is good business sense to have a good relation with the public 2 • Duties of Care and Skill o Negligence (S.122b)  Director owes a duty to the corporation not to be negligent, this diligence is often only that required of an average person  Entitled to rely on information received from officers of the corporation, but cannot willfully close their eyes to mistakes or misconduct, liable if they do  Employees (officers) owe a professional duty of care o Strict Liability  Directors are more likely to be held liable for their acts than their omissions  CBCA, OBCA makes directors liable to their corporation when they vote at meetings of the board on specific matters that cause financial loss to the corporation  Note: If the corporation becomes insolvent, directors are personally liable to all employees for six months wages  Director may raise the defence of due diligence, show that they used reasonable care and skill, hired experts • Fiduciary Duties o Duty of good faith imposes a high standard of conduct on a director o General duty on directors to avoid any conflict of interest o Note: duty is imposed on both the directors and officers / senior employees, any breach allows them to be personally liable o Contracts with the corporation (S.120 CBCA)  Disclose any interest that the director may have in contracts with corporation  Director must disclose this fact at a meeting of the BOD that considers the contract, must not vote on matter  Contract is binding if the other directors still decide to go through with it  Failure to disclose gives the director’s corporation the right to rescind the contract and they become personally liable  Eg. “Royal Group” • Zen (BOD) and Dunsmuir (CEO) set up a numbered corporation to buy land that the corporation was considering buying • The two proceeded to hide behind this veil and re-sell the property to the corporation at a profit  Important to have independence in the board in order to create an air of objectivity, make corporation transparent… this is why it is necessary to have outsiders on the board o Interception of Corporate Opportunity  If it is a directors duty to acquire a particular item of property for the corporation and the director acquires it personally, then they have intercepted an opportunity for the company and are in breach of duty 3 o Corporate Information  Duty to reveal information about profitable ventures when that information has come to you in your capacity as a director  Make a dangerous assumption if you assume that the corporation wouldn’t want a certain property and acquire it in your own name  Again, forms a breach of duty o Competing  Director may not carry on a business competing with her corporation, except with permission of the corporation  This rule cannot be circumvented by simply resigning, can’t just make use of personal information obtained as a director… have to turn in any profits o Consequences of a Breach of Fiduciary Duty  Personally liable for damages for any loss sustained by corporation  Corporation is entitled to rescind a contract in which director has material interest that she did not disclose  Injunction may be obtained to restrain her from continuing to compete with corporation  Have to turn in any profits from side-ventures etc… • Insider Trading o Insider trading occurs when a director or officer (or any person) buys or sells the corporation’s shares or other securities making use of confidential information in order to either make a profit, or avoid a loss o In the absence of common law remedies / punishments, the CBCA has stepped in to fill the void making insider trading a criminal offence punishable by fines or imprisonment o CBCA has strict disclosure requirements whenever a director, or other insider trades in securities of their own corporation o Insider includes a director, officer, an employee, any shareholder who holds more than prescribed percentage of the corporation’s securities, as well as the spouses / fam
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