Course:Business Organizations - LAW 459/Unit 2

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UNIT 2 (WEEK 2): THE BASIC CONCEPTS OF BUSINESS ORGANIZATIONS

Whitechapel_High_Street_1905-360x264.jpg

ALT: A very old photo of Whitechapel High Street London showing horses and carriages. Aron Salomon’s shop was on Whitechapel High Street.

Source of image: <a href="http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd">http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd</a>

 

You will be introduced to some of the themes that recur throughout the course. These themes should constitute helpful reference points as you go through the materials.  The themes will include:

  • The principles of corporate creation.
  • The rather illogical but legally reinforced fiction of “corporate personality”.
  • The distinctions between corporations, partnerships and proprietorships.
  • The application of ethics (as distinct from principles of professional responsibility or fiduciary duty) to corporate law problems.
  • The significant practical distinctions between privately held and publicly held corporations and the puzzle of why those distinctions are for the most part unacknowledged in the legal canon despite immense practical ramifications.

UNIT OUTCOMES:

  • What does company law concern itself with?
  • What not?
  • Why (in either case)?
  • Whose activities are being coordinated and regulated by company law?
  • Whose activities are not being coordinated and regulated by company law?
  • The basics of how a company is formed.
  • At least three outcomes of “Salomon’s case” which are integral to the practice of Business Organizations
  • Cases that have furthered the principles in “Salomon’s case”.

 

You will have been introduced to perhaps the most fundamental characteristics of the corporate form – principally the idea that the corporation is a legal person separate and distinct from its shareholders. In one form or another this concept recurs across the entire body of corporate law.  You will have had the opportunity to explore some of its implications, note its curious history and also consider the “centralized management” that characterizes it.

The concept of “corporate-ness” is largely absent from the law of partnerships.  You will be in a position to consider some of the implications of this absence and, in this way, explore some of the practical advantages and disadvantages of the partnership as a form of business organization or association.

 

 

Please read the following materials for this unit:

Casebook pages 110 -143 which includes the famous/infamous foundational case of Salomon v. Salomon & Co. which in many ways can be seen as establishing the prevailing conceptual framework for separate corporate personality. Although the excerpted judgment is short, you will assuredly spend considerable time in this course reflecting and referring to it.

Casebook pages 279-310, 314-317, 601-606 (on the transferability of shares as property).

BCBCA sections 10, 12, 13, 17, 18, 19, 30, 51, 64, 87, 136, 137, 232 on the coming into existence of corporations as well as on liability and sundry other issues. You will also be asked to look at equivalent sections of the CBCA.

Re Noel Tedman Holdings Ltd., [1967] Qd. R. 561

Robak Industries Ltd. v. Gardner, 2007 BCCA <a href="http://canlii.ca/t/1qd7t">http://canlii.ca/t/1qd7t</a>

You will also be introduced to standard form BC incorporation agreement and by-laws as well as the standard form federal certificate, articles and by-laws.

 

UNIT TOPICS:

TOPIC 1: CREATING A CORPORATION – A SIMPLE PROCESS

Please read page 279 of the Casebook.  Also please read pages 285-286 of the Casebook for the minimum requirements in this regard.

Ease of incorporation is a significant characteristic.  This was historically not always so. The predecessor of corporate existence was letters patent, which required an application to the Crown and was granted as an exercise of royal prerogative.

In British Columbia:

See BCBCA sections 10, 17, 18 and 19 (incorporation proceedings).

“Formation of company

  1. (1) One or more persons may form a company by

(a) entering into an incorporation agreement,

(b) filing with the registrar an incorporation application, and

(c) complying with this Part.

(2) An incorporation agreement must

(a) contain the agreement of each incorporator to take, in that incorporator's name, one or more shares of the company,

(b) for each incorporator,

(i)  have a signature line with the full name of that incorporator set out legibly under the signature line, and

(ii)  set out legibly opposite the signature line of that incorporator,

(A)  the date of signing by that incorporator, and

(B)  the number of shares of each class and series of shares being taken by that incorporator, and

(c) be signed on the applicable signature line by each incorporator.

(3) An incorporation application referred to in subsection (1) (b) must

(a) be in the form established by the registrar,

(b) contain a completing party Statement referred to in section 15,

(c) set out the full names and mailing addresses of the incorporators,

(d) set out

(i)  the name reserved for the company under section 22, and the reservation number given for it, or

(ii)  if a name is not reserved, a Statement that the name by which the company is to be incorporated is the name created,

(A)  in the case of a limited company, by adding "B.C. Ltd." or, if the company is a community contribution company, "B.C. Community Contribution Company Ltd." after the incorporation number of the company, or

(B)  in the case of an unlimited liability company, by adding "B.C. Unlimited Liability Company" after the incorporation number of the company, and

(e) contain a notice of articles that reflects the information that will apply to the company on its incorporation.

Articles

  1. (1) A company must have articles that

(a) set rules for its conduct,

(b) 

(2) The articles of a company must

(a) set out every restriction, if any, on

(i)  the businesses that may be carried on by the company, and

(ii)  the powers that the company may exercise,

(b) set out, for each class and series of shares, all of the special rights or restrictions that are attached to the shares of that class or series of shares,

(c) subject to subsection (5),

(i)  set out the incorporation number of the company,

(ii)  set out the name of the company, and

(iii)  set out, in the prescribed manner, any translation of the company's name that the company intends to use outside Canada.

(4) Without limiting subsections (1) and (2), a company may, in its articles, adopt, by reference or by restatement, with or without alteration, all or any of the provisions of Table 1 and, in that case, those adopted provisions form part of the articles.

  1. (1) A company is incorporated

(a) on the date and time that the incorporation application applicable to it is filed with the registrar,

(2) After a company is incorporated under this Part, the registrar must issue a certificate of incorporation for the company…

Effect of incorporation

  1. On and after the incorporation of a company, the shareholders of the company are, for so long as they remain shareholders of the company, a company with the name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the part of the shareholders provided in this Act.

Evidence of incorporation

  1. Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly incorporated on the date shown and the time, if any, shown in the corporate register.

Capacity and powers of company

  1. A company has the capacity and the rights, powers and privileges of an individual of full capacity.”

 

In Federal incorporations (pursuant to the Canada Business Corporations Act):

“Incorporators

  1. (1) One or more individuals not one of whom

(a) is less than eighteen years of age,

(b) is of unsound mind and has been so found by a court in Canada or elsewhere, or

(c) has the Status of bankrupt,

may incorporate a corporation by signing articles of incorporation and complying with section 7.

 (2) One or more bodies corporate may incorporate a corporation by signing articles of incorporation and complying with section 7.

Articles of incorporation

  1. (1) Articles of incorporation shall follow the form that the Director fixes and shall set out, in respect of the proposed corporation,

(a) the name of the corporation;

(b) the province in Canada where the registered office is to be situated;

(c) the classes and any maximum number of shares that the corporation is authorized to issue, and

(i) if there will be two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares, and

(ii) if a class of shares may be issued in series, the authority given 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) if the issue, transfer or ownership of shares of the corporation is to be restricted, a Statement to that effect and a Statement as to the nature of such restrictions;

(e) the number of directors or, subject to paragraph 107(a), the minimum and maximum number of directors of the corporation; and

(f) any restrictions on the businesses that the corporation may carry on

Additional provisions in articles

(2) The articles may set out any provisions permitted by this Act or by law to be set out in the by-laws of the corporation.

Delivery of articles of incorporation

  1. An incorporator shall send to the Director articles of incorporation and the documents required by sections 19 and 106.

Certificate of incorporation

  1. (1) Subject to subsection (2), on receipt of articles of incorporation, the Director shall issue a certificate of incorporation in accordance with section 262.

Effect of certificate

  1. A corporation comes into existence on the date shown in the certificate of incorporation

Capacity of a corporation

  1. (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.

(2) A corporation may carry on business throughout Canada.”

 

 

PLEASE REVIEW BC INCORPORATION AGREEMENT AND ARTICLES

This and the following documents will provide you with a sense of the documentation that is actually used in creating a company. Often the initial work on these documents is done by paralegals. That said understanding what is in them and the “contractual” nature of these documents is of tremendous real word importance.

 

PLEASE REVIEW STANDARD FORM FEDERAL CERTIFICATE OF INCORPORATION AND FEDERAL BYLAWS

 

 

TOPIC 2: CORPORATE PERSONALITY AND SOME OF ITS IMPLICATIONS

 

  1. Salomon’s Case

 

Please read this case carefully at pages 128-130 of the Casebook. It is a short excerpt of the foundational case for all of corporate law.

 

  1. The Background

An orthodox Jew named Aron Salomon emigrated from Germany in 1859 as a young man. He settled in the predominantly Jewish Whitechapel area of London.  Married the daughter of another orthodox family and eventually had 6 children, 4 boys and 2 girls.

Early 1860s Mr. Salomon started a boot and leather manufacturing business.  The business grew. It occupied large premises on Whitechapel High Street in London.  In the late 1870s he began employing his sons in the business.  By about 1890, the business was very successful but the sons were unhappy as employees.  They wanted to be owners with dad.

In 1892 Mr. Salomon decides to incorporate “Aron Salomon and Company, Limited”. The legal requirements in this regard were meticulously followed.  There were 7 shareholders: Mr. Salomon, his wife and 5 children. Each agreed to purchase 1 share for £1.

 

  1. The Transaction in question (not detailed in the casebook)
  2. Aron Solomon agrees with the Trustee for another company (“Newco”) to sell Aron Salomon and Company, Limited for £40,000.
  3. Consideration:
  4. £1,000 in cash;
  5. 20,000 Newco shares with a par value of £1 each (£20,000);
  6. Aron Salomon agrees to lend £10,000 to the company in exchange for an equal amount of debentures (i.e an agreement by Newco to pay the debt, the obligation being secured by a charge on its assets.
  7. Aron Salomon agrees to pay off all debts related to Aron Salomon and Company, Limited for £9,000.
  8. Newco incorporated in July 1892 – Aron Salomon and his 2 sons among the directors.
  9. August 1892 all transactions approved by shareholders.

 

iii. Later developments

  1. Not long after, general business downturn. No evidence that Aron Salomon anticipated this.
  2. January 1893, Aron Salomon borrows £5,000 from Edmund Broderip. Lends the money to Newco at 10%.
  3. February 1893, Aron Salomon pledges his Newco debentures to B as security for £5,000 loan and causes Newco to agree to pay 8% interest to Mr. Broderip.
  4. Business deteriorates. September 1893 Newco defaults on payment of interest to Edmund Broderip.
  5. October 11, 1893 Edmund Broderip sues to enforce his security, i.e. principal amount of debentures.
  6. October 25, 1893, Newco goes into receivership.
  7. Newco (Receiver):

- contests Broderip’s claim arguing that if it were paid there would be nothing left for trade creditors; and

- sues Aron Salomon personally, arguing creation of Newco is a sham and a fraud and device to defeat claims of creditors and that, therefore, the creation of the corporation should be ignored and Aron Salomon should be made responsible for Newco’s debts.

 

  1. The litigation

 

  1. Trial court finds against Aron Salomon. Newco was found to be acting as an agent for Aron Salomon, the responsible principal throughout, though no fraud was found to have been perpetrated on the creditors.

 

  1. Court of Appeal agrees. One judge says “incorporation scheme a device to defraud creditors and not permitted by law”. Another observes that “to legalize such a transaction would be a scandal.” Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". The Lord Justices of Appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.
  2. Legal result in Court of Appeal: Corporation seen as a legal entity in name only, does not shield beneficial owners and controllers from liability, especially in case where there is an odor of fraud.
  3. Disaster for Aron Salomon – he lost the company and almost all of his money.
  4. Aron Salomon applies to House of Lords successfully for leave to appeal in forma pauperis (I.E. no costs if he loses). An affidavit was filed by Aron Salomon that he had no funds or assets except £5 and the clothes on his back.
  5. The House of Lords finding:
  6. Statutory requirement for 7 shareholders satisfied.
  7. Statute silent on significance of:
  • “control” by any shareholder.
  • motive for becoming shareholder
  1. Company either exists or it does not, regardless of considerations in immediately above (b).
  2. If the company indeed exists, you cannot go behind it if the requisite technical preconditions to its existence are satisfied.

 

  1. Some comments:
  2. Corporate shareholders (including parent companies) enjoy the best of all possible legal worlds. This is because they are not “personally” responsible for the debts or liabilities (or behaviour) of the companies they invest in – they are completely separated.
  3. But investee companies must effectively be run exclusively in the interests of the investors. For these purposes the interests of `the company’ (formally a separate entity) are practically speaking synonymous with those of its shareholders. There are, as we shall see later on, some situations where this is not the case for all purposes. However this is true the vast preponderance of the time.
  4. It is worth noting the troubling paradox which arises and which is not necessarily easy to rationalize on a principled analysis. This is that separate personality is a very serious consideration for the law in some contexts, especially shareholder liability issues. However separate personality shrinks in importance for no obvious reasons in other respects. For example the primacy and deference often accorded shareholder control rights seems to effectively ignore the separateness established through Salomon and the doctrine of separate legal personality generally.
  5. The result of all this - a shareholder’s paradise. We seem to have developed a body of law able to combine the ruthless pursuit of `shareholder value’ without any corresponding responsibility on the part of shareholders for the losses arising out of corporate failure or the damage caused by corporate activities or malfeasance.

 

  1. What Are the Benefits of the Separate Personhood Principle?
  2. Efficiency

As soon as it is recognised that a company is a distinct, legal person in itself then it can create contracts in its own name. As a result, creating contracts in corporate businesses becomes that much simpler. The parties needed only to create one single contract with a human being who was authorised to create that contract on behalf of the company. Contrast this with a partnership, where every single partner must effectively be a signatory.

  1. Limited Liability

It is useful to read at this point the “Notes and Questions” at pages 130-131 of the Casebook.

Please note the following relevant sections of the British Columbia Business Corporations Act:

“Payment of consideration for shares

  1. (1) In this section, "property" does not include

(a) money, or

(b) a record evidencing indebtedness of the person to whom shares are to be issued.

(2) A share must not be issued until it is fully paid.

(3) A share is fully paid when

(a) consideration is provided to the company for the issue of the share by one or more of the following:

(i)  past services performed for the company;

(ii)  property;

(iii)  money, and

(b) the value of the consideration received by the company equals or exceeds the issue price set for the share under section 63.

(4) The directors must satisfy themselves that the aggregate value of the past services, property and money referred to in subsection (3) (a) of this section equals or exceeds the issue price set for the share under section 63 and in doing so must not attribute to those past services or that property a value that exceeds the fair market value of those past services or that property, as the case may be.

(5) In considering whether the aggregate value of the past services, property and money referred to in subsection (3) (a) of this section equals or exceeds the issue price set for the share under section 63, the directors may take into account reasonable charges and expenses that

(a) have been incurred by the person providing the paS services, property and money, and

(b) are reasonably expected to benefit the company.

Liability of shareholders

  1. (1) No shareholder of a company is personally liable for the debts, obligations, defaults or acts of the company except as provided in Part 2.1.

(2) A shareholder is not, in respect of the shares held by that shareholder, personally liable for more than the lesser of

(a) the unpaid portion of the issue price for which those shares were issued by the company, and

(b) the unpaid portion of the amount actually agreed to be paid for those shares.

(3) Money payable by a shareholder to the company under the memorandum or articles is a debt due from the shareholder to the company as if it were a debt due or acknowledged to be due by instrument under seal.”

Please note the following relevant sections of the Canada Business Corporations Act

“Issue of shares

  1. (1) Subject to the articles, the by-laws and any unanimous shareholder agreement and to section 28, shares may be issued at such times and to such persons and for such consideration as the directors may determine.

 (2) Shares issued by a corporation are non-assessable and the holders are not liable to the corporation or to its creditors in respect thereof.

Consideration

(3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.

Consideration other than money

(4) In determining whether property or past services are the fair equivalent of a money consideration, the directors may take into account reasonable charges and expenses of organization and reorganization and payments for property and past services reasonably expected to benefit the corporation.

 

Definition of “property”

(5) For the purposes of this section, “property” does not include a promissory note, or a promise to pay, that is made by a person to whom a share is issued, or a person who does not deal at arm’s length, within the meaning of that expression in the Income Tax Act, with a person to whom a share is issued.”

 

  1. More Problems With The Principle (Or is that “With The Principal”?)
  2. The central problem is ethical. Aron Salomon may give less care and attention to the need to deal honestly and fairly with third parties because he faces no great personal risk of loss, beyond wounded pride and the hope of a profitable business (except what is said below about fraudulent trading). Note that all other shareholders are in fact in the same position.

Considered in this way our entire economy is populated by companies whose shareholders and management bear little direct personal responsibility for loss if those companies should fail. Do not the ethics of that economy become questionable if no-one faces the risk of open-ended, personal loss?

  1. A company occupies a different moral position from the individual – The stigma attaching to the company for its actions will not necessarily translate directly into a stigma attaching to any individual. The company-as-cypher enables individuals to hide behind the facade of corporate personality.

 

Regarding accountability please watch this very short and amusing video on YouTube:  <a href="http://youtu.be/L9R-Wrpd8w8">http://youtu.be/L9R-Wrpd8w8</a>

 

 

  1. Unlimited Liability Companies

Please note the existence of Unlimited Liability Companies under Part 2.1 of the BC Business Corporations Act. These are rarely used but in certain limited circumstances may have certain advantages. Unlimited Liability Companies have the same powers as regular corporations, and are taxed in Canada no differently than other corporations. In the United Sates, however, there are tax advantages.

Unlimited Liability Companies shelter shareholders from liability in most circumstances except upon liquidation when they become liable for the debts of the company they are shareholders of

BCBCA section 51.11 and 51.2 require that the Notice of Articles and share certificates must state that shareholders are jointly and severally liable to satisfy debts and liabilities to extent provided in 51.3.

51.3  (1) Subject to subsection (2), shareholders and former shareholders of an unlimited liability company are jointly and severally liable as follows:

(a) if the company liquidates, the shareholders and former shareholders are jointly and severally liable, from the commencement of the company's liquidation to its dissolution, to contribute to the assets of the company for the payment of the unlimited liability company's debts and liabilities;

(b) whether or not the company liquidates, the shareholders and former shareholders are jointly and severally liable, after the company's dissolution, for payment to the company's creditors of the unlimited liability company's debts and liabilities.

 

 

 

  1. The Transferability of Shares Oddly and Ambiguously Relates to the Separate Personality Principle

Please read pages 601-606 of the Casebook on “Share Transfers”.

Note Section 26.3 of the standard form of BC Articles provided earlier:

“26.3 Consent Required for Transfer of Shares or Designated Securities

No share or designated security may be sold, transferred or otherwise disposed of without the consent of the directors and the directors are not required to give any reason for refusing to consent to any such sale, transfer or other disposition.”

For example consider a restriction on transfer in articles of Smith & Jones Home Renovators that shares in that company cannot be transferred to anyone engaged in the renovation business.

Suppose they are Scientologists. Consider a restriction that says that shares cannot transfer to anyone who is not a Scientologist.

 

Please read Edmonton Country Club v. Case at pages 602-604 of the Casebook.

Whose judgment do you prefer Dickson J. or Laskin J.? Why?

 

Please read Re Noel Tedman Holdings Ltd., [1967] Qd. R. 561 below

 

You will see how a court approaches a situation where there are no longer any directors to transfer shares. The legal machinations required to overcome a tragic circumstance tend poignantly illustrate how strained the concept of separate legal personality largely is.

 

 

 

  1. Generally the View of the Courts Regarding Pre-Incorporation Contracts Tends to Reinforce the Notion of Separate Corporate Personality

 

Please read pages 279-285 of the Casebook on pre-incorporation contracts

Note in particular the principle that corporations do not truly exist until they are brought into existence through legal means. Courts are loath to imply corporate existence. That privilege exists by virtue of statutory conception and in no other way. This is to be contrasted with partnerships where the courts are often willing to declare a partnership even if the putative “partners” do not seem themselves as such.

 

  1. What Does The Principle That Shareholders Can Sue On Behalf Of Corporations (Known Commonly as Derivative Actions) Say About the Principle of Separate Corporate Personality?

Please read Robak Industries Ltd. v. Gardner, 2007 BCCA 61

<a href="http://www.110.com/panli/panli_87908.html">http://www.110.com/panli/panli_87908.html</a>

 

Here we, in a sense, jump to the modern day and see what has really become of the separate corporate personality. We get to view that principle through the lens of a modern corporate power struggle for control of a company. In this case the B.C. Court of Appeal considered the situation of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by "unlawful means" including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated;  "applying economic duress to Getty" and "inducing Blake Cassels & Graydon to breach their duties to Getty".

 

There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a "loss in the value of…a substantial interest in the shares of Getty".

 

Note quotations at paragraph 11 and paragraph 14 of the judgment where the Court of Appeal observed that the chambers judge found “that the rule in Foss v. Harbottle applied to exclude Robak’s claim for loss in the value of its shares of Getty, because those damages were a consequence of damage to Getty, not the result of direct damage to the appellants. Neither of the appellants could claim damages for the wrongful acts against Getty alleged to be part of the conspiracy against them, because any damages flowing from those acts would be damages to Getty, and are "only compensable through a derivative claim". Madam Justice Levine agrees with the chambers judge.

At paragraphs 35 to 37 of the judgment the Court further observes:

 

“There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss.

The appellants suggest that the English cases have exposed the underlying principle of Foss v. Harbottle, as interpreted by Prudential Assurance, as one of avoiding "double recovery" for the same loss: once by the company and secondly by the shareholders: see Johnson v. Gore Wood, per Lord Bingham, at para. 44; Lord Cooke at para. 81; Lord Hutton at paras. 97 and 99; Lord Millett at para. 124.  Thus, if it can be shown that the company cannot sue for the loss, the shareholder may. The appellants say that Getty cannot sue for the loss in value of the shares; therefore, the appellants may.

Double recovery is a consequence that is avoided by the application of the rule in Foss v. Harbottle, but the jurisprudence does not support the appellants’ argument that it is the principal reason for its existence. In addition to the reasons for the rule discussed above, as Lord Hutton and Lord Millett pointed out in Johnson v. Gore Wood, citing Prudential Assurance, the rule bars recovery by one or some shareholders of losses caused by wrongs done to the company, at the expense of creditors and other shareholders of the company.  (See also: Gardner v. Parker, [2004] 2 BCLC 554 at para. 33 (Eng. C.A.); Thomas v. D’Arcy & Ors, [2005] QCA 68 at para. 11 (Queensland S.C., C.A. Div.).”

 

Note in this regard BCBCA section 232:

“232.  (1) In this section and section 233,

"complainant" means, in relation to a company, a shareholder or director of the company;

"shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.

(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.

(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.”

 

 

TOPIC 3:   CENTRALIZED MANAGEMENT

It is useful at this point to begin familiarizing yourself with the legal concepts surrounding “centralized management”. If the legal fiction of corporate personhood is to be accepted, how does that “person” determine its actions? In this context management and directors become the active agents by which the corporate body lives and does. So understanding how companies act through these means is crucial to understanding what companies actually are, as well as their constraints and limitations.

What follows will just be a short introduction to the subject through some casebook pages and the reading of statutory materials. The true complexities of the triangle of corporate personhood, management and directors will manifest in almost all parts of this course.

Background - the nature of the corporate constitution

Read pages 110 to 126 in the Casebook.  Please familiarize yourself with these pages as some of the concepts will be revisited.  You should pay particular attention to pages 114 to 118 and you should also read carefully the provisions of section 19 (3) of the BCBCA.

Notice in particular for the first time language relating to the  “contractarian” corporations. See also BCBCA section 19 (3) below:

“19. (3) A company and its shareholders are bound by the company's articles and notice of articles or by its memorandum and articles, as the case may be, and by any alterations made to those records under this Act or a former Companies Act, to the same extent as if those records

(a) had been signed and sealed by the company and by each shareholder, and

(b) contained covenants on the part of each shareholder and the shareholder's successors and personal or other legal representatives to observe the articles and notice of articles or memorandum and articles, as the case may be.

Note that this section seems historically to be related to deed of settlement companies where shareholders were the theoretical source of all power.

Powers and functions of directors

  1. (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.

(2) Without limiting section 146, a limitation or resriction on the powers or functions of the directors is not effective against a person who does not have knowledge of the limitation or restriction.

Powers of directors may be transferred

  1. (1) Subject to subsection (1.1) but despite any other provision of this Act, the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons.

(1.1) A provision of the articles transferring powers of the directors to manage or supervise the management of the business and affairs of the company is effective

(a) if the provision is included in the articles at the time of the company's recognition or if the company resolved, by special resolution, to add that provision to the articles, and

(b) if the provision clearly indicates, by express reference to this section or otherwise, the intention that the powers be transferred to the proposed transferee.

(2) If the whole or any part of the powers of the directors is transferred in the manner contemplated by subsection (1),

(a) the persons to whom those powers are transferred have all the rights, powers, duties and liabilities of the directors of the company, whether arising under this Act or otherwise, in relation to and to the extent of the transfer, including any defences available to the directors, and

(b) the directors are relieved of their rights, powers, duties and liabilities to the same extent.

(3) If and to the extent that the articles transfer to a person a right, power, duty or liability that is, under this Act, given to or imposed on a director or directors, the reference in this Act or the regulations to a director or directors in relation to that right, power, duty or liability is deemed to be a reference to the person.

(4) A company may resolve to alter its articles, by special resolution, to alter a provision referred to in subsection (1.1).”

 

Compare this to section 102 of the CBCA:

“Duty to manage or supervise management

  1. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

And see section 146:

“Unanimous shareholder agreement

  1. (1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that reSricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.

Declaration by single shareholder

(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement.

Constructive party

(3) A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the agreement.

When no notice given

(4) If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder agreement, in the manner referred to in subsection 49(8) or otherwise, the purchaser or transferee may, no later than 30 days after they become aware of the existence of the unanimous shareholder agreement, rescind the transaction by which they acquired the shares.

Rights of shareholder

(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

Discretion of shareholders

(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.”

Please also read pages 314-317 of the Casebook on the election and removal of directors.

 

 

Note: At this point it may be useful for you to reread or review the notes from unit 1 called “Corporate Law – Some Introductory Notes”.

 

 

The pivotal differences between private and public companies will have been highlighted and you should have had ample opportunity to reflect on them. By focusing on the differences in how privately held and publicly held companies actually operate their enterprises, the extent to which corporate law distinguishes or fails to distinguish between those modalities and the role of securities law in this connection should begin to become clear. Contrasting your nascent understanding of companies to how Partnerships actually exist and function will form the agenda for the next unit…with results that may surprise you.

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