The Process of Incorporation

The Process of Incorporation Differences between BC and Federal legislation • BC o No residency requirement § Federally – 25% of directors must be residents of Canada (not necessarily citizens) o Directors have a lot less liability – eg. if a company does not pay wages, director can be liable for 2 months of pay, federally can be up to 6 months o More difficult for shareholders to remove a director – must do a shareholder’s resolution (vote), need 2/3 (default) to throw them out (can be up’d to 3/4s in the articles) § Federally, must only be simple majority (50%+1) o Legislation does not dictate how many years a term can be for directors – is determined by the articles § Federally, directors cannot exceed 3 years (can only make shorter); but can stand for reelection o Easier for the company to pay dividends § Federally there are more stringent requirements for solvency (extra steps) o Can waive AGM if all shareholders agree (mainly for family businesses) § Federally, can delay meeting but must have it o Company can own its own shares – eg. small company, only a few shareholders and one wants to exit, if cannot sell them or do not want to bring anyone else in, the company can purchase them (not available federally) • Federal o Better protection for your corporate name – highest name protection outside trademarking § Take priority, even if provincial name already registered o Have right to carry on business in all provinces o More investors are familiar with CBCA o Better protection for minority shareholders Carrying on a business • It is an offence for a foreign company to carry on business in BC without registering o But, offenders are rarely prosecuted, will generally be fined by BC government • ON definition – deemed to carry on its business in ON if, inter alia, it has a ‘resident agent, representative, warehouse, office or place where it carries on its business in Ontario’ • BC definition – s 375 BCA – very broad definition compared to ON – not limited to statute (‘it otherwise carries on business’) o Also note ss 374-379 (foreign/extra-provincial registration section) o Exceptions – banks, railways, only because it has interest as limited partner in LP in BC, etc. • If BC company wants to carry on business elsewhere (continuance) – need to (i) obtain consent from shareholders (special resolution), (ii) apply to registrar, and then (iii) meet requirements of foreign jurisdiction o SK, BC and AB can register all at the same time (reciprocal agreement) o Continuance = move into extra-provincial jurisdiction and carry on business o If moving into foreign jurisdiction – get external council from that jurisdiction o If a foreign company wants to continue in BC – fill out continuation application (s 302-311) • Unlicensed extra-provincial companies are usually incapable of bringing actions on contracts they have signed • Amalgamations permitted: s 269; Amalgamations into foreign jurisdictions: s 284(1) Company is deemed to be ‘Public’ if: (1) If company has any of its shares listed on stock exchange (2) If company has filed a disclosure statement/prospectus with securities commission Note: If it is the result of an amalgamation/private arrangement, if it puts you in first two categories, you are public One-person corporations – 1963 BC case claimed ‘meeting’ requires more than 1 person, rejected by legislation (s 172, 140) – meeting can be held by only one person C3 – bridge gap between corporation and non-profit society (Societies Act) – under societies act, cannot pay dividends, so not a lot of personal benefit to invest unless its just a donation • • Corporations are opposite, can pay dividends C3 can still generate profit, and some profit can be paid to shareholders (even though most gets reinvested into business) – cap on dividend is 40% of profits • Types of business you can have is quite broad – just need community purpose • Easier to register C3 under Act than registering charity under Income Tax Act • Signals to community that business has legal obligation to have special social purpose; higher degree of accountability, need to have 3 directors, extra annual disclosure requirements Note sections BCA: 55.91-94, 51.97 Corporate Names • To prevent members of public from being misled about what entity they are dealing with (tackles confusion) • Identical or very similar names to one that already exists will be rejected by registrar • Most corporate names have 3 distinct parts: (i) distinctive part (ii) descriptive part (iii) corporate element/cautionary suffix (inc. ltd. corp. corporation, or full words, or French equivalent) o 2 surnames is okay, or your own first/last name + suffix, can be numbered company o eg. Pinnacle Consulting vs Pinnacle Landscaping is okay, as long as not in same industry (confusing) • Trademarks will take priority over any name registration Note sections: BCA 21-29, 263 Process of Incorporation • Can reserve a name for a period of time after it is approved (56 days) while other requirements are met (s 22(2)) • (1) Incorporation agreement – prepared by lawyer, statement of intention to incorporate under specific statute and buy certain shares, lists authorized share capital, signed by incorporator o Incorporation agreement + notice of articles = memorandum o all 3 documents = corporate constitution • (2) Create articles – internal rules of the company – signed by incorporator (not on public registrar) o Can use standard form provided in regulations, or can customize with lawyer • (3) File online ‘incorporation application’ o list records office – can be regular office or law firm o list directors names and addresses, officers if applicable o describe authorized share capital – max, amount, class, if there are any rights/restrictions [yes/no]; whether shares have par value or not – fixed sale price for tax advantage in BC (not fed) o share rights or restrictions available – whether they are voting shares or not (not on all decisions, but at AGM), whether they can receive profit sharing/dividends, priority for profit sharing (preferred), and priority on dissolution, redemption/retraction – whether company can buy back (prov but not federal)/whether investor can leave when they want o dividends can be mandatory/fixed, or whether it is a management decision o do not need: to state the business’ purpose (different from C3) § articles can have restrictions on purposes that must be overruled by shareholder agreement § Also do not include notice of articles or shareholder names • Solicitors must create minute book – contains cert of incorp, corporate constitution, resolutions, CSR, etc. • If the required forms are handed in properly, registrar must accept them and issue certificate companies are allowed to change articles • needs a shareholder’s resolution with a simple majority, unless established otherwise • changing or creating class of shares is changing the corporate constitution, need consent from shareholders (simple majority generally) • altering the rights of preferred / unique shares can require the consent of shareholders holding those shares/rights • common for legislation to hold that voters who disagree with alterations have right to be bought out at a valuation (appraisal remedy) • majority cannot exercise its powers in fraud of, or to oppress, a minority that operates as a limitation on the power to alter the constitution Plan of arrangement • • • Where a company wants to do something (amalgamate, transfer assets for shares, exchange shares, etc.) but the legislation does not have procedure So disclose to shareholders what you want to do, get special resolution (more than simple majority) then apply to courts - will you permit us and supervise us? o Eg. public companies going private – court will look at unique facts, but if there is precedent procedure, they may follow it even though it hasn’t made it into the act yet o Allows corporation to do multi-step transaction all in ‘one go’ Pre-incorporation contracts • The law does not recognize the existence of a corporation before the certificate of incorporation has been issued, or other conditions are met o Laypeople often negotiate contracts before incorporation which presents issues of personal liability S 20 – BCA (modified common law) Definitions: • Facilitator (or promoter) – purports to enter into contract on behalf of company not yet incorporated • New company – does not exist yet • Other parties – makes contract with promoter Provisions: (3) if after pre-incorporation contract, company is incorporated, company may, within reasonable time, adopt the preincorporation contract by any act or conduct signifying its intention to be bound by it (4) on adoption, (a) the new company is bound as if it was incorporated at time contract was made (b) facilitator ceases to be liable in respect to the contract (2) if a facilitator purports to enter into pre-incorporation contract, they are deemed to warrant to other parties that the company will (warrant – representation to induce entering into contract; if breached, facilitator is liable for damages) (i) come into existence within a reasonable time (ii) adopt the contract within a reasonable time after the company comes into existence (5) if new company does not adopt pre-incorporation contract within reasonable time after incorporation, facilitator or any party can apply to court to restore any benefit received by the new company (company must have received benefit) (8) facilitator is not liable under (2) if the parties to pre-incorporation contract have, in writing, expressly agreed (can contract out of the statute) Previous Common Law (Baron not overly concerned with these cases) Kelner v Baxter [1866] Facts: P was a wine merchant (had his own company); In Aug 1865, proposed that a hotel company be formed in the town; P and others were to be directors, and P was to be manager • The company was to buy land from P for 5K, 3K cash and 2K in shares – this agreement was completed, with Baxter being the nominal purchaser on behalf of company • In 1866, a memorandum of association was executed by P and Ds and others • Pending the completion of sale, P carried on his wine business and purchased additional wine for sale • P then sold the wine to the proposed company for 900, which was later ratified by formed company • Company then collapsed and P brought action for unpaid 900 A: If the company had existed, D’s would have signed the agreements as agents of the hotel • However, as no company existed, the agreement would be inoperative unless it was personally binding on Ds – they profess to be agents but there was no principal at the time of the contract o A stranger by subsequent ratification cannot change this • When a company comes into existence, it creates rights and obligations, but nothing retroactive • Contract was not worded to include a contingency on the formation of the company • In the case at hand, ‘on behalf of the hotel’ is no different than someone buying corn ‘on behalf of my horses’ C: defendants are personally liable Black v Smallwood [1966] F: Blacks purported to enter into a contract to sell land to Western, but the company was not incorporated at time • However, both parties believed it was at the time, and that Smallwood was director of the company A: Rule from Kelner would say that the agent would be personally liable when the principal does not exist • But, that was in a circumstance where based on the contract, and the imputed intentions of the parties, knowing there was no company in existence, that the defendants should be bound personally o Here defendants thought the company existed, so they cannot have intended to incur personal liability • The reason for creating the company may have been to avoid personal liability • In Kelner, the defendants were not substituted as principals, they were principals • It would be wrong to enforce contract when there was no intention here to be personally bound, based on construction in light of what the parties took to be the facts C: Contract is a nullity, as the proposed purchaser did not exist when it was made Wickberg v Shatsky & Shatsky [1969] F: In 1965, S purchased an interest and became directors of Rapid Addressing Systems Ltd, which was carrying on business in Vancouver selling/servicing business machines and supplies • S decided to carry on business under the name Rapid Date (Western) Ltd even though no company was ever incorporated under that name • S hired W to be manager of the corporation, and executed a contract under the fake letterhead, signed by S as president to hire W for 15K/year “to be reviewed 6 months from this date” • S then told W that they should drop ‘ltd’ from name and continue as Rapid Data (Western) • Business was unsuccessful and in 1966, W, after refusing to work on straight commission, was given notice of termination • W now brings claim that S is liable as a party to contract as it was signed by him for non-existent principal A: Rule from Kelner does not apply because it is clear that the defendant did not intend to be personally bound, as was found in Smallwood • However, as S knew the company was not incorporated, they may be liable for breach of warranty or fraud o S represented that it was a company, but there is no causal connection between its non-existence and the plaintiff’s loss • W should have also known that as it dropped ‘Ltd’ it was a firm rather than a corporation • Loss resulted from failed business, not from breach of warranty C: P is only entitled to nominal damages for breach of warranty