Chapter 11: Corporations

Question 1

Separate Legal Entity

LO 11.1 Analyze the separate legal entity principle

Answer 1

Separate Legal Entity

LO 11.1 Analyze the separate legal entity principle

Question 2

An “owner” of an incorporated company

Answer 2

owns shares that can be bought and sold; thus, the shareholders can be
continually changing, while the company itself remains intact

Question 3

Separate legal entity

Answer 3

the principle that a corporation exists separately from the people who created it

Question 4

When the incorporation process is

completed, there are two legal persons:

Answer 4

1) the shareholder and

2) incorporated company, or corporation.

Question 5

Who owns the assets?

Answer 5

Shareholders often have
difficulty understanding that they do not actually own the assets of the
business—the corporation they have incorporated does.

Question 6

Corporate myth

Answer 6

a corporation is a legal fiction

Question 7

Limited liability

Answer 7

liability is restricted to capital contributed; shareholders are shielded from
liability for the corporation’s debts

Question 8

The Role of Agents

Answer 8

The Role of Agents

Question 9

Since the corporate entity is a legal fiction, all of its activities must be

Answer 9

carried out through the services of real people acting as agents.

Question 10

Pros and Cons of Incorporation

LO 11.2 Describe the advantages and disadvantages of incorporation

Answer 10

Describe the advantages and disadvantages of
incorporation

LO 11.2 Describe the advantages and disadvantages of incorporation

Question 11

Advantages

Answer 11

1) Limited Liability
2) Taxes
3) Succession and Transferability
4) Obligations of the Participants
5) Management

Question 12

Personal guarantee

Answer 12

a guarantee of payment for another’s obligation

Question 13

Advantage 2: Taxes

Answer 13

At the very least, the shareholder can leave the funds in the corporation and use it as a vehicle of investment, thus deferring some taxes until a later date

Question 14

Advantage 3: Succession and Transferability

Answer 14

Because a corporation is a separate legal entity and a mythical person, it does not die unless some specific steps are taken to end its existence

The death of even a 100 percent shareholder will not affect the existence of the corporation, although the loss may have practical implications, especially when the shareholder is involved in the ongoing operation of the business

Shares in a corporation, however, can usually be transferred at will, without reference either to
the other shareholders or to the corporate body

Question 15

It is often said that a corporation cannot die, but actually there are several
things that can cause a corporation to be dissolved.

Answer 15

The ultimate end for a corporation going through the bankruptcy process is dissolution by operation of law

The shareholders themselves can vote to bring
the corporation to an end when they feel it is appropriate, filing articles of dissolution or a statement of intent to dissolve at the appropriate registry
office.

But the most common way is for the corporation to simply fail to file the required annual returns. After a year, the corporation will be considered inactive and removed from the registry

Question 16

Advantage 5: Obligations of the Participants

Answer 16

Unlike partners, shareholders are generally free of any obligations or duties to the corporation or other shareholders

There is no fiduciary duty to act in the best interests of the corporation, or even to refrain from carrying on business in competition with the corporation.

Question 17

Advantage 6: Management

Answer 17

In a corporation, however, it is common to
separate the managers from the owners

The shareholders elect a board of directors that controls the business. The directors, in turn, can hire professional managers who have the expertise to make sound business decisions on behalf of the corporation

Question 18

Disadvantages

Answer 18

In the case of a corporation, however, the
incorporating documents themselves may have to be altered, which is an involved and expensive procedure

In closely held corporations, the free transferability of shares is restricted, either through shareholder agreements or by limitations placed in the
incorporating documents themselves

A corporation is the most expensive way to operate a business

Question 19

Intellectual property

Answer 19

personal property in the form of ideas and creative work

such as patents or copyrighted materials.

Question 20

Franchising

Answer 20

arrangements based on contracts of service and the supply of products between larger and smaller units of one organization

Question 21

The Process of Incorporation

LO 11.3 Explain the process of incorporation

Answer 21

The Process of Incorporation

LO 11.3 Explain the process of incorporation

Question 22

Deeds of settlement

Answer 22

contracts used historically for setting up a company

Question 23

Registration

Answer 23

a legislated requirement for incorporating a company in some

jurisdictions in Canada

Question 24

Letters patent

Answer 24

a method of incorporating used in some jurisdictions in Canada whereby the government grants recognition to the company as a separate legal entity

Question 25

Articles of incorporation

Answer 25

a method of incorporating based on a US approach and used in some jurisdictions in Canada

Question 26

In Canada, it is possible to incorporate a corporation at the

Answer 26

federal level or at the provincial level

Question 27

Registration

Answer 27

Incorporation through registration recognizes the contractual relationship between its members and grants them corporate status Nova Scotia is the only jurisdiction in Canada still using the registration system of incorporation The process involves registering a “memorandum of association” and “articles of association” with the appropriate government agency and paying the required fee The British Columbia government introduced new corporate legislation moving away from the previous registration system, but retaining significant aspects of it and creating a process of incorporation unique to that province

Question 28

Memorandum of assocaition

Answer 28

the constitution of a corporation in a registration jurisdiction such as the name of the company, the authorized share capital (the total value of shares that can be sold), and, when appropriate, the objects of the incorporation

Question 29

Articles of association

Answer 29

internal regulations setting out the procedures for governing a corporation in a registration jurisdiction These articles deal with such matters as how shares are to be issued and transferred, requirements for meetings of the board of directors and of shareholders, voting procedures at those meetings, regulations covering borrowing, powers of directors and other officers, requirements dealing with dividends, regulations concerning company records, and how notice will be given to shareholders

Question 30

Letters Patent

Answer 30

The letters patent method of incorporation is based on the practice of the monarch granting a royal charter The process involves an applicant petitioning the appropriate government body for the granting of the letters patent. The government representative, acting by statute, grants a charter of incorporation to applicants who meet certain qualifications. Today, only Prince Edward Island uses this method of incorporation

Question 31

Articles of Incorporation

Answer 31

The articles-of-incorporation method has features of both the letters patent and the registration methods As with letters patent companies, corporations under this system are primarily the creations of government rather than being based on contract ``` The articles of incorporation serve the same function and contain the same types of information as the memorandum of association and the letters patent in the other systems. ``` The “articles” in an articles-of-incorporation jurisdiction is the main incorporating document and so corresponds most closely to the letters patent in that system or the memorandum of association in a registration jurisdiction.

Question 32

Other Incorporated Bodies

Answer 32

Cities, universities, and other public institutions are incorporated legal entities that can sue or be sued in their own right Under both federal and provincial legislation, it is also possible to establish (incorporate) nonprofit bodies, sometimes called “societies” or non-share capital corporations These bodies are primarily cultural, social, charitable, and religious organizations, such as the BC Society for the Prevention of Cruelty to Animals

Question 33

Capacity

Answer 33

In provinces using the registration system of incorporation, the capacity of the company to enter contracts was limited

Question 34

Funding LO 11.4 Discuss the funding of a corporation

Answer 34

LO 11.4 Discuss the funding of a corporation

Question 35

Share

Answer 35

the means of acquiring funds from a large number of sources to run a corporation; an interest in a corporation held by an investor

Question 36

Point of owning shares

Answer 36

Owning shares gives the shareholder control of the corporation and, under certain circumstances, a right to the assets of the corporation upon dissolution.

Question 37

Par-Value versus No-Par-Value Shares

Answer 37

Par-Value versus No-Par-Value Shares

Question 38

Par-value shares

Answer 38

a share with a stated value at issuance (most shares are now no par value) Such practice involves each share being given a specific value, such as $1, at the time of issuance This method is declining

Question 39

No-par-value share

Answer 39

allowing the marketplace to determine the value. The articles of incorporation jurisdictions (except British Columbia) have abolished par-value shares.

Question 40

Common shares

Answer 40

shares to which no preferential rights or privileges are attached

Question 41

If there are no preferred shares

Answer 41

the common shares must include the rights to vote at shareholders’ meetings, to receive dividends declared by the corporation, and to receive the property of the corporation on its dissolution

Question 42

Preferred shares

Answer 42

shares giving the shareholder preference over other classes of shares; that preference often pertains to the payment of dividends

Question 43

Preferred shareholders

Answer 43

holders of preferred shares who may have a right to vote arising if dividends are not paid

Question 44

Common shareholders

Answer 44

holders of common shares who do not have any preferential rights or privileges

Question 45

Special shares are used for other purposes, such as estate planning, when two classes of shares can be created:

Answer 45

1) one with a right to vote and with some control in the affairs of the corporation but no right to dividends or to receive money upon dissolution, 2) and the other with a right to dividends but no right to vote

Question 46

Borrowing

Answer 46

The corporation can also borrow funds, thus accumulating debt. This can be done by borrowing large sums from a single creditor, such as a bank, which usually requires a mortgage on the property of the corporation It can also be accomplished through the issuing of bonds or debentures, either secured or unsecured, to many different creditors

Question 47

Bond

Answer 47

a share interest in the indebtedness of a corporation; often used synonymously with “debenture,” though a bond is normally secured against specific assets, while a debenture is likely not

Question 48

Debenture

Answer 48

an acknowledgment of debts by a corporation normally involving more than one creditor; often used interchangeably with “bond,” but whereas a bond is typically secured against a specific asset, a debenture may be unsecured or secured by a floating charge against inventory

Question 49

Restrictions to bond holders

Answer 49

a bondholder | has no right to vote and cannot affect management decisions

Question 50

Closely Held and Broadly Held | Corporations

Answer 50

Closely Held and Broadly Held | Corporations

Question 51

Closely held corporation

Answer 51

corporations in which there are relatively few shareholders; referred to as non-distributing corporations in some jurisdictions There are restrictions on the sale of shares, which cannot be sold to the general public openly or on the stock market. AKA a private company

Question 52

Broadly held corporations

Answer 52

corporations that are publicly traded on the stock market; referred to as distributing corporations in some jurisdictions AKA a public company

Question 53

Corporate Directors, Officers, and Shareholders LO 11.5 Examine the roles of corporate directors, officers, and shareholders

Answer 53

Corporate Directors, Officers, and Shareholders LO 11.5 Examine the roles of corporate directors, officers, and shareholders

Question 54

Directors (Managers) Within the Corporation

Answer 54

The shareholders normally exercise control over a corporation through the election of directors at the annual meeting. Once the directors are elected, the shareholders have little real say in the operation of the corporation until the next election, but the expectation is that if they want to be re-elected, the directors will follow the wishes of the shareholders.

Question 55

The federal legislation, | for example, now requires directors to exercise

Answer 55

the care, diligence, and skill of a “reasonably prudent person” when exercising their powers and discharging their duties

Question 56

Directors info

Answer 56

Directors also owe a fiduciary duty to the corporation Directors are not permitted to take personal advantage of opportunities that arise because of their positions as directors, nor can they start a business in competition with the corporation When a director is personally involved in some transaction that the corporation may become involved in, the director must disclose that interest by making a declaration to the board of directors, avoid any involvement in the discussion of the matter, and abstain from voting on it

Question 57

Derivative action

Answer 57

a lawsuit in which certain shareholders are given the right to launch a civil action against the directors on behalf of an injured corporation ; also called a representative action

Question 58

Representative action

Answer 58

a lawsuit where certain shareholders are given the right to launch a civil action against the directors on behalf of an injured corporation; also called a derivative action

Question 59

Insider knowledge

Answer 59

information that affects share pricing that is not publicly known; directors, officers, and large shareholders, among others, cannot profit by improperly using confidential knowledge about the corporation

Question 60

External Obligations

Answer 60

External Obligations

Question 61

Various federal and provincial statutes impose personal liability on the director primarily in three areas.

Answer 61

1) Directors can be held personally liable when a corporation fails while owing workers unpaid wages 2) A second area of personal liability for directors involves unpaid taxes. 3) The third area involves environmental regulation

Question 62

Due diligence

Answer 62

doing everything reasonable to avoid a problem leading to legal liability

Question 63

senior officer definition

Answer 63

includes a director, the chief | executive officer, and the chief financial officer

Question 64

Promoter

Answer 64

a person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering

Question 65

Securities commission

Answer 65

a provincial agency that serves as a watchdog for the stock market

Question 66

Prospectus

Answer 66

a public document disclosing relevant information about a corporation to disclose all pertinent information of interest to investors about the corporation and its business operations

Question 67

Shareholders

Answer 67

One of the main attractions of incorporation is that shareholders have few obligations to the corporation, or to other shareholders, other than to not use insider knowledge for their own purposes

Question 68

Rights

Answer 68

Shareholders do have significant rights and remedies. Certain records must be kept at a designated corporate office and made available to the shareholders These records include the following: -the documents of incorporation -lists of all the shareholders -lists of transactions or changes in relationship to the shares -lists of officers, directors, and debenture holders minutes of shareholders’ meetings.

Question 69

Auditor

Answer 69

a party responsible for ensuring that an organization’s financial statements have been properly prepared The auditor’s duty is to the shareholders, not to the directors, and the auditors have access to the corporation’s books to ensure the accuracy of their conclusions

Question 70

Annual general meeting

Answer 70

a meeting where shareholders elect directors and vote on other important resolutions Advance notice of this meeting, including the appropriate financial statements, must be given to the shareholders

Question 71

Proxy

Answer 71

when shareholders designate another person to vote on their behalf at an annual general meeting

Question 72

The bylaws or articles set out how many votes each shareholder is entitled to, but this may vary with the type of shares held

Answer 72

Holders of common shares are usually entitled to one vote per share. Preferred shareholders usually cannot vote unless a promised dividend has not been paid

Question 73

Pre-emptive rights

Answer 73

the right of a shareholder to buy new shares in the same proportion as her current ownership of shares

Question 74

Shareholder Protections

Answer 74

To protect minority shareholders from abuse, the statutes have provided several safeguards

Question 75

Oppression action

Answer 75

an action against the directors who have allegedly offended the rights of creditors or minority shareholders

Question 76

Dissent and appraisal

Answer 76

the right of minority shareholders who are adversely affected by major changes to indicate their opposition and force the corporation to buy back their shares at a fair price

Question 77

Dividend

Answer 77

a payment to shareholders out of corporate profits

Question 78

Shareholder Agreement

Answer 78

an agreement among the shareholders of a corporation that sets out the terms of their relationship Most shareholder agreements ensure that each of the shareholders will be elected to the board of directors every year. They also ensure that major changes will not take place without the unanimous agreement of the shareholders

Question 79

A unanimous shareholder agreement (USA)

Answer 79

is usually given special status under legislation governing corporations. The Canada Business Corporations Act, for example, allows the powers of the directors to manage the business and affairs of the corporation to be restricted by a unanimous shareholder agreement

Question 80

Termination of the Corporation LO 11.6 Distinguish the ways that a corporation can be terminated

Answer 80

Termination of the Corporation LO 11.6 Distinguish the ways that a corporation can be terminated

Question 81

Corporations can be dissolved in several ways

Answer 81

-Dissolution can take place either voluntarily or involuntarily, and the procedure can be induced internally, by the directors or shareholders, or externally, by the courts or creditors -The process can be voluntary, by following the winding-up procedure found in the corporate law statutes or, in some jurisdictions, in a separate winding-up act - If the corporation owns sufficient assets, it may be worthwhile to follow this process, but often it is not worth the expense.

Question 82

Occasionally, a court will order a corporation to be dissolved when

Answer 82

a minority shareholder has been unfairly treated. If there are more debts owing to the creditors than the corporation has assets to cover, the common procedure is bankruptcy, and the end result is usually the dissolution of the corporation.

Question 83

One of the most common ways for corporations, especially small, closely held corporations, to come to an end is for

Answer 83

the principals simply to | neglect to file the annual return.

Question 84

Characteristics of incorporation

Answer 84

- Separate legal entity - Owners hold shares, which may be bought or sold, so he owner can change - In Canada, you can incorporate provincially or federally - If you carry on business in another province, you can register in just that province

Question 85

Separate legal entity

Answer 85

-Legal fiction / corporate myth -'lifting the corporate veil' where they go after the directors and officers -Allows for the acquisition of capital without involving shareholders -Shareholder have limited liability -

Question 86

Pros of incorporation

Answer 86

- limited liability - tax benefits - succession and transferability - Shareholders are free from obligations and duties

Question 87

Cons of incorporation

Answer 87

- Limited liability can be weakened by personal guarantees - Statutory and other restrictions - Expensive

Question 88

Three methods of incorporation

Answer 88

1) Registration 2) Letters patent 3) Articles of incorporation - Only focus on this one as it is in BC - Based on filing of articles of incorporation and the granting of certificate of incorporation

Question 89

Ways to fund a corporation

Answer 89

Debt or Equity

Question 90

Difference between a corporation and a company (exam question)

Answer 90

There is no difference, they are synonyms

Question 91

Equity

Answer 91

Ability of the corporation to acquire capital

Question 92

Three different clases of shares

Answer 92

Common - gives rights to vote Special: may have special rights and restrictions Preferred: usually give shareholders dividends

Question 93

Debt

Answer 93

Bonds : not participants in corporation Debentures: likely to be unsecured Loans Advantage of debt, no control over management

Question 94

Public compnay

Answer 94

Broadly held Restrictions on sales, securities legislation applies

Question 95

Public company

Answer 95

Closely held

Question 96

Directors

Answer 96

- Shareholders exercise control of the corporation by electing directors at an annual meeting - Fiduciary duty to corporation and not shareholders - Directors can face personal liability in some cases (ie., unpaid wages, unpaid taxes) - Can escape liability if they show they acted in due diligence - Indemnities and insurance can mitigate some of the risk

Question 97

Officers and Senior Executives

Answer 97

- Directors usually appoint a president or CEO who is given responsibility for managing the company. - Owes the same types of duties and care but may be held to higher standards

Question 98

Promoters and Securities Law

Answer 98

"promotor" is someone who participates in the initial setting up of the corporation or who assist the corporation in making a public share offering

Question 99

Shareholders

Answer 99

- Few obligations - No duty to act in the best interests of the corporation - Cannot use insider information for own benefit Shareholder rights - Inspect records - Receive copies of annual financial statements and auditors report - May attend annual general meeting and use proxy - Have no right to force a dividend payment but can vote out directors

Question 100

Termination of corporation

Answer 100

- Voluntarily - Involuntarily - Initiated internally by directors of shareholder or externally by courts or creditors - Not file annual returns

Question 101

Sales of a corporation

Answer 101

Share sale | Asset sale

Question 102

Share sales

Answer 102

Preferred by sellers to keep the corporation intact

Question 103

The right to a derivative or representative action exists in British Columbia, Nova Scotia, and those jurisdictions that use the

Answer 103

articles-of-incorporation method of incorporation