Fed. 23, 2026 - Business Law Notes

Methods of Incorporation

3 Methods

1. Royal Charter Incorporation: Created through the use of the royal prerogatives.

   • Royal prerogatives: Special powers that belong to the Crown, and can be exercised without needing a law passed.

2. Special Act of Corporation (Statutes): For major public works , such as crown corporations.

3. General Routine Acts: Acts that businesses or other people can resort to create a corporation according to the procedure laid out. Three basic types include:

   1. English system of registration.

   2. Letter paten system.

   3. Certificate of incorporation.

Royal Charter Incorporation

Methods of Incorporation

Created by the monarch using royal powers (historically). The crown used this to raise money by creating companies for a fee. The king essentially “handed out permission slips” to start a company.

• Example: Hudson's Bay Company.

Status today: Not used anymore, because the monarch’s special powers were ended.

Special Act Corporation (Statutes)

Methods of Incorporation

Created through a special law passed for a specific purpose, usually major public works. Often used to create crown corporations or government-run companies.

• Examples:

  • Canadian Pacific Railway.

  • Canadian National Railway.

  • Manitoba Public Insurance.

Parliament passes a law just for this company, it doesn’t follow the normal rules.

General (Routine) Acts

EL

Methods of Incorporation

This is the normal way businesses are incorporated today. Anyone can follow the procedure in the law to create a corporation. Filing the right papers gives you legal status; federal gives national protection, provincial is local.

Includes both the English system and letter paten, which would both end in incorporation.

• English system of registration (Modern): Register your company with the authorities.

• Letter paten system (Oldest): People apply to the government for permission to create a corporation.

• Certificate of incorporation (Official confirmation): After the corporation application is accepted, the government issues a certificate of incorporation. In Canada, there is a split between federal and provincial companies:

  • Federal companies: Under the Canada Business Corporations Act.

  • More expensive.

• Name is protected across all of Canada.

• Provincial companies: For example under the Ontario Business Corporations Act (or other provincial acts).

  • Cheaper.

  • Name is only protected in that province.

How Do You Organize a Company in Manitoba?

4 Steps

Choose a name: Do a corporate name search to make sure it’s available. You can pick your own name or use a numbered name. The cost of this search is $35.00.

Decide a company type:

• Operating company: Runs the business directly.

• Holding company: Holds money/assets to limit liability. Money is often left in the hold-co for safety.

Prepare articles of incorporation: Create and submit to the corporation branch (government). Must include (per Section 6 of Manitoba Corporations Act):

• Company name & corporate head office.

• Nature of business.

• Types of shares & their rights (characteristics).

• First directors & incorporators.

• Think of this as the constitution of the company, including rules about what the company can do (entrenched aspects).

Pay fees: Standard fee: $300, or optional: +$100 for preferred/overnight service.

Parts of the Constitution of a Corporation

2 Parts (AB)

Articles of Incorporation (Company Constitution):

• This is the core “rulebook” of the corporation.

• To change it, you need 2/3 majority approval from every class of shares.

• Includes things like:

  • Company name, head office.

  • Restrictions on the type of business the company can do.

• This is entrenched, meaning it’s hard to change.

Bylaws (Internal Rules):

• Not entrenched bylaws can be changed with a simple majority of shareholders.

• Initially created by the first directors, then approved at the first shareholders’ meeting.

• Covers day-to-day governance, such as:

  1. Responsibilities of the Board of Directors.

  2. Quorums for meetings (directors & shareholders).

  3. Notice rules and voting procedures.

  4. Duties of officers.

  5. Signing authority.

  6. Fiscal year of the corporation.

  7. Includes the three types of participants (shareholders, directors, and officers).

Directors

3 Types of Participants - Company Constitution

Directors are the people who run and oversee a corporation on behalf of the shareholders. They are elected by shareholders and have power to make major decisions. They also sit on the board of directors.

Responsibilities:

• Adopt initial bylaws.

• Make corporate decisions and exercise corporate power.

• Annually elect officers of the corporation.

• Directors do not have to be shareholders (under section 100).

Officers

3 Types of Participants - Company Constitution

Role is to handle daily operations of the corporation. They carry out decisions that are made by directors, manage employees, handle daily business activities and sign contracts on behalf of the company.

• Elected annually by the directors.

• Don’t have to be directors themselves.

• Execute the decisions and manage the business day-to-day. operations of the actual business.

Partnership (General and Limited Liability)

A business owned by two or more individuals who work together and share profits, losses, and management of the business.

There is general (limited) partnerships where each partner is personally responsible for debts, and there is limited liability partnerships where partners are not usually liable for other partners mistakes.

• Two or more owners: Partners.

• Shared profits and losses: Partners split the money the business earns (or loses).

• Shared decision-making: Partners usually help manage the business.

• Personal liability: In general partnerships, partners are personally responsible for the business’s debts.

• Limited liability: In LLPs partners are not responsible for other partners mistakes, but still liable for their own actions.

When Is a Partner Liable After Leaving a Partnership?

A partner is only responsible for debts that were created while they were a partner, if they properly leave the partnership.

To properly end liability, the partner must:

1. Publish a public notice that the partnership has been dissolved.

2. Give actual (direct) notice to customers or businesses who recently and regularly dealt with the firm.

If you don’t give proper notice, you could still be held liable for new debts because outsiders might assume you’re still a partner.

General (Limited) Partnership Elements

1. Can accidentally become one: Through partnership by estoppels, if you act like a partner, you can be treated as one in the eyes of the law.

2. Unlimited personal liability: For the other partner’s debts become your debts.

3. Every partner can bind: All partners are agents that can enter into contracts, create debts and all partners are responsible for those debts.

4. Seek reimbursement: Compensation can be sought if one partner pays more then their share of debt.

Limited liability: To get this structure, you either need to be incorporated as an LLP, or you need a separate legal entity (corporation). Some people form a corporation and then have the corporation become the partner instead of them personally.

Professions that Can Use LLP Model

1. Lawyers;

2. Chartered Accountants;

3. Certified General Accountants.

Once registered into an LLP, a partner is not liable for the other partners: Debts, obligations and liabilities of the partnership, and the other partner.

LLP Limitations

LLPs still do have limitations. This includes limitations on protection if the partner:

1. Knew of negligence and failed to take reasonable steps.

2. Negligence was committed by an employee, agent, or representative of the partnership for whom the partner was directly responsible for in a supervisory role.

3. LLP is a “partial shield,” meaning it protects innocent partners from negligence, wrongful acts of others in the firm, but does not provide any protection for contractual or trade debts.

   • Only Saskatchewan has full liability protection.

4. Creditors can only go after partnership based assets, and not personal assets (notwithstanding clause).

   • Ensure other partner’s have more money, so that they have more to loose.

Tax Sheltering

A legal strategy used to reduce or defer taxes by using specific structures, investments, or accounting methods allowed under tax law.

• Tax avoidance (legal): Arranging finances to minimize taxes within the law.

• Corporations use tax sheltering to:

  1. Lower taxable income

  2. Defer taxes to future years

  3. Move income to lower-tax jurisdictions

  4. Increase after-tax profits

Public Company

Corporations

There is no clear definition in the corporation act. They are public if there is a distribution to the public of their shares and they are involved in sales in the stock market.

• Under the Security Act, a public company is required to do a filing.

• Defined by NOT being what is defined as a Private Company under the Security Act.

• This is to prevent fraud on potential investors in public trading or distribution of shares.

The Security Act (1988 - Manitoba)

Each province has its own Act, which regulates how corporations raise money from investors. If a corporation was to sell shares to the public, issue bonds, merge with another public company, or to report quarterly earning, it must follow this act.

It protects investors and ensures fair financial markets by requiring:

• Full disclosure of financial information.

• Honest reporting.

• Registration of brokers and dealers.

• Rules for public stock offerings.

• Insider trading restrictions.

Private Company

Corporations

A company in whose instrument of incorporation or incorporation articles include:

1. Right to transfer its shares is restricted.

2. Shareholders are limited to not more than 50.

3. Any invitation to the public to subscribe for its securities is prohibited (no advertising), this is a violation.

Otherwise you have to prescribe to the Security Act which is expensive. As a private company you are exempt from many of the costly actions as required by the Security Act.

Shares

Units of ownership in a corporation. When you own a share, you own a small percentage of the company. When a corporation needs money to grow, it can:

• Borrow (take on debt), or

• Issue shares (sell ownership).

If you buy shares, you give the company money. In return, you receive ownership rights.

What Shareholders Get

(VR / D / CG)

Depending on the type of share, owners may receive:

Voting Rights. You may vote on the:

• Board of directors.

• Major mergers.

• Important corporate decisions.

Dividends: A portion of company profits paid to shareholders.

Capital Gains: If the company grows and the share price increases, you can sell your shares for more than you paid.

How Shares Are Created

Shares are authorized when a corporation is formed under laws like:

• Canada Business Corporations Act.

• Or provincial corporate laws (e.g., Manitoba Corporations Act).

The corporation decides:

• How many shares exist.

• What types exist.

• What rights each type carries.

Agency Law

A relationship between the principal and its agent according to which the principal has hired and authorized the agent to enter into contracts with third parties in their name.

• Expressed agreement: written or oral.

• Plays a role in both organizations and businesses.

• Corporations are artificial entities and must act through human agents.

  • Board of directors are agents that have a fiduciary duty.

Apparent Authority of an Agent

One Type of Agency by Estoppels

A corporation is liable for the acts of its agents under the ordinary rules of agency. An officer of a corporation acting within his or her usual authority but without express authority may bind it to contracts made with third parties. Corporation may ratify acts made by unauthorized agents on its behalf.”

• Implicit is the role of the law of agency and in particular apparent authority.

• There are two parties, the principals and the agents, who create a relationship through a contract.

• If the agent does their duties properly, there’s no mali fides, then the liability will be with the principal and third party.

3 Ways Apparent Authority is Manifested in Corporations

(PFD / IMR / PIC)

1. Publicly filed documents (old rule): The public was deemed to know everything in filed corporate documents (even if they didn’t read them). However, this has changed as it created unfairness. It used to block apparent authority; now statutes restore protection for outsiders. Limits apparent authority.

2. Indoor management rule: An innocent third party may assume internal corporate rules were properly followed, unless they knew of an irregularity or suspicious circumstances. Protects apparent authority.

3. Pre-incorporation contract: A corporation cannot ratify a contract made before it existed. Corporation only becomes bound once incorporated. The person who signed on its behalf is not longer personally liable. Shows apparent authority fails if the principal does not exist.

All three doctrines limit or protect reliance on apparent authority.

Agency by Estoppel for Corporations

Two Types

Agency by estoppel in corporate law is basically about fairness and reliance. It applies when a corporation lets someone appear to have authority, and a third party relies on that appearance.

• The corporation represented (by words or conduct) that the person had authority, or

• The corporation allowed others to believe they had authority.

• A third party reasonably relied on that belief.

Two types include: Apparent Authority, and Holding Out.

The Effect of Publicly Filed Documents

3 Ways Apparent Authority is Manifested

At one time, the law assumed everyone knew what was written in a corporation’s filed public documents, even if they had never read them. So, if those documents limited an officer’s power, a third party could not rely on apparent authority, even if it looked like the officer had authority.

• This rule was unfair because people were treated as knowing things they realistically wouldn’t know.

• Because it caused injustice, the rule has now been abolished by statute (this defeated the purpose of apparent authority).

• Now third parties are generally protected from outsides.

• Limits apparent authority.

Indoor Management Rule (and Court Case)

3 Ways Apparent Authority is Manifested

Requirements for acts to be performed in a specific manner, if they are to be valid (e.g. bylaws, contracts must be in writing). This must come from the corporations very own Constitution, and Governing Act. This decision came from the Royal British Bank v. Turquand Court case (seminal authority). An innocent third party can assume that a corporation’s internal procedures were properly followed, as long as:

• The transaction looks regular on its face.

• There are no suspicious circumstances.

• The third party did not know about the irregularity.

If those conditions are met, the company is bound. Without this rule corporations could avoid contracts by claiming the internal rules were not followed, ignore their own rules and later escape liability, and third-parties would have to investigate corporate internal procedures every time. So the rule protects outsiders acting in good faith, and protects apparent authority.

Pre-Incorporation Contract

(Common Law Rule / Modern Rule)

3 Ways Apparent Authority is Manifested

A contract made before the corporation legally exists, but made in the name of that future corporation.

This comes from the Common Law Rule (old rule), and says that:

1. A corporation cannot ratify the contract later (because it didn’t exist when the contract was made).

2. The person who signed it was also not bound, because the intention was to contract with the corporation, not personally.

   1. The problem with this was that the contract could end up unenforceable against anyone. Because you cannot have agency without a principal, and a non-existent corporation cannot be a principal.

Modern Statutory Rule (Provincial Corporate Statutes)

To fix this unfair result, statutes now provide that:

• Once incorporated, the corporation is bound by the contract as if it existed at the time it was made.

• The person who signed on behalf of the corporation is no longer personally liable.

• Shows apparent authority fails, if the principal did not exist.

This makes commercial transactions more practical and fair.

Director’s Duties

Corporation

Directors are in charge with the management of the corporation and do not have to be shareholders. Duties of the director are owed to the corporation, and not necessarily the shareholders.

• Directors activities are controlled through the director’s duties.

• As long as the directors are acting appropriately for the corporation, then they are protected. Directors have authority, but not restrictions on authority.

• Uphold a fiduciary duty. If they fail to follow these duties, then they can be liable to someone.

  • This includes fiduciary duties of both care and skill, and good faith (bona fides).

What is a Shareholder?

A shareholder is a person or entity that owns shares in a corporation. By owning shares, the shareholder owns a portion of the company.

• Shareholder rights vary from voting rights, to dividends and the right to share in assets if the company is dissolved.

• Shareholders are equity owners within a corporation.

• Owner not a manager, directors and officers are managers.

• They only really participate in the corporate governance once a year in the election of the board of directors.

Fiduciary Duty Definition

(Secondary Definition)

A person holding a character of a trustee or a character analogous to a trustee in respect to the trust and confidence involved in it and the scrupulous (high level ethics) good faith and candour (honesty) which it requires.”

• Secondary definition: “A person having duty created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking.”

Fiduciary Duties to Restrict Power

(CS / GF)

Common law duties revolve around two things related to fiduciary.

1. Care and Skill: Directors cannot be negligent, reasonable care is to be exercised. Diligence of a average person required, with two exceptions. Accountants and lawyers are subjective to a higher standard, or professional board.

2. Good Faith (Bona Fides): Two types of bona fide include

   • Disclose an interest in contracts with the company: Disclose the interest before the board and not act in any discussions or voting. At the very least remain silent and do not participate.

   • Interception of corporate opportunity: You have to act in the best interest of the corporation or client, or don’t take what’s not yours. If you do you will have to give up any benefits received as a result and may have to pay for damages.

Restall’s Paper

These common law duties that evolved from equity have now been incorporated in the Corporation Act in S. 115 & 117.

However, the potential liabilities of director’s have been expanded beyond merely what are the common law duties in this section.

• There is a new variety of director’s liabilities, most of which are called “gatekeeper” liabilities - the attempt to control wrong doing of companies by making the director’s liable through duties.

• The liabilities consist of financial and penal nature for directors. This protects the government's revenue from the corporations.

• Some of these duties are owed to a series of individuals depending on the statutes: (about 400) it’s owed to shareholders, employees, creditors etc…

Example of Potential Liabilities

• Board of director’s not remitting EI, CPP or income taxes.

• Debts that are liable to employees for up to 6 months worth.

• Environmental legislation that can give you jail time.

• The Supreme Court has indicated that director’s remain liable even if they quit, during a time of crisis.

• All liabilities apply to non-share corporations or not-for-profit corporations.

From a societal standpoint, corporations created a lot of prosperity because they were able to obtain limited liability. As a result the people that will be members of board of directors won’t be the best because reasonable people won’t take the job. This damages the potential for prosperity. Slowly and inevitably reasonable people will not be a part of the board of directors.

Derivative Action

Minority Shareholder Protection

When a shareholder sues on behalf of the corporation, not for personal benefit, but to fix harm done to the company. A shareholder can sue the board of directors in the name of the company for the wrong done to the company.

• This action takes the stance that the company was harmed.

• However, it is rarely used because the courts require a very high deposit of money in advance, and as a result few shareholders are willing to do this.

• Traditional minority shareholder.

Oppression Remedy

Minority Shareholder Protection

Protects minority shareholders when those in control of the company act unfairly, abusively, or in a way that harms their interests. As a shareholder, you can go through the courts and ask for a remedy.

This is a more common method for minority shareholder protection.

• The judge can choose the remedy and there are no limitations to it given by the court. Long process and the uncertainty of results.

• Some possible remedies include:

  • The court can dissolve the company and disperse the capital on their own means.

  • Court can order the forced purchase of shares.

  • Reverse a decision.

  • Compensate the harmed shareholder.

  • Mark any order that is thinks is fair.

1970’s Amendments to Assist Shareholders

1. Disclosure of Company Affairs: The shareholder gained the right to be entitled to financial statements, document of record and if you own 5% you can apply for an inspector (court-appointed).

2. Right to Attend Meetings: Shareholders gained the right to attend meetings, hear what is happening in the company, and participate in major decisions.

3. 5% Owners Initiate Meeting: If you own at least 5%, you can require the corporation to hold a shareholder meeting. This allows shareholders to force discussion on important matters, and prevents management from avoiding accountability.

4. Special Majority Vote (More than 2/3): Some major changes required a special resolution (more than two-thirds approval 66%). Ensures that major decisions have strong support.

5. Proxy Votes: Permissible for shareholders to have other people vote for them. This however, gave managers more control because they get proxies.

What are Considered Fundamental Changes to a Corporation?

Stipulated as major changes to the corporation, such as:

• Changing the articles of incorporation.

• Amalgamation (merging with another corporation).

• Selling all or most assets.

• Changing share structure.

Because these are big decisions, they require:

• A special resolution (usually 75% approval).

• Often 75% of each class of shares must approve.

This protects minority shareholders from being overruled on major structural changes.

Unanimous Shareholder Agreements (USA)

Minority Shareholder Protection

This is the best protection for a shareholder, which is a private agreement signed by all shareholders. It can override normal corporate rules and directly control how the company operates. Can shift power from directors to shareholders, and it creates binding obligations between shareholders. A USA can control:

• Employment Opportunities: Guarantee certain shareholders jobs in the company.

• Special Majorities for Certain Actions: Require higher voting thresholds for decisions like taking on loans, issuing shares and selling assets.

  • Adds extra protection beyond the normal 75% rule.

• Capital Control: Control when new shares are issued, how money is invested, and who contributes to more capital.

  • Prevents dilution or financial manipulation.

• Board of Directors: It can decide how directors are elected, limit director powers, and assign specific duties.

• Share Control Clause: Controls what happens if a shareholder wants to exit (Shot Gun Clause, and Fair Market Value Proposition)

Shotgun Clause (in a Shareholder Agreement)

This is a forced sales clause found in a Shareholder Agreement. It allows one shareholder to:

• Offer to buy the other’s shares at a set price per share, OR

• Sell their own shares at that same price.

The other shareholder must choose which option. It’s called “double-edged” because:

• You don’t know whether you’ll end up buying or selling.

• It can hurt shareholders who don’t have enough money (undercapitalized).

Can be used in partnerships or small business areas. The uncertainty is meant to force fairness, because when initiating the clause the person does not know if they will be a buyer or seller.

Fair Market Value Proposition

Shareholders Agreement

To prevent abuse (and unfair buyouts):

• The share price can be set by an independent arbitrator.

• This ensures the price reflects fair market value.

• Protects weaker shareholders from exploitation.

• This is related to the shotgun clause, and acts as a protection for shareholders that could be undercapitalized.

  • This is more prevalent in smaller corporations with fewer shareholders.

Considerations of Corporations

• Limited Liability (Risk Level): If your business has serious financial risk, especially risks that insurance won’t fully cover you should incorporate.

• Perpetual Existence (Continuity): Incorporate for the business to exist past the owners death.

• Estate Planning: When you die, assets are taxed. Corporations allow for share transfers, tax planning strategies, and freezes and estate planning tools.

• Number of Owners: Multiple owners would benefit from incorporation.

• Relationship Between Owners: Ensures formal protections, and clearer legal rules.

• Borrowing Needs: Lenders may rather lend to corporations, offer better terms and require personal guarantees anyway.

• Government Grants: May only be available to certain business types.

• Employee Ownership: Corporations allow employee stock options, shared incentives.

• Costs: Corporations cost more to set up, have ongoing filing requirements and more legal complexity. Sole proprietors are cheaper and simpler.

• Flexibility of Structure: Some business forms are easier to change. Corporations have more formal rules, are more rigid and require formal amendments.

• Income Tax Considerations: Different structures are taxed differently, and have different deduction rules. Corporations may have more advantages.

• Government Restrictions: Some professions are required to use a specific model (lawyers LLPs). Certain industries are required to use corporations.

Shareholders (Owners / Investors)

3 Types of Participants

Company Constitution

Role is to provide money (capital) by buying shares. Rights are limited to mostly financial and voting rights (vote for directors annually, and vote to approve major changes like amending the articles of incorporation). The bulk of the articles of incorporation revolve around the classes characteristics.

This includes:

• Different Types of Shareholders (4 types).

• Different Classes of Shares (5 types).

• Main Classes of Shares (2 Types).

4 Different Types of Shareholders

Shareholders

1. Voting Shareholder: Shareholders can vote on majority decisions, such as electing the board of directors, approving big mergers. More control and more influence.

2. Non-voting Shareholder: Shareholder does not vote. They can still receive dividends and earn money if share price goes up.

3. Dividend rights (share of profits): The share pays a set (fixed) amount of money regularly. A guaranteed interest payment. This is more stable and lower risk, but usually have no voting rights.

4. Redemption Value Rights / Retraction: The corporation can force the shareholder to sell the shares back to the company at a set price. This can be used when the company wants to restructure ownership, they have extra cash, they want to remove certain investors. Power is with the corporation.

5 Different Classes of Shares

Shareholders

The bulk of the articles of incorporation revolve around the classes characteristics.

1. Voting Shares: Vote on majority decisions, such as electing the board of directors, approving big mergers. More control and more influence.

2. Non-Voting Shares: Shareholder does not vote. Can earn money but do not make decisions.

3. Prescribed Dividend Rate: Share pays a set, fixed amount of money (usually a percentage) every year. If the rate is 5% and you invest $1,000, you get $50 per year. It is a fixed paycheck from your shares.

4. Redemption: This gives the corporation the right to buy the shares back from the shareholder at a set price. Company can pull shares back, power is with the company.

5. Retraction: This gives the shareholder the right to force the company to buy their shares back at a set price. Power is with the shareholder, investor (shareholder) pulls out.

Two Main Classes of Shares

Shareholders

Common Shares: Control first, money later.

• Voting: Usually yes, you can vote on major decisions.

• Dividends: Not guaranteed, you may get a share of profits, but it depends on the company.

• Liquidation: If the company goes bankrupt, common shareholders get paid last, after everyone else (creditors, preferred shareholders).

Preferred Shares: Money first, control later (or never).

• Voting: Usually no, you don’t vote on company decisions.

• Dividends: Fixed, you get a set payment regularly.

• Liquidation: If the company goes bankrupt, you get paid before common shareholders.

Companies can assign different classes to different shareholders to control dividends and influence, based on income level.