Corporations
- Corps are social institutions with varied structures that can be used for profit and non-profit activities, as well as co-ops and social enterprises. They all share three key features: they enjoy the benefits of limited liability and perpetual existence, and they are separate legal entities (Salomon).
Structure
For-profit corps / Non-profit corpsCapital structure /
- Equity interests are divided into shares (which are “bundles of rights”) held by SHs
- Shares are divided into different classes
- Three general types of rights that must appear in a share structure:
- Voting rights
- Includes right to elect directors
- Dividend rights
- Right to share in dividends declared by directors
- Dissolution rights
- Right to receive what remains when assets of a corp are sold, liabilities paid off, and corp is dissolved
- Typically have members instead of SHs
- Members usually pay fees to provide capital needed to carry on the corp’s activities
- Members will have rights that include voting rights and what happens when the corp winds up
Management structure /
- Board of Directors: elected by SHs, responsible for managing/supervising management of the corp, typically appoint officers (the C-suite)
- Officers: manage the day-to-day operations of the corp, may hire others to help with mgmt/carrying on business if they have the authority to do so
- Same - Board is elected by the members
Legal Status
Issue / Where / Ratio / NotesGeneral / Salomon / A corp is a separate legal entity.
SH/Creditor / Salomon / Therefore, anSH can also be a creditor of a corp, and can rank equally or even ahead of other creditors depending on whether he/she is secured or unsecured. / Ex) Salomon, who was a SH, had a debenture which ranked him ahead of other creditors. B/c company was separate person, this was ok and creditors couldn’t go after Salomon personally when the business failed.
SH/Director/ Officer/ Employee / Lee / Therefore, even a sole SH of a company can be an employee, an officer, and/or the director of the company. A director’s acts are the acts of the company. / Ex) Lee, sole SH of Lee’s Air Farming(NZ) as well as director, officer and sole employee, was injured at work. Lee died in work accident. Wife still eligible to claim under worker’s comp b/c company employed him as they were separate people.
Assets / Macaura / The corp owns the assets, not the SHs, as shares are just bundles of rights that give a right of action against the company. / Ex) SH insured timber of corp, timber burned down, insurance held invalid b/c SH had no insurable interest: the corp owned the timber, not him (note insurance aspect was overruled in Kosmopolous, but for our point of ownership still good – confirmed in Sparling)
Problems Created By Legal Status:
(1)SHs may cause the company to become indebted to the SHs when the company is insolvent or about to become insolvent in order to defeat the interests of creditors
(2)Company may make pay-outs to SHs when it is insolvent, defeat creditors
(3)Company may enter into Ks with SHs that are unfavourable to other SHs or creditors
(4)Can have a company with very little capital and defeat interests of creditors or 3P tort claimants
(5)Parties may be deceived into thinking they are dealing with an individual or partnership, not a corp
(6)Persons may incorporate to avoid personal obligations or restrictions i.e. not allowed to carry on a business in a certain area due to employment K, so create corp to carry on that business (it isn’t you)
Benefits of Limited Liability
- Limited liability is valuable for a number of reasons, including that valuation costs are lower, monitoring costs are lower, it allows for investment diversification which also allows for high value investment decisions by managers, it provides liquidity, it makes it easier to achieve economies of scale, it reduces transaction costs, and it is less risky from a negligence action point of view.
Unlimited Liability / Limited Liability
1. Valuation
Costs / Need to check:
- Earning capacity (future cash flows) and risk
- Wealth of fellow investors
- Earning capacity (future cash flows) and risk, but not the wealth of fellow investors
2. Monitoring
Costs / Need to control against managers putting wealth at risk
Changes in wealth of fellow investors:
- Due to sales of theirinvestment
- Due to changes in theirpersonal assets
- Less need to control mgmt since smallerpotential loss
- Don't need to monitor wealth of others or control their exit from the firm
- Potential for control block of investment to monitor management
3. Diversification /
- Each investment carries risk of loss of all personal wealth - therefore keep number of investments to a minimum
- Increased number of investments doesn't increase risk since personal wealth is not exposed with each investment
- Diversification smooths out fluctuations
4. Liquidity / Lack of liquidity due to:
- High costs of assessing value
- Controls on transfer of shares
- Lowers cost of valuation information
- Less need for control over other investors selling their investment
5. Optimal
Investment
Decisions / Managers may not make highest value investment since must take account of diversifiable risk to which investors exposed, and compensations for valuation costs, monitoring costs and lack of liquidity / Investors can diversify risk and this allows managers to ignore diversifiable risk in investment decision and make highest value investment
6. Market Price
Impounding
Information /
- No single price since each investment must be valued
- Harder to determine
- Single price for units of investment - price reflects just estimate of future cash flow and risk (see 1 above)
- Thus price impounds important info on value of firm
- However, there are limitations in market price measures
7. Economies of Scale / Costs of unlimited liability rise as number of investors increase so harder to get accumulation of large number of equity investments – tend to need a few very wealthy investors to capture economies of scale / Costs don’t increase as number of investors increases so it is easier to have a very large number of relatively small investments to accumulate funds needed to capture economies of scale
8. Transaction Costs / Can get limited liability through negotiating K with each creditor, but each transaction requires more cost then—must be negotiated. / Granting limited liability as a starting point avoid these costs since the costs of negotiating over limited liability only need to be incurred if the persons dealing with the firm want to override limited liability (by, e.g., obtaining a personal guarantee).
9. Tort Liability / Expansion of negligence in the 20th century makes unlimited more risky / Victims of negligence can’t negotiate ahead of time to override a default limited liability… should policy concerns provide that in the case of negligence it is always unlimited?
Incorporation
Why Incorporate?
- Incorporation is valuable for a number of reasons. Incorporation provides for limited liability, perpetual succession, ease of share transfers, facilities for a body corporate to secure additional capital, and tax advantages. Further, it allows shareholders to contract with the corp and ensures that shareholders alone cannot make binding contracts on behalf of the corp. I note that there is a cost associated with incorporating.
Reasons / Pro / Con
Limited Liability (see chart above) /
- May give protection against relatively insignificant trade credit
- Protection against personal liability in tort
- May not provide benefit if you just have to give a personal covenant to get credit anyway
- Possible to piercecorporate veil for tort claims
- Need to buy tort insurance regardless of whether you incorporate
Perpetual Succession /
- SP may have to assign Ks etc when they sell and this may be hard to do w/o PS
- Can head the problem of reconstituting with death of partners or SPs before it happens in K
Ease of Transfer of Share /
- Freely transferable unless there is an express restriction
- Securities laws do put certain restrictions on shares (esp for closely held corps)
- Added expense for compliance w/ securities law
SHs Alone Cannot Bind /
- They’re typically not agents
- In closely held corps the individual SHs are usually the officers and have authority to bind
- Partners can constrain authority of partners anyway through express agreement
SH Can Contract with Corp /
- Because it’s a separate legal entity
- Can achieve a very similar thing in partnership, can enter into K, which is separate from partnership with the other partners.
Facilities for a Body Corporate to Secure Additional Capital /
- Share and debentures
- Don’t need the partners to be the ones who put in more money - can be anyone
- Can sells shares – often why non-profits incorporate, so they can sell shares
- In partnership you could just get more partners or get partners to invest more funds
- Anyone can make debentures, just a doc that shows debt i.e. IOU
- Still have to comply with securities legislation when selling shares so hardly more ready source
Tax Advantages /
- “Small business deduction” can provide a tax advantage
- Private corps incorporated in Canada and carrying on active business can get a reduced rate on the first $500K of income
- Can control the timing of the distribution through corpwhich allows tax planning
- Losses incurred at the start up phase cannot be passed on to investors
Costs of Incorp /
- Fee for incorp itself, few hundred dollars
- Legal fees
- Filing annual reports with a modest fee
- Maintaining certain records
- Filing additional tax return
Which Act to Choose? CBCA or BCBCA?
- You have to file everywhere you carry on business but can only incorporate under one Act
- A BCBCA company doing business in BC will incorporate in BC and then file an extra-provincial registration form in AB
- As a CBCA company you incorporate under the CBCA and then file extra-provincial forms in BC & AB
CBCA / BCCA
(i)Name protection
(ii)No restriction on maintaining an action
(iii)Lawyers and SHs in other provinces are familiar with it / (i)Lawyers here are more familiar
(ii)Easier to deal with Victoria than Ottawa
(iii)It is cheaper
CBCA Incorporation
Issue / Section / NotesWho may incorporate? / 5(1) / One or more individuals, none of the individuals may be:
(a)under 18
(b)of unsound mind as found by a court in Canada or elsewhere or
(c)bankrupt
May incorporate by signing articles of incorp and complying with section 7.
5(2) / One or more bodies corporate may incorporate by signing articles and complying with s. 7
Company vs corp / 2(1) / A corp is “a body corporate incorporated or continued under [the CBCA]
A body corporate is “a company or other body corporate wherever or however incorporated”
Who is in charge? / 2(1), 260 / 2(1) The “Director” is appointed under s260 by the Minister and carries out the duties and exercises the powers of the Director under the Act.
Articles / 6(1) / Must set out:
(a)Corporate name
(b)The province in Canada where the registered offices of the corp will be situated
(c)The classes of shares and any max number of share that the corp is authorized to issue
(i)If there will be two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares [voting, dividends, dissolution rights];
(ii)If a class of shares may be issues in series, the authority give to the directors to fix the number of shares in and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to the shares of each series;
(d)Any restrictions on the transfer of shares
(e)The number of directors the corp is to have, or the minimum and max number of directors it is to have
(f)Any restrictions on the business of the corp
6(2) / Can also put in provisions that are permitted by the Act or by law to be set out in the corpby-laws
6(3) / Can set outa greater number of votes of Directors or SHs than required by Actin the articles (orUSA)
6(4) / Except for the required number of votes to remove a director under 109
Signing of Documents / 7 / Must send articles of incorp to the Director along with docs that are required by s19 and 106
19(2) / Must send notice of the registered office of the corp to the Director
106(1) / Must send notice of the directors of the corp to the Director
Naming / **See below* / Cannot have a name that is confusingly similar to another corp or business. Can get numbered name with “Canada Ltd.” on the end OR if you want a different name, must file a NUANS name search report.
Fees / Reg 97 Sched 5 / Must pay prescribed fees
Issuance of Certificate / 8 and 12(1) / If all the requirements are met, the Director shall issue the certificate of incorp. Granted as of right.
Date of existence / 9 / Corp comes into existence on the date shown in the certificate of incorp.
Post-Incorp / 104 / After the issue of the certificate, directors shall meet and they may:
(a)Make bylaws
(b)Adopt forms of security certificates and corporate records;
(c)Authorize the issuance of shares;
(d)Appoint officers;
(e)Appoint an auditor to hold office until the first meeting of SHs
(f)Make banking arrangements; and
(g)Transact any other business
n/a / Normally, at the first meeting directors will pass a set of general by-laws that will deal with matters such as:
(i)Procedures at directors meetings;
(ii)Notice for and procedures with respect to SH meetings;
(iii)Procedures for the allotment and issuance of shares;
(iv)Procedures for the declaration and payment of dividends; and
(v)Procedures for the appointment of officers.
By-laws are not publicly filed but can be accessed by SHs and creditors (often kept by the corp’s lawyer)
BCBCA Incorporation
Issue / Section / NotesWho can incorporate? / 10 / One or more “persons” can incorporate a “company” under the BCBCA.
BCIA 29 / “Persons” defined to include corps or partnerships, therefore individuals, partnerships or corps can incorporate a company under the BCBCA
Company vs Corp / s1(1) / A corp is defined as a “company, body corporate, a body politic and corporate, an incorporated association or a society however and wherever incorporated.”
A company is defined as a “corp, recognized as a company under this Act or a former Companies Act, that has not ceased to be a company since the most recent recognition"
Thus a company refers to an entity incorporated under the BCBCA (or forerunner) and corp refers to a company incorporated under BCBCA or anywhere else in the world.
Who’s admin? / BCBCA / Called the “Registrar” (rather than Director like in the CBCA)
Incorp Process / 376 / Appoint one or more attorney
10 / First step: people who intend to incorporate must enter into an incorp agreement under which each incorporator agrees to one or more shares of the company in their own name
10(1) / Must file an “incorp application”
10(3) / Incorp application must:
(i)Set out the full names and addresses of the incorporators
(ii)Contain a completing party statement: provides for a person who examines the “articles” and incorp agreement to verify they are both properly endorsed by the incorporators and then files both the articles and the incorp agreement at the records office of the company
(iii)Set out the full names and mailing addresses of the incorporators
(iv)Set out the name of the company
(v)Contain a notice of articles
11 / Notice of Articles must be included and:
(i)Set out the name of the company
(ii)Set out the name and address of each of the directors
(iii)Identify the registered office and its mailing address and delivery address
(iv)Describe the authorized share structure
(v)Set out for each class or series of shares any special rights/restrictions attached to shares
12 / Company must also have “articles” andthe person who signed the “completing party” statement in the incorp application must file them. Must set out:
(i)The rules for the conduct of the company
(ii)Any restrictions on the business powers of the company
(iii)For each class or series of shares, all the special rights/restrictions attached to shares
12(4) / The company may adopt the articles set out in Table 1
19 / Notice of Articles and Articles are binding on the company and its SHs
Fees / There is a fee for incorp of $350 and a fee of $30 for a corporate name where it is going to be something other than the numbered name
22 / Reserve a name: must make application for non-numbered name ahead of time, can be reserved for up to 56 days. Indicate up to three names in order of preference.
388 / Attorney for an extra-prov corp is deemed to be authorized to accept service of process on their behalf
381, 382 / Must file notices of any changes of attorneys for service, corporate name or amalgamation
380 / Must file annual report updating filed info
475 / Prescribed fine
13(1) / Incorp happens on the date and at the time the incorp application is filed
13(2) / Registrar must issue certificate after all the steps have been done
Post-Incorp / Different than CBCA b/c articles already are like by-laws, etc. But at first meeting will likely want to deal with procedures for directors meetings, notice for and procedures of SH meetings, procedures for the allotment and issuance of shares, procedures for the declaration and payment of dividends, possibly also procedures for the appointment of officers or borrowing, adopt form for security certificates and corporate records.
Extra-Provincial Registration (BCBCA)
Issue / Where / NotesWho must register? / 375 / “Foreign entities” must register as an “extra-provincial company” within two months of beginning to “carry on business” in BC.
Foreign Entity / 1(1) / Defined as a foreign corp or limited liability company
- Foreign corp: acorp that is not a “company”, meaning a company incorporated under the BCBCA or a prior Companies Act, that has issued shares (so not non-profit) and is not a co-operative association.
Carry-on Business / 375(2) / You carry on a business in BC if (any one of the three):
(a)Its name, or any name under which it carries on business is listed in a telephone directory
(i)For any part of BC
(ii)Together with an address or telephone number in BC