1. CHAPTER Microsoft ® PowerPoint ® Presentation Prepared By Gail McKay, LLB, Thompson Rivers University © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved. © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved. 7 Corporation Law

2. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-1 OBJECTIVES 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

3. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-2 INTRODUCTION 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

4. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-3 NATURE OF A CORPORATION 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

5. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-4 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 CONTROL AND LIABILITY

6. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-5 TRANSFER OF INTERESTS 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

7. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-6 CORPORATE NAME 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

8. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-7

9. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-8 FORMS OF INCORPORATION 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

10. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-9 GENERAL ACT CORPORATIONS 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

11. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-10

12. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-11 THE INCORPORATION PROCESS 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

13. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-12 CORPORATE SECURITIES 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

14. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-13 DUTIES OF DIRECTORS 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

15. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-14 LIABILITY OF DIRECTORS 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

16. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-15 DIRECTOR’S DEFENCE OF DUE DILIGENCE 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

17. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-16 SHAREHOLDERS’ RIGHTS 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

18. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-17 SHARE OR ASSET PURCHASE 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

19. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-18 SECURITIES LEGISLATION 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

20. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-19 SECURITIES REGULATION 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

21. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-20 PROSPECTUS DISCLOSURE 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

22. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-21 ELECTRONIC FILING AND DISCLOSURE 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)

23. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-22 INSIDER TRADING 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

24. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-23 PROXY VOTING AND SOLICITATION 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

25. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-24 TAKE OVER BIDS 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

26. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved7-25 SUMMARY 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