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BU231 (315)
Chapter 27

BU231 Chapter 27

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Wilfrid Laurier University
Keith Masterman

1 READING NOTES CHAPTER 27 – Nature of a Corporation & Its Formation Nature of a Corporation • A ‘legal person’ formed by incorporating according to a prescribed legal procedure • A legal person is an entity recognized by law as having its own rights and duties of its own, entirely a creation of the state Characteristics of Corporations • Liability o Corporation is liable for its own debts, but shareholders can only lose the value of their shares o Value of limited liability are often overlooked in small corporations where banks require personal guarantees or pledge property • Transfer of Ownership o Shareholders may sever by transferring their shares to another person • Duty of Good Faith o Shareholders have no such obligation to the corporation, may carry out multiple businesses Consequences of Separate Corporate Personality • Capacity o Under the Canadian Business Corporations Act (CBCA) a corporation has the capacity and all the rights, powers and privileges of an individual o Corporation can act only through its agents (employees), who must have authority • Separate Existence o Salomon’s Case 1897  Man owned every share of his company, but six… when the business went bankrupt creditors claimed that corporation was a sham  Court upheld Salomon’s claim as a corporation and recognized the separate legal personality of the “one-man company” • Limitations on the Principle of Separate Corporate Existence o Exceptions to Limited Liability  Shareholders of small private companies are often required to provide security or personal guarantees for loans made to their corporations  CBCA provides further exception as shareholders are liable for corporations debt if they’ve received improper distribution of assets (dividends paid out even when no profits made)  Owners of corporations are not protected from personal liability, even if the corporation is vicariously liable o Lifting the Corporate Veil  Courts have sometimes been prepared to disregard the separate existence of corporations 2  In order to identify an individual with a corporation there are three conditions that must be met: 1) Individual must control the corporation 2) Must use that control to commit a fraud, a wrong, breach of duty 3) Misconduct must be cause of injury Methods of Incorporation (OBCA and CBCA) • Corporations Act o Requires articles of incorporation which are the basic constitutional document of corporations that set out essential terms of agreement and are reviewed by the government which grants a certificate (discretionary) • Jurisdiction o Choice to incorporate either federally (CBCA) or provincially (OBCA), thus you must decide if you are going to work in one province alone or not o If you are not incorporated within a certain province you must comply with certain registration requirements to operate there Constitution of Corporation • Articles of Incorporation o Must include name of business, location of head office, classes and number of shares, number of directors • By- Laws o These are the internal working rules of a corporation o While articles of incorporation are entrenched (permanent), by-laws are rather flexible, requiring a majority of shareholders to make alterations o Include issues such as the qualifications and election of directors, how to post notice of shareholder meetings o Also provides job descriptions of officers, quorum (min. # of directors necessary to be present at a meeting), authorizati
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