Share structures and shareholders

In class notes
Corporations:
● Modern corporate form derived from two sources
○ Private corporation
○ Public corporation
● Corporate finance: debt (held by creditors) and equity (from shareholders) two ways
of financing the corporation
● Capital Requirements (old-school view)
○ Capital contributed via shares was thought to represent value that should be
available to creditor-equivalent to debt
○ Capital should stay in the corporation, and only dividends from profits paid to
share investors
○ Corporation could not buy back or redeem its own shares, guarantee debts or
make loans to shareholders
● Capital requirements (modern day)
○ Redemption, repurchase (buy-back) of shares by corporation now permitted
○ Corporation m ay now redeem or repurchase its shares as long as it passes
SOLVENCY TEST:
■ Corporation must be able to pay its debts in ordinary course
■ Corporation’s assets must exceed its liabilities
○ After paying dividends
■ Corporation must be able to pay its debts in the ordinary course
■ Assets of the corporation must exceed sum of liabilities and the stated
capital of the corporation’s shares
● Directors:
○ In private corporation:
■ Run the business and are usually shareholders as well
○ Public corporation:
■ Run the business for many passive shareholder investors
■ Daily management delegated from directors to professional managers
responsibilities to the board
○ Responsible for:
■ Business - commercial relations of the corporation as a legal person
with other legal persons
■ Affairs - the relations between the corporation and its shareholders
○ Today, business and affairs have been split:
■ Directors continue to be responsible for the affairs of corporation
■ Business are run by professional managers (delegated by directors)
○ Powers of directors:
■ First directors in articles of incorporation
■ Manage the business and affairs
■ Issue shares
■ Declare dividends
 ■ Adopt by-laws
■ Call shareholder meetings
○ Election of directors:
■ Shareholders elect directors via annual meeting
■ Vacancies filled by board unti next shareholder meeting
■ Canadian requirement
○ Duties of directors to the corporation:
■ Fiduciary duty - act in good faith and best interests of corporation
■ Duty of Care - duty of care in their daily operational decisions to
exercise the “care, diligence, and skill a reasonable person would
exercise
○ Duties and Obligations:
■ Specific statutory duties to deliver financial statements and call annual
meeting
■ Submit by-laws for approval
■ Submit other business to shareholders
■ Duties of director to public, those who deal with corporation
○ Duty and Standard of Care
■ Ordinary (non-fiduciary) directors’ duty of care in daily decision making
■ Standards are:
● No special requirements that directors act “professionally”
● Reasonable decisions not perfect
● Must show diligence, investigate and oversee affairs in light of
recent corporate scandals
○ More fiduciary duty
■ Must not have a conflict of interest with corporation
■ Director must disclose conflict to corporation, and refrain from voting
to approve contract
■ Corporate opportunities must be reserved for corporation, directors act
as agents for the corporation
■ Corporate info can’t be acted on or used by director
■ Can’t be in competition with the corporation
○ Penalties for breaching fiduciary duties
■ Damages in the amount of loss
■ Unwinding of contracts
■ Delivery to corporation of any assets held by directors in trust for
corporation
○ Case Example - “Firm A deals in fine art, jay is an art collector and a board
member of Marsh. He came across a sketch that was previously offered to
firm A a year ago and they declined to purchase it. Jay purchased the sketch
and reseold it to another collector at a profit of 100k. Does Firm A have an
action against Jay?”
■ Ans: No, Jay can’t be held against his actions. The company had
previously declined to purchase it. Since Jay is an art collector, and
the painting is not wanted by the firm (with their best interest), Hence,
there was no missed business opportunity.
 ○ Case Example 2 - “Firm A mined a earth deposit along mT. mOON,
Following laws and regulations. mINING CUASE A MASS MIGRATION OF
NATAIVE SPECIES around mt moon to flee. Residents are outraged at the
impact of mining activities and want to sue Giovanni for Damages”.
■ Ans: Giovanni can’t be sued by the locals as he is just acting as an
agent for Silph Co. The company may be sued though
○ Case Example 3 - “A bike company is declaring bankruptcy due to new
skateboard initiative by the company’s board. The initiative was outside hart’z
core business and ate up most of its operating budget. Board members relied
on an expert report from TDG (consulting firm) that projected large profits
from the skateboard initiative. Is there a claim against the Board for approving
the skateboard initiative?
■ nOTE: After liquidation, there is not enough money to pay employees
for the last 3 weeks of work. Employees want to sue the board for their
missing wages. Do they have a claim?
■ Ans: No claim as it was a business decision and best interest of the
company. However since
● Shareholders:
○ Key rights: Right to vote, receive dividends, or receive property on dissolution
○ One class or a combination of classes of shares must have all 3 right
○ Voting rights:
■ Special cases require ⅔ of the votes, usually 51%
● Fundamental cases i.e. sale of all property
■ Public corporations - few shareholders attend meetings and vote
■ Proxy - a person appointed to vote for a shareholder who is not
attending.
○ Financial rights:
■ Rights to receive dividends
● Dividends paid only from profits, retained earnings from profits
in previous years
● Paid at discretion of directors
● Once declared, must be paid equally to all shareholders of the
same class of shares
● Must be paid according to preferences in articles
■ Right to receive surplus on dissolution
● Must be paid to some class of shareholders
● Must be paid according to priorities in the articles
○ Information Rights:
■ Right to receive financial statements at annual general meeting
■ Right to appoint an auditor, responsible to them, to report on financial
statements
■ Apply to court to appoint an inspector, but must show serious
mismanagement
■ Can inspect them minutes of shareholder meetings, articles, and
registers
○ Duties and rights of the minority
 ■ Shareholders have no duties to one another or to the corporation
○ Shareholder remedies * IMPORTANT
■ Appraisal remedy
● If fundamental changes are proposed, shareholders may apply
to have shares appraised and purchased and purchased by
corporation at fair value
● Strategic move: causes delay, may deter the corporation
■ Derivative Action
● Action brought on behalf/in name of the corporation where
corporation being harmed or may potentially be harmed
● Shareholder may apply to court to bring action in name of
corporation if directors refuse to take action
● Remedy goes to the corporation unless exceptional
circumstances
■ Oppression Remedy
● Significant and growing remedy for shareholders
● Shareholders may apply for a personal remedy from the acts
of corporation via directors
● Must show the acts were:
○ Oppressive of shareholder’s interest
○ Unfairly prejudicial of that interest
○ Unfair in disregarding the shareholder’s interest
■ Winding up
● Most drastic form of shareholder relief
● Shareholder may apply to court to have corporation wound up
● Only wound up if, w/o insolvency factors
● No wrongdoing is required
● Indoor management Rule
○ If someone claims to be a representative of the firm and it is reasonable to
assume that person is authorized to act as the agent of the firm
○ Person will bind the firm in contracts with other parties --even if the person is
not authorized
○ Preserves rights of outside parties to deal with firm in good faith
● Pre-incorporation Contracts
○ Problems with contracts entered into by promoter for a firm will be formed in
future
○ To become a contract of the firm, new firm must adopt the contract via
resolution of directors
○ Firm is then bound and not the person. Person signing is personally bound

● Corporations - Duty of care VS Standard ********

○ Duty of Care - responsibility or legal obligation of a person or organization to
avoid acts or omissions that could likely cause harm to others
○ Standard of Care - Def - Standard of care speaks to what is expected in the
circumstances
■ Usually a reasonable person in similar circumstances
 ■ Can be enhanced - experts, fiduciaries
■ Standard of care is only relevant when a duty of care has been
established
○ Why is this relevant?
■ If a director/corporation owes a duty of care and falls below the
applicable standard of care, there is potential action against that
director/corporation