Chapter 15 The Corporation: Organizational Matters PDF

The Corporate Form: Organizational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of a corporation as a legal person the distinction between federal and provincial incorporation the share structure of a co...

The Corporate Form: Organizational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of a corporation as a legal person the distinction between federal and provincial incorporation the share structure of a corporation the selection of a corporation’s name how a corporation is created how a corporation is financed how securities are regulated 2 The Corporation Defined The corporation is the predominant business vehicle in modern commerce. It is a separate legal entity and is treated as a legal person. The corporation alone is responsible for its own debts and other liabilities. The shareholders are not responsible for a corporation’s default on its liabilities. 3 Landmark Case 15.1 (1) Salomon v Salomon Ltd, AC 22 (HL) Salomon carried on a profitable shoe-manufacturing business and formed a corporation to run the business. He and his family were the only shareholders, with Salomon owning 20 001 shares and family members owning 6 shares. Salomon fully controlled the corporation and was also a secured creditor of the corporation. The business suffered financial problems and became insolvent. 4 Landmark Case 15.1 (2) Salomon v Salomon Ltd, AC 22 (HL) Creditors sought to collect their debts from Salomon personally, suggesting it was improper for an individual to conduct his business through a one-person corporation to secure limited liability. Resolution: o House of Lords confirmed that there is nothing wrong with a shareholder being a creditor of the corporation, even when that shareholder essentially controls the company in question. o Creditors knew they were dealing with a limited liability company on an unsecured basis. 5 Stakeholders in the Corporation (1) stakeholder: One who has an interest in a corporation. Internal stakeholders are individuals or groups who have a direct or indirect role in governing the corporation, and determining its mission and how that will be achieved, such as shareholders, directors, and officers. o officers: High-level management employees appointed by directors who manage day-to-day operations of the corporation.  Examples: president, secretary, treasurer 6 Stakeholders in the Corporation (2) External stakeholders are people who have dealings with the corporation but without a role in its governance. o Examples: customers, employees, creditors, government Corporation law seeks to regulate the relationships among the corporation’s internal stakeholders, whose interests may at times conflict with one another. 7 Pre-Incorporation Issues Decisions that must be made include the following: o whether to incorporate federally or provincially o what type of shares will be available and to whom o what to name the corporation 8 Provincial and Federal Incorporation Both levels of government have passed legislation that provides for the incorporation of companies. Federally incorporated corporations have a right to carry on business in each province. Provincially incorporated corporations have the right to carry on business only in the province in which they are incorporated but can be licensed to carry on businesses in other provinces. 9 Shares and Shareholders (1) The incorporators must decide on a share structure. A share represents an ownership interest in the issuing corporation. o Shareholders do not have the right to use the assets of the corporation or any right to directly control or manage the corporation. o Shareholders have those rights that specifically attach to their share. share structure: The class or classes of shares the corporation will issue, their rights and privileges, and the number issued. 10 Shares and Shareholders (2) A corporation may have one type or class of shares, which will have all the basic shareholder rights attached to it: o the right to vote for the election of directors o the right to receive dividends declared by the directors o a right to a share in the proceeds on dissolution of the corporation, after the creditors have been paid 11 Shares and Shareholders (3) Typically, the share structure will include different classes of shares which may include a combination of the following various rights and privileges: o voting rights o financial rights o preference rights o cumulative rights o redemption rights The number of shares can be limited to a particular number of shares or left open-ended (unlimited). 12 Availability of Shares (1) widely held corporation: A corporation whose shares are normally traded on a stock exchange. o Widely held corporations are subject to regulation pursuant to the relevant securities legislation. o Shares are normally available to the public. 13 Availability of Shares (2) closely held corporation: A corporation that does not sell its shares to the public. o This is the most common form of corporation and is commonly referred to as a “private corporation.” o They are not subject to securities legislation as long as they meet private corporation requirements, such as a limited number of shareholders. o They may be subject to a lower tax rate. o Examples: McCain Foods, Irving companies, Holt Renfrew 14 Who May Own Shares? A share is a piece of property and is freely transferable unless there is a restriction in place. In widely held corporations, shares are almost always freely transferable. In closely held corporations, it is common to have a provision in the incorporating documents that shares cannot be transferred without the agreement of the directors or a majority of the shareholders of the corporation. o “A right of first refusal” means that the shareholder wishing to sell must first offer their shares to the directors (or shareholders) at the same price they have negotiated with the outsider. o This gives the insiders one last chance to acquire the shares for themselves instead of having to welcome a new investor to the company. 15 Business Application of the Law 15.1 (1) Rogers Communications and Dual-Class Shares Rogers was founded by Ted Rogers in 1960, with a dual-class share structure which included voting shares and non-voting shares. After his death in 2008, Edward Rogers (chair of the Board of Directors) attempted to terminate the CEO, against the wishes of fellow board members, which included other family members. The board blocked the plan and voted to remove Edward as chair of the board. Edward then replaced 5 of the 14 directors, who reinstated Edward as chair. 16 Business Application of the Law 15.1 (2) Rogers Communications and Dual-Class Shares How was this possible? o Ted had left the voting shares to a trust for his family; Edward was the chair of the trust. o Rogers Control Trust held 97 percent of the outstanding Class A Voting shares and approximately 9 percent of the Class B Non-Voting Shares of RCI. o The Class B shares pay dividends but had no voting rights. o Although the trust owned less than 30 per cent of the company’s equity, it controlled more than 97 percent of the votes. 17 A Corporate Name (1) All jurisdictions require a company to be identified by a name or designated number. The corporation’s name must o be distinctive o not cause confusion with any existing name or trademark o include a legal element (Ltd, Corp, Inc, etc.) o not include any unacceptable terms 18 A Corporate Name (2) Care must be taken when selecting a name. o If the name that is confusingly similar to the name of another business, the entrepreneurs can be sued for trademark infringement and the tort of passing off. o They will be liable for any damages that the other business has suffered and perhaps be ordered to change the name of their corporation. Instead of a distinctive name, corporations can have a numbered name, followed by Canada, Ltd, Inc, etc. o shelf company: A company that does not engage in active business.  Often incorporated by law firms for future use by their clients. 19 Case 15.1 (1) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities Inc was incorporated in Alberta and acquired its name in 2003. o Aquatera Utilities’s head office is in Grande Prairie and provides water, sewer, waste handling, and recycling services to Grande Prairie and the greater Peace River Country region. Aquaterra Water Management Inc (Aquaterra Water) changed its name to Aquaterra Water in 2014. o It operated in oilfield waste management and water disposal for the petroleum industry. Its head office is in Red Deer, and operates in Alberta, Saskatchewan, British Columbia, North Dakota, and Texas. 20 Case 15.1 (2) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities requested that the Corporate Registrar direct Aquaterra Water to change its name. In 2016, the Registrar found the names were confusingly similar in contravention of the Business Corporations Act and associated regulations and directed Aquaterra Water to change its name. 21 Case 15.1 (3) Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Court: Upheld the registrar’s decision. o Identical names were not required; rather, the focus is whether it is reasonable to find that persons interested in dealing with one business would instead deal with the other similarly named business, having regard to the given factors. o In determining that the names were similar and caused confusion, the following factors were considered: distinctiveness of the name Aquatera, length of time used (2003 v 2014), similarity in nature of the business, degree of similarity in appearance and sound, and overlap of the geographic areas where the name is likely to be used. 22 The Process of Incorporation (1) The processes across Canada vary but are similar. incorporator: The person who sets the incorporation process in motion. articles of incorporation: The document that defines the basic characteristics of the corporations in Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, Manitoba, Ontario, and federal jurisdiction. 23 The Process of Incorporation (2) The process can differ across provinces, but generally the process is as follows: o Submit articles of incorporation.  defines basic characteristics of the corporation o Submit a Notice of Registered Office.  lists the address of the corporation o Submit a Notice of Directors.  names and addresses of the directors o Submit a NUANS report.  to search for similar names already in use o Pay a filing fee. 24 Organizing the Corporation Once incorporated, directors will meet to start things up, including doing the following: o make bylaws  bylaws: Rules about day-to-day operating procedures of the corporation. o adopt forms of share certificates o authorize the issue of shares and securities o appoint officers o make banking arrangements The first meeting of shareholders must happen within 18 months of incorporation to elect directors. 25 Financing the Corporation Two methods exist for financing the corporation so it can operate: o debt financing o equity financing securities: Shares and bonds issued by a corporation. 26 Debt Financing A corporation can raise money by borrowing from banks, family, shareholders, and government. Bonds and debentures give the lender a charge on assets of the corporation, if the debt is not repaid. o bond: A document evidencing a debt owed by the corporation, often used to refer to a secured debt. o debenture: A document evidencing a debt owed by the corporation, often used to refer to an unsecured debt. These do not result in an ownership interest in the corporation. On insolvency, holders are entitled to repayment before shareholders. 27 Equity Financing A corporation can raise money by selling shares. Equity financing results in an ownership position. o Shares are issued to investors in exchange for a purchase price. o This provides a flexible means of raising capital. o It provides investors an opportunity to benefit from the corporation’s growth. Corporations can combine shares and bonds to raise money, and some can be given conversion rights. o conversion rights: The right to turn one type of security into another type. On insolvency, shareholders are entitled to share in the proceeds after all creditors are paid. 28 Business and Legislation 15.1 (1) Crowdfunding Crowdfunding funds a venture through soliciting small amounts of money from a large amount of people. o This is usually done online, with a pitch from the entrepreneur. The three models of crowdfunding: o Donation model: The lender receives nothing in return. o Lending model: The lender will be repaid. o Investment/equity model: The lender receives equity in return for financing. 29 Business and Legislation 15.1 (2) Crowdfunding In 2021, the Canadian Securities Administrators (CSA) approved a harmonized national framework for start-up crowdfunding. o Eligible issuers can raise up to $1.5 million (up from $500 000 in some jurisdictions) in any 12-month period. o An individual can invest $2500 (up from $1500 in some jurisdictions) or $10 000 if a registered dealer has provided advice. 30 Securities Legislation (1) The aims of all securities legislation are the following: o It provides the mechanism for the transfer of securities. o It ensures investors can access information needed to make informed decisions. o It ensures the system is such that the public has confidence in the marketplace. o It regulates those engaged in the trading of securities. o It removes or punishes those participants not complying with established rules. 31 Business and Legislation 15.2 A Co-operative National Securities Regulator Canada has 13 provincial and territorial securities regulators. In 2013, the federal government launched the Cooperative Capital Markets Regulatory System to administer a single set of rules and regulations to regulate the Canadian market. In 2018, the Supreme Court of Canada unanimously ruled that the Cooperative System does not improperly fetter the provinces’ sovereignty and falls within Parliament’s general powers to regulate trade and commerce. The federal government was unable to get opposition support to budget the funding of the organization. 32 Securities Legislation (2) All Canadian securities regimes have three basic requirements: registration, disclosure, and insider-trading restrictions. o Registration: Any company intending to sell securities to the public in a given province must be registered to do so with the relevant provincial securities commission. o Disclosure: The company must comply with disclosure or prospectus provisions.  prospectus: The document a corporation must publish when offering securities to the public. The purpose of a prospectus is to ensure full, true, and plain disclosure of facts that are likely to affect the price of the securities. 33 Securities Legislation (3) An issuer of securities has an obligation to continue to keep the public informed of its activities and must notify the public of any material change in its affairs. Investors who suffer losses in connection with misrepresentations or omissions by a company have, in addition to common law causes of action, a statutory right of action. 34 Case 15.2 Wong v Pretium Resources Inc, 2022 ONCA 549 Investors sought leave to sue in a class action. They alleged losses on the secondary market because Pretium Resources Inc failed to disclose in a timely manner an unsolicited negative opinion about a gold mining project (which was later determined to be unreliable and erroneous). Court of Appeal: o There was no omission of a material fact. o The policy objectives of the continuous disclosure regime are not served by the flooding the market with unreliable information and leaving it up to investors to determine what is valid information. 35 Insider-Trading Restrictions insider trading: Transactions in securities of a corporation by or on behalf of an insider on the basis of relevant material information concerning the corporation that is not known to the general public. insider: A person who has access to relevant material about a corporation. o They must report any trading in which they are engaged. o They must not pass on information to a tipee.  tippee: A person who acquires material information about an issuer of securities from an insider. The Criminal Code also includes insider-trading and tipping offences. 36 Case 15.3 Finkelstein v Ontario (Securities Commission), 2018 ONCA 61 Prominent mergers and acquisitions lawyer and four investment advisors were convicted by the Ontario Securities Commission (OSC) of tipping and insider trading. OSC was able to prove tipping and insider trading on the basis of circumstantial evidence such as frequency and date of phone calls, the pattern of trades, and the dates of trades. The OSC imposed a total of $2.9 million in penalties, costs, and disgorgement orders against the parties. The lawyer received a 10-year trading ban, a lifetime ban on becoming an officer or director of a public corporation, a $450 000 administrative penalty, and $125 000 in costs. 37