10: Business organizations: Corporations

Question	Answer
There are several consequences that flow from the separate existence of the corporation	Shareholders enjoy the benefit of limited liability to the extent of their capital contribution only; that is, they only stand to lose what they paid for their shares. The company, not its shareholders, is solely responsible (liable) for the payment of the company’s debts. The liability of a corporation for its debts is limited to its assets. A corporation is unlike a partnership or a sole proprietorship in that its creditors have no claim on the personal assets of its shareholders for the payment of the corporation’s debts. This separate legal existence with limited shareholder liability is the main benefit of incorporating.
Characteristics of corporations and partnerships	• Liability – The liability of shareholders is limited to the amount of their capital contributions • Transfer of ownership – Partner bargain for her release with both partners and creditors. – Shareholders has no liability for corporate debts, and transfer her shares to another person • Management – Shareholders have no authority to bin their corporation to contractual obligations; only officers of the corporation may do so. • Duty of good faith – partners owe each other a duty of good faith or fiduciary duty. A shareholder owes no such duty to the corporation • Continuity – a corporation exists independently of any of its shareholders • Taxation – a corporation is a taxable entity
Consequences of separate corporate personality	• Capacity – corporation were formed for specific purposes and could act only for the purposes expressly stated in their constitution any act outside the scope was ultra vires – beyond the powers of the corporation • Separate existence
Lifting the corporate veil	• The individual must control the corporation • That control must have been exercised to commit a fraud, a wrong, or a breach of duty • The misconduct must be the cause of the plaintiff’s injury
In order to incorporate, the following information must be provided:	• proposed name and address of the registered office of the corporation • number, names, and addresses of the first directors • classes and number of authorized shares and restrictions on each class of shares • name of the person incorporating the company • any restrictions on the type of business of the corporation
After the corporation is formed, the governing document, which is filed in the government registry, is referred to	as the charter. The charter contains essential information related to the company and is cumbersome to amend, usually requiring a special resolution and approval of two-thirds of the shareholders.
By-laws are the	rules that govern the day-to-day operation of the corporation. They are sometimes referred to as the articles, particularly in provinces that use the letters patent method of incorporation
A corporation may be incorporated	federally, pursuant to the Canada Business Corporation Act, or provincially, under the appropriate provincial statute. Incorporating federally allows a company to carry on business across Canada and use the corporate name across Canada, but the corporation must be registered extra-provincially in each province
A corporation may also be	a widely or publicly held corporation, or a closely or privately held corporation.
A widely held corporation, or public corporation, has no	limit on the number of shareholders and there are no restrictions on the right to purchase or transfer shares. These corporations are permitted to make public offerings of shares, which generally means that the shares are listed for trading on a stock exchange.
In a closely held or private corporation, shareholders are	able to seek the advantages of incorporation yet maintain some of the advantages of a partnership. Restrictions are placed on the transfer of shares, which allows the shareholders to choose their business associates through control of ownership. Shares are usually held by a few members and are not traded on the stock market.
The indoor management rule is an application of the apparent authority principle in the law of agency. A corporation cannot claim	that it has not followed its own rules and procedures and thus avoid responsibility for the actions of its agents.
Pre-incorporation contracts made on behalf of a corporation before it came into existence are either	a nullity or may be ratified, depending on the jurisdiction.
there are three basic groups common to all corporations:	: the shareholders, the board of directors, and the officers
The directors are responsible for	ensuring that the company is well managed.
The officers and senior executives of the corporation have a	fiduciary duty to the corporation that is generally the same as that of the directors.
Directors have various duties to the corporation. First	duty not to be negligent is to exercise reasonable care and skill in carrying out their duties. Directors owe a duty of good faith and they must not be involved in a conflict of interest, or compete with the corporation
Directors and officers are liable should they breach their duties. Directors may face	personal liability for both civil and criminal actions in a number of circumstances. Directors are liable for up to six months’ unpaid wages of employees, and can be held strictly liable for breaches of employee welfare legislation such as the Employment Standards Act and for any income taxes that the corporation has withheld and not remitted to the government. Directors can also be held liable for violations of environmental laws and any resulting damages. They may be held personally liable, for example, for the costs of cleaning up an oil spill. Directors can be liable under acts such as the Competition Act and other consumer legislation
Corporate governance refers to	the rules governing the organization and management of the business and affairs of a corporation in order to meet internal objectives and external responsibilities.
A share is a chose in action; it is a	right to participate in a corporation’s profits by way of a dividend if and when declared.
If shareholders cannot attend a meeting in order to exercise their voting rights, they may give their voting rights to someone else, called a	proxy, who may vote according to their directions.
In closely held corporations, shareholders may be frozen out	of the decision-making process and yet be locked in at the same time because they may not dispose of their shares without the consent of the directors.
A pre-emptive right guarantees	that a shareholder will not have his or her proportionate share of the corporation diminished by an issue of new shares.
A derivative action allows the shareholders to bring an action on behalf of and in the name of the corporation to	remedy a wrong done to the corporation
A derivative action is brought in the name of the corporation. In order to get the court’s permission to bring a derivative action, the shareholders must demonstrate the following:	• The directors will not bring an action. • The shareholders are acting in good faith. • The action is in the best interests of the corporation or the shareholders.
oppression remedy	It allows individual shareholders who have been treated oppressively or unfairly as a result of the way the corporation was managed to seek a remedy
a dissent (also referred to as an appraisal remedy)	if a decision by the majority of the shareholders has a negative impact on the minority shareholders.
The courts also have the power to wind up a corporation where it is just and equitable to do so.	In this case, the assets would be divided as set out in the incorporating statute, or in the company’s charter document or by-laws.
Shareholders of closely held corporations may try to obtain the benefits of both a partnership and a corporation by resorting to a	a shareholder agreement. Shareholder agreements are essentially contracts, and are binding upon the parties as is any other contract. Shareholder agreements, unless they are unanimous shareholder agreements (known as USAs), must be limited to the parties’ activities as shareholders.

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10: Business organizations: Corporations

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