Ch 15 - the corporate form: organizational matters

The corporation

A predominant business vehicle in modern commerce because it is a separate legal entity

• The corporation alone is responsible for its own debts and other liabilities

• If the corporation fails on its obligations, the shareholders are not responsible

• The most a shareholder will lose is the value of their share in the company

Pre-incorporation issues

• Whether to incorporate federally or provincially

• What types of shares will be available and to who

• What to name the corporation

Federal vs provincial incorporation

• Federal incorporated businesses have the right to carry on business in each province

• Provincially incorporated businesses generally only have the right to carry on business in the province in which they are incorporated

• There is little practical difference, sometimes provincially incorporated businesses can be licensed to carry on business in another province

Share

Represents an ownership interest in the issuing corporation

• If a company owns an asset (such as an appt), the person who owns the company does not own it. If the person owns 50% of the shares, they still dont own 50% of the appt.

Share structure

A corporation may have one or more type or class of shares

The 3 rights in share sturcture (common shares)

Each of these 3 rights must be attributed to at least one class of shares (if there is only 1 class of shares, they must be all attributed to that)

1. The right to vote (and elect directors for the company)

2. The right to share in profits through dividends (if declared by the directors)

3. The right in the assets of the company upon its dissolution

• If you only have one class of shares, it is considered a common share

• If you have multiple classes of shares, it is considered a preferred share

• These rights are legally implemented

Other rights that can be carried in preferred shares

Shares may also carry other/different rights, such as:

• The right to receive dividends before other shares do (preference rights)

• The right to have dividends not paid in one year carried forward and added to the following year (cumulative rights)

• The right to have the company buy back the shares at a set price (redemption rights)

If someone wants to invest in your company and be a shareholder, they may put some of these requirements on you.

• If you want a shareholder to not have one of the 3 rights in common shares, you must have preferred shares with rules that would prohibit these rights. Ex: if you want your kids to own a share but dont want them to have the right to vote, you must put them under preferred shares, not common.

Widely held corporation (public)

Shares are normally traded on the stock exchange (open to the general public)

Securities legislation

Corporations are subject to regulations in those provinces in which the securities are issued or traded

• Provides the mechanism for the transfer of securities

• Seeks to ensure that all investors have the ability to access adequate information in order to make informed decisions

• Ensures that the system is such that the public has confidence in the marketplace

• Regulates those engaged in the trading of securities

• Removes or punishes those participants not complying with established rules

Closely held corporation (private)

Shares are not sold to the public

• Not traded on the stock market

• Have fewer than 50 shareholders

Parent company and subsidiaries

A parent company owns another company (subsidiary)

• this is important for tax purposes

Naming a corporation

All jurisdictions require a company to be identified by a name or designated number

It must:

• Be distinctive

• Not cause confusion with any existing name or trademark

• Include a legal element (Lts, Corp, Inc, Co)

• Not include any unacceptable terms

Nuans report (newly upgraded automatic name search report)

Document that shows the result of a search for a business name to ensure the name is not already in use

• A database search, it takes your proposed name and spits out any matches.

• Not as comprehensive as a trademark search

• Does not recognize unregistered names

• All provinces require you to do this before you submit your name request

• Ideally you should get a lawyer to run a trademark search, it is more thorough but more expensive

The process of incorporation

Articles of incorporation

• Notice of registered office (an address that people can deliver paperwork to)

• Notice of directors (form that explains who the first directors are of the company)

• NUANS report

• Filing fee payable to the receiver general of Canada (or the province if provincially registering) - $300

• Can put restrictions when creating your company, however, putting restrictions on the type of business you are carrying on can be a hassle

Articles of incorporation

Defines the basic characteristics of corporations and sets out the basic features of the corporation, including:

• Name and place of the corporations registered office

• Class and number of shares

• Any restrictions on the transferring of shares

• The number of directors

• Restrictions on the business that can be carried on

• Any other provisions that an incorporator requires to customize the corporation

Articles of incorporation are filed along with a notice of directors and notice of address. A fee is paid, and then a “certificate of incorporation” will be issued

First directors meeting

First directors call an organizational meeting to:

• Make bylaws (the rules that govern day-to-day decision making): could include how many directors must be at a meeting, where the meetings are held, how often you have meetings, etc

• Adopt forms of share certificates and corporate needs

• Authorize the issue of shares and other securities

• Appoint officers

• Appoint auditor

• Make banking arrangements

• Transact any other business

Financing the corporation

A corporation can raise money by borrowing (bonds, debentures, securities), or selling shares

• Debt financing vs equity financing

Bonds

Document evidencing a debt owed by the corporation, often used to refer to a secured debt

• Includes collateral

Debentures

Document evidencing a debt owed by the corporation, often used to refer to an unsecured debt

• Bond and debenture holders do not have ownership

• No collateral

Securities

Shares and bonds issued by a corporation

• have interest

Security interest

A legal right a lender has to take back specific property (called collateral) if the borrower doesnt repay the loan

• “First dibs" on a specific asset if something goes wrong.

Equity financing

Selling shares to investors in exchange for a purchase price

• Provides a flexible means of raising capital

• Provides opportunity to benefit from the corporations growth

• Many investors want a right along with buying the share (there is usually a catch)

• It is not likely to raise money by selling shares to investors without sacrificing something else to them

• Sometimes the boundary between debt and equity financing gets blurred

Components of the securities legislation

1. Obligation of registration: public company must be registered in securities legislation

2. Disclosure: Everyone who is buying and selling shares must have access to the same information, must share material information to the public

3. Addresses insider trading

Any corporation wishing to sell securities to the public must

• Register

• File a prospectus (a big book that sets out everything you might want to ask about a company, a statement by the issuing company of prescribed information (disclosure))

• Have insider trading restrictions (insiders must report any trading they have engaged in)

Insider trading

Transactions in shares based on confidential information of a material nature

Insider

A person who has a special relationship with a corporation (anyone who might have access to sensitive information on the company)

• Can include officers, directors, etc

Tipping

Giving someone a tip on buying a certain stock

2 main rules for insiders

1. Must submit a form every time you trade in stocks and buy securities

2. If you have access to material nonpublic information about the company that others do not, than you are barred from buying or selling. If you violate that prohibition, you can be banned from buying and selling and could go to prison