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Presentation Prepared By
Gail McKay, LLB, Thompson Rivers University

1.
To understand the nature of a corporation and the process of incorporation
2.
To examine the structure of corporate power and the duties of directors and officers
3.
To understand the rights of a shareholder
4.
To survey securities legislation and the conduct of trading securities
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-1

A corporation is an artificial “person” created by the state which, like a person, has the power to carry on business, own property and provide services
It is regarded as a separate legal entity from the people who are responsible for its direction and control, and from those who own its shares
A share is a fractional interest in a corporation
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-2

A corporation has a legal existence but no material existence
It is managed by a set of directors who are elected by the corporation’s shareholders
The directors then elect or appoint officers to act as president (CEO), treasurer and secretary and they carry out the day-to-day operation of the company
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-3

Acting as stewards of a corporation, the directors have a duty to make decisions in accordance with the corporation’s objectives and to keep shareholders informed, at least annually, of the activities of the company
Shareholders do not participate in decision making or bind the corporation in contract since only directors or officers may do so
The liability of shareholders for the debts of a corporation is limited to their investment
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-4

Unlike a partnership where the death, retirement or desire of a partner to leave the partnership occasions complex processes, the transfer of ownership of corporate shares is simple
In a public company, all that is involved after the sale of a share is a change in the share register of the identity of the person holding the share
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-5

The last word in a corporate name must identify it as a corporation by the use of
Limited, Incorporated, Corporation or their common abbreviations
The name must not be similar to that belonging to any other corporation and, given that the name is a company asset, the selection of a name is often given careful consideration, although number names such as
12345678 Canada Ltd. are also permitted
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-6

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-7

A corporation is created by statute, either by a special act or by a general act
Special act corporations are created by governments when they decide a particular public service would benefit from incorporation, or when the service is delegated to a private sector company but strictly regulated
Statutory rights and duties specified must be strictly observed or risk ultra vires arguments
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-8

The general act corporation has the powers of a natural person, although the incorporators may specify restrictions on the company in terms of the scope of business activities the directors can engage in
Third parties dealing with a corporation are entitled to rely on the indoor management rule: outsiders need not verify whether a corporation or the officers of it have the authority to enter into a specific type of transaction
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-9

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-10

An application for incorporation contains the company name, address of the head office and principal place of business, names of incorporators, objects of the corporation, share capital and any rights or restrictions attached to the shares, and any restrictions on the activities of the corporation
It must also indicate whether its shares are to be sold publically or privately; and after incorporation, bylaws and internal operating procedures must be established
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-11

To raise capital for the corporation, a number of different securities may be issued
Common or voting shares may be issued, as well as preference shares with special rights such as priority in payment or a right to a fixed rate of return in the form of dividends
Fixed charge securities that create a debt such as a mortgage bond or debenture may also be issued, as well as floating charges that may attach to general assets
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-12

A private corporation requires at least one director and a public corporation needs a minimum of three
Directors have exclusive rights such as the decision whether or not to declare dividends
They owe a fiduciary duty to the corporation to place its interests above those of any particular group of shareholders, and the doctrine of corporate opportunity precludes their making a personal profit at the expense of the company
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-13

Corporate activity with negative environmental impact and economic loss that causes plant closures may result not only in penalty or liability provisions against corporations themselves but also against their directors
If a corporation declares bankruptcy, its directors may be personally liable for any amount of unpaid wages of employees which the sale of corporation assets has failed to cover
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-14

The limits of liability for directors depend on whether
1.
The action under scrutiny leads to absolute liability, in which case it need not even be shown that the director knew of the problem in order for liability to attach, or
2.
The action under scrutiny permits a defence of due diligence, in which case it must be shown that the director exercised all reasonable care and skill, meaning the director may not be passive or acquiescent to an offence being committed by others
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-15

Shareholders have the right to elect directors at the AGM and to approve important corporate changes, the right to a report on the business activity of the corporation and the right to view auditors’ financial statements
They have the right to request meetings and the statutory right to oppression provisions such as a requirement that minority shareholders’ shares be purchased at fair market value, a requirement that oppressive conduct cease, or a requirement that an accounting be undertaken
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-16

From the perspective of the seller, a share purchase may be preferable to an asset purchase of a company because the seller may look forward to dispensing with all of the corporation’s assets at once
From the perspective of a purchaser, an asset purchase allows the selection of equipment, land, inventory, customer lists, and intellectual property, but does not require him or her to accept undesirables such as redundant or obsolete equipment or contaminated land
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-17

Securities legislation is designed to protect unsophisticated investors and to foster confidence in the integrity of the securities marketplace
The definition of securities is broad, ranging from documents that demonstrate title to interests in a corporation, to various rights that may be issued for sale to the public such as annuities or mutual fund interests
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-18

The regulation of securities attempts to promote appropriate disclosure of corporate information to further create protection for investors
It requires registration of investment advisors, and imposes a licensing requirement for education and training on them
Accountants, bankers and lawyers are exempt from the registration requirement
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-19

Issuers of new securities must provide an acceptable prospectus to a securities commission regulator before any public trading of that security may occur
Plain disclosure of material facts regarding the corporation must be provided, including fees associated with the underwriting of the issue
Prospectus exemptions exist for trades to accredited investors, private issuers and minimum investments amounts of $150,000
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-20

The Canadian Depository for Securities maintains on the Internet an electronic filing and disclosure system
The System for Electronic Document Analysis and Retrieval (SEDAR) contains most of the documents which the various securities commissions require
The American equivalent of SEDAR is the
Electronic Data Gathering, Analysis and
Retrieval system (EDGAR)
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-21

Trading based on information undisclosed to the general public about a security is called insider trading, and is illegal in Canada
It occurs when an investor is in possession of critical information that could affect the price of the security because he or she is in a special relationship with the company
When he or she trades for personal benefit or tips someone else, both tipper and tippee are liable to prosecution
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-22

A proxy is the transfer of a voting privilege by a shareholder to an agent, and is based on a relationship of trust
The situation arises because the shareholder is unable to attend the annual general meeting to place his or her vote
Anyone soliciting proxies is required to distribute an information circular describing exactly who is soliciting as well as that person’s interest in the corporation
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-23

An attempt to acquire a controlling interest in the voting shares of a corporation is known as a take over bid
A controlling interest is a total of 20 percent of the voting shares
The bid must be made to all holders of the class of securities sought, must disclose the financial terms of the bid, and must disclose what existing interest the bidder has in the corporation
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-24

A corporation is a legal entity which is separate from its shareholders
Its directors and officers owe the corporation a fiduciary duty to place the best interests of the corporation above their own
Shareholders have rights to information, some voting rights and remedies against minority shareholder oppression
Legislation governs both securities and trading
Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved 7-25