Pol/Soc Sci 3165 6.0A
Tuesdays, 2:30-5:30 pm
Simon Archer sarcher@torys.com

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“The Corporation”, Achbar, M. based on book by Balkan, J.
Anyone seen it? Thoughts? Populism?
What role does corporation play...
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 in the movie?
in the capitalist system?
How are corporations similar to “natural persons”?
How are corporations dissimilar to people?
What is the primary “engine” or “driving force” or reason behind “corporate behaviour”?
What was the primary remedy identified?
Question: is a corporation a “democratic” form of association, or a “totalitarian” form of association (or neither)?

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Partnerships

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Simon and Tina purchase a sail boat in crap condition with the aim of fixing it up and selling again. Are we partners? Why?
Simon and Tina decide to make a partnership. They call their partnership
Tina LLP and register their partnership, and hire Grajame to clean up the boat.
Grajame carelessly injures Annie, who wants to sue him. Annie wants to know who she can sue.

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Simon and Tina are probably partners. We have collaborated on the project for the purposes of profiting. We do not have enough information about the rest of the relationship.
Annie can sue Grajame, and Grajame’s employers are vicariously liable *if* he injures
Annie in the course of his duties. Annie can sue the partnership, and usually, all partners are liable for the torts of other partners or employees of the firm. This is a firm liability, not a personal liability, so Simon is liable for the negligence as well. Alternately, we say that if
Annie sues Tina, Tina can claim against Simon for his portion of the liability.

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Financial Statements, valuation, stuff.
Slides on web.
Not testable because we had no class.
If you’re interested, take a peek.
If you’re going to be a business wonk, read closely and learn everything you can about valuation of a business.

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Just who are they?
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Historical development of the corporation
Nature of a corporation
Methods of incorporation
The incorporation process
A “typical case”: Salomon v.
Salomon

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Royal Prerogative (e.g. Hudson’s Bay Co.)
Limited liability arose in late 1800’s
 cf. rise of massive train accidents, rich passengers able to sue
Created by legislation in USA after War of
Independence (no monarch to exercise prerogative)
Canada followed suit in 1849-1867 period
Q1: The Charter applies to all government actors. It applies to those who regulate corporations. It does not apply to corporations per se. Why?

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Separate legal entity
Powers of a natural person
Shareholders have limited liability
Agents bind it in contract
Must operate within Articles of
Incorporation or Charter (e.g., scope of business)

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Principal distinguishing features
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Aspects of Control – Board of Directors
Limited Liability – no general partners
Transfer of Ownership – easy
Term of Operation – unlimited
Governed by statute
Separate existence from shareholders
Name style identifier – Ltd, Corp, Inc

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Royal Charter
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Not used anymore
Letters Patent
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Version of royal charter
Special Act
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Banks, etc.
General Act
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Doctrine of constructive notice
Indoor management rule

CORPORATION LAW
INDOOR MANAGEMENT RULE
Written Authority or Approval of
Contract Provided
CONTRACTING
PARTY
Contract
AUTHORIZED
OFFICER OF
CORPORATION
No Need for
Contracting Party to
Inquire Behind
Authority Provided by
Officer of Corporation if It Appears to Be in
Order
SHAREHOLDERS
OR DIRECTORS
Authority to
Bind Corporation in Contract
(as Required )

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Proposed name search
Application for Articles of
Incorporation
Government filing
Get certificate of incorporation
Initial By-laws and Resolutions

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Leading case on basic corporate theory and “one-man” companies, UK, 1896
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NB: UK behind others because need for some development was slower
Aron Salomon had carried on business successfully as a leather merchant for many years
In 1892 Aron agreed to sell all the assets of his leather business to a newly incorporated entity named “Aron Salomon and Company Limited”

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Aron and six other family members formed a company and contributed
£1 each for seven shares
The Company then bought the assets of the leather business and paid Aron by giving him 20,000 shares valued at £1 each and
£10,000 face value of secured debt.

Balance Sheet at Inception
Short Term Assets Liabilities
Cash £ 7
Long Term Assets
Leather Business
£30,000
Secured Debt to Aron
£10,000
Shares
Outstanding 20,007
£20,007
Total £30,007 £30,007

The Incorporation - “Aron Salomon and
Company, Limited”
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There was a general incorporation statute that granted shareholders “limited liability” - major concept.
Statute required 7 individuals to sign the incorporation document and to become shareholders in the corporation.

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Aron, his wife, a daughter and four sons signed as incorporators
Name “Aron Salomon and Company, Limited”
Capital
- authorized number of shares 40,000
- each share nominal value of £1
Aron, his wife and five of his children each subscribed for 1 share at £1 per share
The company was duly registered under the statute

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Each incorporator had previously transferred 1£ for 1 share each.
Aron transferred all the assets of his leather business to the corporation, which assets he said were worth £30,000
The corporation therefore had a liability of
£30,000 which it satisfied by
 issuing 20,000 shares to Aron (nominal value
£1 each)

 issuing a debenture, which recorded the £10,000 debt owing to Aron, and was secured by a charge on all the assets of the new company
• Such a secured debt must be properly registered, which was done

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Aron borrowed personally £5,000 from
Broderip
Aron gave Broderip as security, a pledge of his £10,000 debenture
Pledge is the delivery of goods by a debtor to his creditor to be kept by the creditor until the debt is satisfied
- legal title remains in pledgor
- possession must pass to pledgee
- pawn is same concept

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Debenture required company to pay interest (normally quarterly or halfyearly)
Company defaulted on interest payment in 1893
Broderip sued the company to collect money owing on the debenture
Company went into liquidation
(bankruptcy)

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Distress sale of assets
Pay liquidator etc. first
Pay Broderip £5,000 plus interest
Balance £1,500
Claims against balance:
- Aron Salomon on his debentures £5,000 + int.
- Unsecured creditors £7,733 8s.3d.
- Shareholders £20,007

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If Aron had not transferred his business to the company he would:
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 get nothing on the liquidation; be responsible personally to pay all the unsecured creditors.

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Corporations are created by statute and one looks to the statute for basic guidance;
Corporations are entities completely separate from their “owners”;
Corporations own their assets and can deal with them freely;

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Corporations are “persons” under federal (s.35) and Ontario (s.29)
Interpretation Acts
Transfer at inflated value carried by acceptance of all shareholders
Creditors only have rights they bargain for
There is nothing wrong with a one person company?

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CBCA s.5(1) says:
- One or more individuals not one of whom a) is less than 18 years of age b) is of unsound mind and has been so found by a court in Canada or elsewhere, or c) has the status of bankrupt, may incorporate a corporation by signing articles of incorporation and complying with section 7 (which section requires sending the articles and two other forms to the Director)

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There can be several layers of investment in a corporation with different levels of priority or subordination
Equity (shares) are subordinate to debts, whether secured or unsecured.
All debts are equal unless secured

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Various security statutes and concepts
- PPSA
- Mortgage
- Floating Charge
Subordinate by contract

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The Court made several clear statements…
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Incorporators need not all invest significant amounts - so long as incorporation requirements are met.
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Once you have a corporation, the motives of the persons forming it are irrelevant (with obvious extreme exceptions).
Once incorporated there was a legal entity and the business belonged to it and not to Mr.
Salomon.
Artificial creation of the law. Legal existence.
Legal entity.

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“The company is at law a different person altogether from the subscribers… and though after incorporation the business is precisely the same as it was before… the company is not in law the agent of the subscribers or trustee of them. Nor are the subscribers as members liable… except as provided.”

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A corporation is a creature of its own statute - s. 45(1) of CBCA says shareholders are not liable for acts or defaults of the corporation (except for very limited situations specified in the statute)
Basic concept is no shareholder liability beyond the money the shareholder contributed - the shareholder owns shares but does not own the corporation or its assets.

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Limited liability means you decrease the need to monitor the liability.
Reduces the need to monitor other shareholders as their liability is also set.
Free transfer gives shareholder a way to exit
Can establish a fair price.
Allows for diversification.

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Some say there is higher cost of borrowing if shareholders have limited liability as creditors cannot go after the shareholders.
Others say that if unlimited liability, equity investors will expect higher rates of return to compensate risk while lenders will charge less.
Equity investors are more likely to monitor management b/c they stand to lose their investment before the debt holders are impacted.

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Was Salomon and Company, Limited really just a legal fiction that realigned responsibilities - i.e. nothing new in productivity?
Are corporations separate people?
What kind of people are they?
Next week...
 piercing the corporate veil

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Should corporations have the same right to free speech as natural persons, as guaranteed by s. 2(b) of the Charter?
Why, or why not?
Should there be a single national securities regulator in Canada? Why, or why not?
Should business methods be patentable?
Why, why not?
I will add one more topic on the subjects we cover, post-reading week.