The Corporate Constitution

The Corporate Constitution

Notes from Class

-Rights and remedies are often designated in the corporations constitution

-Corporate Constitution

-What can it do and what can it not do: it was not until about 100 years ago that the courts resolved that a corporation was separate from its shareholders. Since 1887 this has been a well-recognized principle, that a corporation is separate and apart from any liability of the shareholders

-Corporate constitutions also allocate decision making roles, rights and responsibilities along with remedies. There is generally a notion that the board of directors run the corporation and make strategic decisions however in practice they don’t do nearly as much. They are generally lead by executives, president and VP who dictate to the board, rather than the other way around which is the more traditional corporate theory. These higher end executives also often tend to be the very people that pick who will be on the board of directors

-While directors have a fiduciary responsibility to a company, shareholders do not. So if you are a director and a shareholder, there is a potential to use your votes as a shareholder to protect yourself from your actions as a director – which can be problematic

-Executives used to be treated just like any other employee, however now the law includes a fiduciary responsibility for senior executives as well

-Corporate law functions as if the world outside the corporation doesn’t matter even though they do have a major impact on the corporation itself – ex: external constituencies (foreign investment, fiscal responsibility etc)

-Creditors until very recently played no role in corporation law and their rights were limited to rights under contract law – unless a corporation was close to insolvency in which case they can seek approval from the court to get a trustee to protect their interests – they have recently been added to the list of people who can use statutory remedies to complain about the corporation (the CBCA is more extensive then BCBCA for creditors inclusion)

-There is not a huge amount of scope for shareholders to complain because like in a parliamentary democracy, the directors are elected and then are generally free to do what they want unless they are purposing a major change (ex: merger) – otherwise they are held accountable by simply not being elected again

-Shareholders are not owners, even though they may be the closest – in fact, nobody owns the corporation, the corporation just owns stuff

-What shareholders purchase is essentially the right to receive notice of shareholder meetings, information about agenda in shareholders meetings, the right to elect directors, the right to call a meeting, the right to add a matter to the agenda and the right to share in profits – but even then, only if the directors elect to send out dividends

-The majority runs the corporation, however there are also protections in place for the minority

-Most legislation (CBCA and BCBCA) says that directors simply manage or supervise – they have to fulfil their duties with a view to the best interests of the corporation (note: this wording seems to be less onerous than saying fiduciary duty)

Notes from Readings:

Introduction

-The study of business organization is largely about answering – 1) who is in control, 2) who gets profits, 3) who is liable – a corporate constitution gives answers to the first two and partial answers to the third – the other part of the answer to the third comes from the principle of corporate personality and the general laws governing personal and vicarious liability

-The primary function of any organization’s constitution is to prescribe how the internal government of the organization is to operate – includes allocating rights, duties, obligations and access to grievance procedures among the membership (shareholders included) and their elected or appointed officials

-Corporate law in Canada is now built on four major principles – 1) corporate personality – the principle that a corporation’s behavior is to be legally analyzed to the behavior of human beings, 2) managerial power – the principle that the daily operation of corporate business is to be done by a relatively independent management group, 3) majority rule – internal corporate decisions are to be made by a democratic process among those constitutionally enfranchised on any particular issue, 4) minority protection – certain corporate managerial or majority shareholder inclination ought to be retrained from injuring minority members of any group created by the corporate constitution

-The main issue in corporate law is what happens when these principles come into conflict

The General Public

-The general public interest in corporate activity is addressed in many federal and provincial statues – but corporate statues do at least in a limited way include features that reflect the public interest in what corporations do – ex: mandatory rules creating offences for violations of corporate law and rules about the investigations of corporations

-Corporate social responsibility – the idea that management of a corporation needs to be constructed with a broader view to the interests of society

-Members of the public may also interact with the corporation as trade suppliers or as customers – this may turn them into creditors and will generally bring in other legal issues outside of the corporate constitution (contracts, torts etc)

The Crown, Legislatures and Civil Servants

-Government personnel relate to corporation in three difference ways – 1) provision of legislative regimes that allow for the creation of corporations and the regulation of their business activities, 2) creation and administration of various anti-monopoly, tax incentives, foreign investment review and other political-economic statutory control (outside corporate law), 3) involvement as a shareholder in a particular corporation – ex: Crown corporation would be 100 percent minority shareholder as well

Employees

-Traditionally dealt with elsewhere – labor or employment law – however there is one importance exception: corporate personality dictates that when directors of a corporation are acting as such, their acts are corporate and not individual acts – hence they are not liable as individuals

Creditors

-A creditor of a corporation is someone to whom the corporation owes money – a person might buy a corporate bond or a bank might lend a large sum to make credit available for example – in either event it will become a secured creditor under Personal Property Security Act

-Supplies of inventory, office supplies, equipment or services are likely to extend credit to the corporation – some as secured while others not

-Traditionally – creditors have been considered outside a corporate constitution – however modern Canadian statues provide access to grievance procedures for complaints including for a holder of security and debt security – some grievance procedures are open to creditors as well

-If a corporation is in financial difficulties, a secured creditor may have appointed a receiver or receiver-manager to take control of the property for the benefit of the creditor – where this occurs they may be the subject of some slight regulation under CBCA or Bankruptcy and Insolvency Act

Internal Groups

-Even in relation to the internal groups, the corporation is a separate person from any member of one of those groups

-The difference between internal and external groups is just that the internal groups determine how the corporation behaves

-A principle function of the corporation structure is to allocate the power to decide what the corporation will do in a given situation – ex: constitution can determine who has the power to decide whether the corporation will accept an offer

Shareholders

-Many say that the shareholders are in control – while others go so far as to say shareholders shouldn’t own the corporation. There are two obvious problems with both propositions: shareholder power is usually indirect (not through day to day decisions but through their power to elect directors) and if a corporation is a person at law they how is it possible to have owners

-The Governing Principles

-Shareholders are a source of capital and a constituency to which management must report – corporate law however deprives shareholders of any legal status as proprietors but they are far more than creditors – corporate statues are designed to give the collective group of shareholders a major say, however indirectly, in how the business is run

-Who gets the profits – generally shareholders do but the full answer is that the profits go to the corporation and the directors have the power to declare dividends

-Different considerations arise upon corporate death – if it’s to be wound up or terminated then the first step is to pay their debts – once that is done the remaining property is distributed to the shareholders

-As the economic, though not legal, proprietors of the corporation – shareholders are entitled to information including a list of shareholders, disclosures of any management conflicts of interests and financial reporting by management

-Shareholders also have remedies available to them to enforce compliance with the corporate constitutions

-Shareholders are generally not found liable – however it is possible to hold a person vicariously liable for the actions of another – this can happen when two people are in a partnership or where one is acting as the agent for another

-General corporations statues make it clear that shareholders are not liable as shareholders for corporate debts

Directors and Officers

-Corporate management comprises two inter-dependent groups – directors who oversee corporate strategy and officers who function as tacticians, supervising other functionaries in the corporation’s daily business life

-Legal analysis has traditionally focussed on directors, which in the modern world are actually the less important of the two groups

Directors in Theory and Practice

-Canadian corporate statues typically create a board of directors to manage or supervise the management of a corporation – elected by shareholders

-The directors, once elected, are collectively given the power to determine the direction of corporate business and have imposed statutory obligations to exercise their powers in the best interest of the corporation

-Their power and duty is to run the business independently as they see fit and they may be democratically thrown out of office if shareholders don’t like it

-They must exercise their powers for the benefit of the corporation but it is they who determine what the corporation wishes to be done

-In practice, its much less dramatic – they operate as review bodies and sounding boards

Officers in Theory and Practice

-Officers are employees, they run the day to day operations within the long range policies set by the directors

-Practically speaking they do more – they determine the corporate destiny and CEO’s effectively appoint the board of directors

-Corporate Constitutions in Action

The Division of Powers

-One of the most important functions of the constitution is to divide power among internal groups

Canadian Jorex Ltd v 477749 Alberta

Class: case is about the power of directors to cancel a meeting under their residual powers. Shareholders argued that it was a meeting for shareholders and that directors couldn’t cancel it because it didn’t say they could in the constitution. The Court says that the residual managerial powers vests with the board of directors in the CBCA model. Rules that directors can really do whatever they want within their powers but it has to be for the best interests of the corporation – in this case it was and therefore could not be challenged. The obligation of the directors to act in the best interest of the corporation, is to the corporation and not to the shareholders – so they are not going to want to sue themselves for a breach of fiduciary duty and the only time directors are really at risk is during a takeover.

Readings: Court on appeal says that the directors of a federal corporation have the power to cancel a special meeting called in advance of its scheduled date. Under the corporate model adopted by the CBCA, the residual power to manage a corporations affairs rests with the directors – this power is given by statue and not derived from the delegation of power by shareholders.

Grievance Procedures

-Another important function of the Constitution is to provide procedures that offer redress for violations of the constitution

Roles v 306972 Saskatchewan Ltd

Class: Case is about grievance procedures and who can do what to keep a corporation in line. Involved a difference of opinion with the majority of the corporation and what you can do about it. S. 240 of the CBCA provides a number of people who are able to seek an opportunity from the court to require the corporation to comply with the law or stop the corporation from not complying with the law. This is what Roles was seeking. Roles was the director of a corporation, it was taken over and he was unhappy with the takeover, believing that the corporation was paying too much. He sought the opportunity to inspect the books and argued that he needed to do so before an upcoming general meeting. Roles tries to rely on s.20(2) that states that a corporation is required to maintain various kinds of information, in this case adequate accounting records – s.20(4) says this information should be available to the directors, which Roles is. The court basically tells him to chill, that he’s about to get all that information in four days at the AGM. Then at the AGM he is not re-elected, so he appeals. The reasoning behind not wanting to share that accounting information is about not wanting to make that info public, some of the people with large shares might be competitors trying to get that info. Now that Roles is not a director, court says his intention is unclear and s.20(4) doesn’t apply. CBCA says no access for former directors in this case – while BCBCA allows for it (in favor of more information).

Readings: Director applied to the court for the production of accounting records and was denied. He is appealing that decision however since that time he was not re-elected as a director of the company. Whether or not a statutory right exists after removal, it is at least incumbent to demonstrate the reason for wanting access is for the benefit of the corporation. In this case, the courts were unable to see how access would have helped him fulfil any obligation as a past director.

Types of Corporate Constitution

Charter Corporations

-Corporation created by an executive act – created by royal prerogative, it’s a discretionary power of the crown

-Over time practical control has passed from the monarch to the executive branch of the government and its scope has diminished in favor of legislative or parliamentary power

-In Canada, there are no more businesses that are charter corporations

-Constitutional document of a charter corporation is its charter – document bearing the royal seal by which the corporation is created

-This Charter is sometimes called letters patent

Special Act Corporations

-A special act corporation is created by a particular act of the legislature – it was common in the 19th century but less so now – the main difference from a charter corporation is the source of its power is legislative rather than executive

-The constitutional document in this case is the act by which it is created

Letters Patent Corporations

-A “letters patent” corporation is one incorporated under a registration statue that adopts the charter corporation as its model – until 1970’s, the federal jurisdiction and five provinces followed this method

-One characteristic that distinguished this type of corporation is the retention of a discretionary element in the creation of the corporation – letters patent always provide that the relevant government official “may” issue incorporating documents rather than “shall”

-Its constitutional documents are its letters patent and also the statue they are granted under

-The letters patent will set out the name, capital structure and other basic facts – and will provide for the creation of by-laws

-The division of constitutional powers is set out in the statue – generally managerial power goes to a board of directors and the shareholders are given power to elect the directors and also power in special situation

-In general, they do not provide for grievance procedures

Contractarian Companies

-Generally are known as English model companies or memorandum and articles companies – this type of body is very different from charter and letters patent corporations

-Legislation beginning in 1844 regularized companies by requiring registration as a way of guarding against fraudulent promotions – provided registration as a right

-The basic constitutional documents are a “memorandum of association” and “articles of association”. The memorandum is the shorter document containing the name of the company, tis objects, its share capital etc – in BC the memorandum is now called the “notice of articles” – the articles of association is much longer setting out all the details of the corporate constitution, including anything that would be a by-law in another type of corporation

-The memorandum can be seen to correspond to the charter and the articles to the by-laws

-The constitution of this type of corporation is treated as a contract among all shareholders and the company itself – directors not usually given any managerial powers and shareholders ar the theoretical source of all power – any power the directors have they get from the shareholders

-The articles of association can be changed with a majority vote – in this way the terms of the corporate constitution can be changed

-Although BC and Nova Scotia retained this contractarian model – they have followed the division of powers jurisdictions by adding a range of grievance procedures

Division of Powers Corporations

-This is now the dominant model in Canada – it was created to try to rationalize corporate law and remove some of the difficulties that had developed in cases trying to interpret the contractatian model

-The statue expressly divides powers within the corporate constitution between shareholders and management – had a lot in common with letters patent in this way

-The basic constitution is called the Articles of Incorporation – similar to the letters patent and memorandum of association in substance