1. CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 7 Corporation Law

2. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-1 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. LEARNING OBJECTIVES Understand the nature of the corporation Examine the incorporation process Outline the division of corporate powers Understand shareholders’ rights Consider securities legislation Examine the conduct of trading of securities CH 7

3. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-2 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Nature of a Corporation Corporation or Company A separate legal entity created by the state Shareholder Person who holds a share interest in a corporation (part owner) Director Person elected by the shareholders to manage the affairs of the corporation Officer Person appointed by the directors to manage daily operations (President = CEO) 7.2

4. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Nature of a Corporation (Cont’d) Control Directors are delegated management and can bind the corporation; shareholders cannot bind the corporation Liability Shareholders have limited liability, limited to their investment in the corporation Creditors look to the corporation for payment Transfer of Interests Shares may be freely transferred in a public company 7.2

5. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-4 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Nature of a Corporation (Cont’d) Term of Operation of the Business Unlimited existence as it does not depend on the shareholders fortunes Operation of the Business Entity Governed by the statute under which it is incorporated, and other related statutes, such as securities legislation Separate Existence of the Corporation Clearly defined separate existence at law – leading case: Salomon v. Salomon @ p.189 Corporate Name Asset of the business and must include identification as a corporation (Limited, Ltd., Inc., Corp.) 7.2

6. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-5 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Basic Characteristics and Differences among Sole Proprietorship, Partnership, and Corporation Figure 7-1

7. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-6 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Incorporation Corporation is created by statute Government service Letters patent – Quebec and PEI  older system issued by the Crown General act system – remaining provinces and federal government Essentially two types of corporations for business activities 7.3

8. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-7 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Incorporation (Cont’d) Special Act Corporations Created by special legislation for a particular purpose with powers granted under the statute Actions beyond power granted are ultra vires and a nullity What are examples of this type of corporation? 7.3

9. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-8 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Incorporation (Cont’d) General Act Corporations Powers of a natural person Memorandum of Association  Filing document creates the corporation existence Articles of Association  Document is filed and the government then issues a certificate of incorporation that creates the corporation Indoor Management Rule  Third party may rely on the authority and validity of the officers to bind the corporation 7.3

10. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-9 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Corporation Law—Indoor Management Rule Figure 3-1

11. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-10 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Incorporation Process Application for incorporation Details of the proposed corporation  Public corporation Shares offered to the public – must also follow securities legislation  Private corporation Shares not offered to the public Submission of application to appropriate office with fee After incorporation by-laws and rules for internal operation are established 7.4

12. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-11 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Corporate Securities Issuance of securities to acquire capital Share – fraction of ownership  Common – voting shares  Preference – special rights Debt – secured to assets  Fixed charge attaches to specific assets – Mortgage bonds and debentures  Floating charge - attaches to assets in general 7.5

13. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-12 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Division of Corporate Powers Duties and Responsibilities of Directors Private corp. – 1 to 3 directors Public corp. – minimum 3 directors Directors (elected by shareholders) are responsible for daily management of the corporation 7.6

14. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-13 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Division of Corporate Powers (Cont’d) Duties & Responsibilities of Directors Fiduciary duty (loyalty – to the corporation)  Must act in good faith on behalf of the corporation  Failure could result in the doctrine of corporate opportunity, and the director will be held as trustee for the corporation  Duty of honesty, care and skill on behalf of the corporation Insider trading – if insiders (directors) use information acquired by their position to trade shares, resulting in losses to the public, they may be liable 7.6

15. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-14 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Division of Corporate Powers (Cont’d) Personal Liability of Directors Statutes impose liability and penalties directly upon directors for specific, designated activities What types of activities can result in personal responsibility by directors? 7.6

16. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-15 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Division of Corporate Powers (Cont’d) Shareholders’ Rights Full report by directors of business activities Must approve all important matters Elect the directors at the annual general meeting Entitled to the auditor’s report on financial statement; prepared on their behalf Special meetings at their request Shareholder oppression provisions – to grant relief to minority shareholders 7.6

17. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-16 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Dissolution Infinite life span, but may be dissolved Wind-up Complex procedure Voluntary with shareholder approval Involuntary if corporation is insolvent 7.7

18. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-17 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Securities Legislation Consumer protection Protect investors from unfair and fraudulent practices Foster confidence and integrity in the securities market place Securities are broad terms Documents representing title to interests in the corporation Rights issued for sale to the public 7.8

19. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-18 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Securities Regulation (Cont’d) Securities “Buyer beware” for evaluation of quality Regulations Control the intermediaries in the securities market (individuals and businesses) by education and licensing processes to ensure competency Registration Investment advisor registration Exemptions for professionals with regulatory bodies 7.8

20. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-19 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Securities Regulation Disclosure True, full, and plain disclosure of all material facts relating to the securities Prospectus Disclosure Issuers must provide a prospectus to the provincial securities with detailed information regarding the corporation If accepted by the securities administrators the securities may be issued Issuer obligated to continuous filing of material information that may affect the valuation of the securities 7.9

21. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Conduct of Trading Intermediaries such as employees in brokerage houses have a privileged position of knowledge regarding securities  They have the ability to “move the market” which can lead to abuse  Regulations are needed to prevent such abuse 7.10

22. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-21 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Insider Trading Trading in securities based on undisclosed information not available to the public; for personal benefit Tipping - passing on material information to others (tipper & tippee are both liable) Penalty: fines and imprisonment 7.11

23. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-22 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Other Aspects of Corporations Proxy Voting and Proxy Solicitation: Transfer of voting privilege by a shareholder to an agent on the basis of trust Take-Over Bids Attempt by one company to acquire controlling interest in the voting shares of another company Investigation and Enforcement Provincial administrators can impose sanctions and penalties, and may also create civil liability actions for misrepresentation CH 7

24. Essentials of Canadian Business Law, 1st Canadian EditionSlide 7-23 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. SUMMARY Nature of a Corporation Separate legal entity created by statute law Complex incorporation processes, with dissolution provisions and procedures Duties and Responsibilities of Directors Management of the corporation with good faith and diligence owed to the corporation May be personally liable under statute law Shareholders’ Rights Elect directors and approve important by-laws Securities Legislation Protects the public & controls intermediary activities Governs insider trading CH 7