ADM 3360 Lecture Notes - Lecture 8: Initial Public Offering, Sole Proprietorship, Giant Tiger
17 Oct 2016
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Chapter 15
The Corporate Form: Organizational Matters
General Nature of a Corporation; Relationship Among Parties
Separate legal person, with corporate existence separate from share ownership.
Contrast partnerships and sole proprietorships.
Relate to leading case of Salomon v. Salomon (House of Lords, 1897)
Demonstrating that one can be a creditor of one’s own corporation. Corporation
issuing debt for the assets of a sole proprietorship.
The issue relates to whether there has been full disclosure of the arrangement and
whether the corporation is operating without intention to defraud or deceive.
Creditors chose to deal with the company on an unsecured basis.
Consider requiring personal guarantees in relation to corporate bank loans.
Federal and Provincial incorporation
- Legal existence
Prior to incorporation
- Pre-incorporation contracts. John Smith, on behalf of ABC Inc., a corporation to be
formed.
- Corporation adopts the pre-incorporation contracts.
Capital Structure:
- Common shares, preferred shares. Different “classes” of shares, with different rights.
- Must have at least one class of voting shares, though you may have multiple classes of
voting shares, with different voting rights. Hollinger Case: pp. 358-360.
- P. 359. – Dual class structure 30% of equity but 75% or larger percentage of vote, due to
multiple votes associates with a particular class of shares. Still permitted.
- What happens if after you invest, with 1 vote per share, another class is issued at 30
votes per share? Block sale. “Bought deal”
- Consider why companies stay private- e.g. Giant tiger.
Corporate Name- Tangerine Case (pg. 361)
- Virtual banking subsidiary of Scotiabank
- Trademark dispute that is based on bad faith/ name hijacking
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Crowdfunding vs. Securities Regulation
Securities Market and Secondary Market Liability
- Use of class actions in relation to secondary market liability
- Primary market: initial public offering
- Need leave of the court to commence class action- leave is not readily given
Question 2, Chapter 15
- Does the rule in the Saloman case apply? Discuss rule- separation of corporation and
shareholder. This is why, in many corporate transactions, personal guarantees are
required. Could have been obtained in present case.
- Exceptions to salmon rule- “liftin of the corporate veil”- in circumstances where the
corporation was established based on fraud or intent to deceive. If the corporation
never had significant funds, but entered into significant financial transactions…?
A corporation has the capacity and all the rights, powers and privileges of a natural
person, as referenced to whether it is incorporated federally or provincially.
Provincial incorporation: legal existence is provincially- based. If corporation wants to
expand into other provinces, it must apply to be continued in those provinces.
Federal incorporation: legal existence throughout Canada, though the corporation is
subject to any provincial rules of general application.
Incorporation is now as a matter of right (rather than a matter of a privilege accorded by
the Crown), by way of Articles of Incorporation. Authorities generally cannot to refuse
to incorporate a company, even if there are reservations concerning the criminality or
general integrity of the incorporators.
Incorporation using a name or a number. Frequently, one will incorporate using a
number (e.g. 123456 Canada Inc.) and then register a trade name. Plus, ideally obtain
trademark protection, through which the trade name is protected.
Legal separation of the status of owner and the status of manager, though a
shareholder can also function as a manager. One ends up with two legally distinct roles,
however. One individual can be a shareholder, creditor, director and senior officer
(such as the president) of the same corporation. Shareholder, as the owner of the
corporation, can choose an active or a passive role, in terms of deciding whether to
become involved with the Board of Directors or as a member of management.
Limited liability of shareholders: only liable to the extent of their share investment.
Transferability of ownership in corporation-- though generally there is a restriction on
ownership with respect to private corporations. Contrast private corporation and public
corporation. Private corporation generally limited to 50 shareholders. Plus, no
obligations to publicly disclose. Consider Giant Tiger as a private company: what
financial information is available on the Giant Tiger website? www.gianttiger.ca
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Document Summary
General nature of a corporation; relationship among parties. Separate legal person, with corporate existence separate from share ownership. Relate to leading case of salomon v. salomon (house of lords, 1897) Demonstrating that one can be a creditor of one"s own corporation. Corporation issuing debt for the assets of a sole proprietorship. The issue relates to whether there has been full disclosure of the arrangement and whether the corporation is operating without intention to defraud or deceive. Creditors chose to deal with the company on an unsecured basis. Consider requiring personal guarantees in relation to corporate bank loans. John smith, on behalf of abc inc. , a corporation to be formed. Must have at least one class of voting shares, though you may have multiple classes of voting shares, with different voting rights. Dual class structure 30% of equity but 75% or larger percentage of vote, due to multiple votes associates with a particular class of shares.
