COMPANY LAW
CONTENTS
ORGANIZATION OF A BUSINESS
[§1.01] The Unstructured Business 1
[§1.02] Choosing a Business Structure 2
[§1.03] Sole Proprietorship 2
[§1.04] Partnership 2
[§1.05] Limited Partnership 3
[§1.06] The Corporation 3
1. Immortality 3
2. Limited Liability 4
3. Transferability of Shares 4
4. Separate Legal Entity 4
5. Capital 4
6. Tax Advantages 4
7. Rights and Remedies of Shareholders 4
[§1.07] Jurisdiction of Incorporation 4
[§1.08] Choice of Jurisdiction 5
[§1.09] Federal Corporations 5
1. Canada Business Corporations Act (CBCA) 5
2. Canada Corporations Act (CCA) 5
3. Special Acts of Parliament 6
4. Bank Act 6
5. Trust and Loan Companies Act 6
6. Pension Fund Societies Act 6
7. Others 6
[§1.10] Provincial Corporations (British Columbia) 6
1. The Company Act 6
2. Society Act 6
3. Special Acts of the Legislative Assembly 6
4. Financial Institutions Act 6
5. Cooperative Association Act 7
6. Railway Act 7
7. Others 7
[§1.11] Methods of Incorporation 7
1. Letters Patent 7
2. Registration of Memorandum and Articles 7
3. Filing of Articles of Incorporation 8
4. Statute 8
[§1.12] Further Reading 8
(ii)
REPORTING AND NON-REPORTING COMPANIES IN BRITISH COLUMBIA
[§2.01] Reporting Company 9
[§2.02] Non-Reporting Company 9
[§2.03] Consequences of Being a Reporting or Non-Reporting Company 9
[§2.04] Further Considerations 10
INCORPORATION PROCEDURES
[§3.01] Guidelines for Approval of Names 11
1. Reservation of Name 11
2. Form of Name 11
3. Registrar's Discretion as to Names 12
4. Name Approval Procedure 12
5. Extraprovincial Names 13
6. Name Not to Suggest Government Connection 13
7. Name Not to Suggest Connection with Crown or Royal Family 13
8. Name Not to be Objectionable on Public Grounds 13
9. Well-Known or Established Names 13
10. Identical or Similar Names Not Available 13
11. Statutory Prohibitions or Restrictions on the Use of Words
in a Company's Name 14
12. Miscellaneous Restricted or Prohibited Words 14
13. Internet Names 16
[§3.02] Memorandum 16
1. Content Required 16
2. Form of Memorandum 16
3. Subscribers 16
[§3.03] Articles 16
[§3.04] Registration 17
[§3.05] Post-Registration Procedures 17
1. Initial Proceedings of Subscribers 17
2. Initial Proceedings of Continuing Directors 18
3. Initial Proceedings of Members 18
SHARE CAPITAL
[§4.01] Introduction 19
[§4.02] Kinds and Classes of Shares 19
[§4.03] All Shares are Created Equal, or are They? 20
[§4.04] Special Rights 20
[§4.05] Voting Rights 20
[§4.06] Participation as to Income 21
[§4.07] Cumulative and Noncumulative Dividends 21
[§4.08] Participation as to Capital Surplus 21
(iii)
[§4.09] Preemptive Rights 21
[§4.10] Redemption and Retraction 21
[§4.11] Repurchase/Convertibility 22
[§4.12] Variations/Abrogations of Special Rights and Restrictions 22
PRECEDENTS
Precedent A: Voting Rights 23
Precedent B: Income Participation 24
Precedent C: Participation as to Capital Surplus 26
Precedent D: Preemptive Rights 26
Precedent E: Rights of Redemption and Retraction 28
Precedent F: Restrictions Against Modification 29
GOVERNANCE
[§5.01] Introduction 30
[§5.02] Management of the Company 30
1. Control of the Corporation 30
2. Directors 30
(a) Election or Appointment of Directors 30
(b) Number 31
(c) Residency Requirements 31
(d) Qualification of Directors 31
(e) Improper Election or Appointment 31
(f) Term of Office 31
(g) Resignation 31
(h) Removal 31
3. The Powers of Directors 31
4. Officers 32
5. Insiders 32
6. Residual Powers of Shareholders 32
7. Directors’ Meetings 33
[§5.03] Duties and Liabilities of Directors and Officers 34
1. What are the Duties? 34
2. To whom are the Duties Owed? 36
3. Avoiding the Duties 38
4. Prohibited Resolutions 38
[§5.04] Conflict of Interest 39
1. General 39
2. Disclosure and Ratification 39
[§5.05] Protection from Liability 41
1. Due Diligence 41
2. Indemnification 41
3. Insurance 42
4. Resignation 42
5. Trust Funds 42
6. Relief by Court 43
(iv)
[§5.06] The Lawyer as a Director 43
1. Duties 43
2. Conflicts 44
3. Loyalty 44
4. Use of Confidential Information 44
5. Privilege 44
APPENDICES
Appendix 1 – BC Company Law – Role of Corporate Actors 46
FINANCE
[§6.01] Introduction to Methods of Finance 47
1. Shareholder Loan (Debt Finance) 47
2. Share Purchase (Equity Finance) 48
3. Corporate Borrowing 48
4. Procedural Aspects – Overview 49
[§6.02] Issue of Shares 49
1. Initial Proceedings 49
2. Kinds of Shares 49
3. Share Registers and Certificates 49
4. Form of Share Certificates 50
5. Dating of Share Certificates and Other Formalities 50
6. Lost Share Certificate 50
7. Price for Shares 50
8. Non-Cash Consideration for Shares 50
9. Limitation of Liability 50
10. Payment for Shares/The Paper Trail 51
11. Partly Paid Shares 51
12. Commissions and Discounts 51
13. Restrictions on Subsequent Allotments 51
14. Transfer of Shares 51
15. Restrictions on Share Transfers 51
16. Transmission 52
17. Conflicts 52
[§6.03] Borrowing and Granting of Security 52
1. Introduction 52
2. Capacity to Borrow 52
3. What the Lender's Lawyer is Looking For 52
4. Opinions 53
5. Registration of Charges 53
6. Register of Debentures 53
[§6.04] Restricted Transactions/Loan and Financial Assistance 54
1. Introduction 54
2. Reasons for Restrictions 54
3. Authority for Purchase or Redemption of Shares 54
4. Solvency Test 54
5. Requirement to Purchase Pro Rata 54
6. Provision of Financial Assistance and Guarantees 55
(v)
7. Section 102 55
8. Section 103 55
9. Exceptions to the Financial Assistance Restrictions 55
10. The Employee Stock Purchase Exception 56
11. The Acquisition Exception 56
12. Related Company Exception 56
13. Saving Provision 56
14. Planning Tips and Traps for the Unwary 56
ORDINARY PROCEDURES
[§7.01] Transfers of Shares 57
1. General Information 57
2. Transmission of Shares on Death and Bankruptcy 57
[§7.02] Shareholders' Meetings 57
1. Definitions: "Members" and "Resolutions" 57
2. Annual General Meetings: Calling, Notice, Quorum and Waiver 57
3. Voting 58
4. Proxies 58
[§7.03] Financial Statements 59
[§7.04] Annual Report 59
[§7.05] Registrar of Companies 59
1. Records Maintained by the Registrar 59
2. Filings With the Registrar 60
[§7.06] Registered and Records Offices 60
1. Records Office Functions 60
2. Duty of Care 60
3. List of Members and Debentureholders; Forms of Records Generally 60
4. Records to be Kept at Records Office 60
5. Examination of the Records 61
6. Time Coverage of Records 61
7. Other Records and Material 61
[§7.07] Auditors and Audits 61
1. Requirements for Auditor 61
2. Appointment of Auditor 61
SPECIAL PROCEDURES
[§8.01] Alteration of Memorandum and Articles Generally 62
1. Alteration of Memorandum 62
2. Alteration of Articles 62
[§8.02] Alteration of Share Rights 63
1. Creation of Special Rights and Restrictions 63
2. Variation or Abrogation of Special Rights and Restrictions 63
3. Interfering With or Prejudicing Class and Series Rights 64
4. Right to Apply to Court 64
5. Filing With the Registrar 65
6. Series of Shares 65
[§8.03] Increase in Authorized Capital 66
(vi)
[§8.04] Subdivision, Consolidation and Change of Shares 66
1. Subdivision 66
2. Consolidation 66
3. Changes 66
[§8.05] Reduction of Capital and Cancellation of Shares 67
[§8.06] Capital Alterations Generally 67
1. General Information 67
2. Records Office Filings 68
[§8.07] Change of Corporate Name 68
AMALGAMATIONS AND REORGANIZATIONS
[§9.01] Amalgamations 69
1. Meaning 69
2. General Procedure for Amalgamations 69
3. Name 69
4. The Amalgamation Agreement 69
5. Share Exchanges 70
6. Adoption and Approval of the Amalgamation Agreement 71
7. Post-Amalgamation Matters 73
[§9.02] Compulsory Acquisitions 73
[§9.03] Compromises and Arrangements 74
DISSOLUTION AND RESTORATION
[§10.01] Cancelling and Striking from Register 75
1. Involuntary Dissolution 75
2. Dissolution by Request 75
[§10.02] Winding–Up 75
1. Voluntary Winding-Up 75
2. Powers and Duties of Liquidator During Wind-Up;
Status of Company During Wind-Up 76
3. Winding-Up by Court Order 77
[§10.03] Restoration 78
CONTINUATIONS
[§11.01] Continuations Into British Columbia 79
[§11.02] Continuations Out of British Columbia 79
EXTRAPROVINCIAL COMPANIES
[§12.01] Extraprovincial Companies 81
1. Definition 81
2. Registration 81
3. Duties of Extraprovincial Companies 81
4. Failure to Register an Extraprovincial Company 82
(vii)
SHAREHOLDERS – RIGHTS AND REMEDIES
[§13.01] Introduction 83
[§13.02] Court Proceedings 83
1. General Provisions 83
2. Rectification of Irregularities 83
3. Relief from Oppression 83
4. Derivative Actions 84
5. Order for Winding Up 85
[§13.03] Dissent Proceedings 85
1. General Information 85
2. Preliminary Steps 85
3. Application and Price 85
4. The Rights and Duties of the Dissenting Member/Relief 85
SHAREHOLDERS' AGREEMENTS
[§14.01] Introduction 87
1. Allotment: Section 41 87
2. Purchase or Redemption: Section 237 87
3. Approval by Special Resolution 87
[§14.02] Parties 89
[§14.03] Conduct of the Affairs of the Company 89
1. Management of the Company 89
2. Major Decisions 89
3. Employment Contracts 89
4. Non-Competition Agreement 89
[§14.04] Financing/Shareholders' Contributions/Distribution of Net Profit 90
[§14.05] Restrictions on Transfer/Right of First Refusal 91
[§14.06] Compulsory Buy–Out 92
[§14.07] Investment Sale on Death 93
[§14.08] Default 94
[§14.09] Tax Considerations 95
[§14.10] Model Shareholders' Agreement 96
COMPANY ACT FORMS AND PRECEDENTS
Precedent 1 – Instruction Form 112
Precedent 2 – Memorandum 115
Precedent 3 – Articles 116
Precedent 4 – Notice of Offices 137
Precedent 5 – Subscriber's Resolutions 137.1
Precedent 6 – Resignation of Subscriber as Director 137.2
Precedent 7 – Consent to Act as Director 137.3
Precedent 8 – Director's Resolutions 137.4
Precedent 9 – Notice of Directors 137.5
Precedent 10 – Share Subscription 137.5
(viii)
THE CANADA BUSINESS CORPORATIONS ACT
[§15.01] Introduction 138
[§15.02] Capacity and Powers of CBCA Corporations 139
[§15.03] Whether to Use a Company Act Company or a CBCA Corporation 139
1. Advantages of CBCA Corporations 139
2. Usual Commercial Practice 140
3. Advantages of Company Act Companies 140
[§15.04] Words with Special Meanings under the CBCA 140
[§15.05] Incorporation Procedures 141
1. Name Selection and Reservation 141
2. Documents 141
3. Differences Between Articles of Incorporation and a Memorandum 142
4. Organizational Meetings 142
5. Registered Office 143
6. Rights of Examination of Corporate Records 143
[§15.06] Corporate Finance 143
1. No Par Value Shares Only 143
2. Unlimited Number of Shares Permitted 143
3. Shares to be Fully Paid 143
4. Stated Capital 143
5. Directors May Fix Special Rights 143
6. Trafficking in Shares 144
7. Financial Assistance 144
[§15.07] Security Certificates, Registers and Transfers 144
1. Negotiable Instruments 144
2. Registers 144
[§15.08] Directors and Officers 144
1. Restraints on Directors' Powers 144
2. Shareholder Democracy 145
3. Residence 145
4. By-laws 146
5. Delegation of Directors' Powers 146
6. Standard for Directors’ Duties 146
7. Officers 146
[§15.09] Insider Trading, Going-Private Transactions and Squeeze-Out Transactions 147
[§15.10] Shareholders 147
1. Meetings 147
2. Record Dates 147
3. Form of Notice of Meeting 147
4. Right to Vote 148
5. Cumulative Voting 148
[§15.11] Financial Disclosure 148
1. Report of Directors 148
2. Approval of Financial Statements 148
3. Filing of Annual Financial Statements 148
4. Waiver of Auditor 148
5. Independent Auditor 148
(ix)
6. Resignation or Removal of Auditor 149
[§15.12] Fundamental Changes 149
1. Special Resolution 149
2. Meaning of "Fundamental Change" 149
3. Dissent Proceeding 149
4. Procedure 150
5. Amalgamation 150
6. Arrangements 151
[§15.13] Continuances (Import and Export) 151
1. Export 151
2. Import 152
[§15.14] Compulsory and Compelled Acquisitions 152
[§15.15] Liquidation and Dissolution, Investigation, Remedies,
Offences and Penalties 152
1. Summary Dissolution 152
2. Long Form Dissolution 152
3. Investigation 152
4. Remedies, Offences and Penalties 152
[§15.16] General Provisions 152
CBCA PRECEDENTS
Precedent 11 – Articles of Incorporation 153
Precedent 12 – Notice of Registered Office 157
Precedent 13 – Notice of Directors 159
Precedent 14 – By-laws 161
SOCIETY ACT
[§16.01] Purposes and Characteristics 179
[§16.02] Advantage of Incorporation 179
[§16.03] Essential Difference Between a Society and a Company 179
[§16.04] Registrar of Companies 179
[§16.05] Incorporation Procedure 179
1. Constitution and By-laws 179
2. Additional Filings 179
[§16.06] Annual Filings 180
[§16.07] Reporting Societies 180
[§16.08] Borrowing 180
[§16.09] Practice Point 180
(x)
SECURITIES LAW
[§17.01] Introduction 181
[§17.02] Overview of Securities Legislation 181
[§17.03] The Private Issuer Exemption 181
[§17.04] Who is the “Public”? 183
[§17.05] What other Securities Laws are Relevant? 183
[§17.06] What should the Subscription Agreement Say? 184
[§17.07] Other Private Placement Exemptions 185
[§17.08] What are Securities Anyway? 185
[§17.09] Exempt Securities 185
[§17.10] Distribution of Debt Securities 185
[§17.11] What about Bank Debt? 186
[§17.12] Resale of Securities 186
[§17.13] Sale of the Business 186
[§17.14] Securities Act Exemption Orders 187
[§17.15] Information Available to the Public 187
[§17.16] Shareholder Reporting Requirements 187
[§17.17] Representing the Unhappy Investor 188
[§17.18] Breach of the Securities Act 188
THE CORPORATE TAX SYSTEM AND TAX ASPECTS OF INCORPORATION
[§18.01] Canadian–Controlled Private Corporation 189
[§18.02] Taxation of Canadian–Controlled Private Corporations 189
1. Active Business Income 190
2. Capital Gains 191
3. Aggregate Investment Income 191
4. Dividend Income 192
[§18.03] Taxation of Dividends 193
[§18.04] Integration in Practice 193
[§18.05] Tax Advantages of Incorporation 193
1. Deferral Advantage 193
2. Income Splitting 194
3. Estate Freeze 194
4. Qualified Small Business Corporation Shares 194
[§18.06] Disadvantages of Incorporation 195
1. Double Taxation 195
2. Double Taxation where Refundable Tax is not used 195
3. Segregation of Profits and Losses 195
4. Capital Gains Exemption 195
5. Filing Requirements 195
(xi)
6. Shareholder Benefits 195
7. Transferring Assets out of the Corporation 195
8. Absolute Tax Costs 196
APPENDICES
Appendix 3 197
Appendix 4 198
TRANSFERS OF PROPERTY TO CORPORATIONS, CORPORATE
REORGANIZATIONS AND ESTATE PLANNING
[§19.01] Transfers of Property to Corporations 199
1. Situations where Property is Transferred to Corporations 199
2. The General Rule 199
[§19.02] The Rollover Alternative (Section 85) 199
1. Requirements 200
2. Determining the Elected Amount: General Rules and Specific Rules 201
3. Cost of Property Received by the Transferor 203
4. Valuation Concerns 204
5. Paid-Up Capital Adjustments 205
[§19.03] Corporate Reorganizations 205
1. Section 85.1 205
2. Section 86 207
3. Proposed Section 86.1 209
4. Proposals Regarding Sales to Foreign Corporations 210
5. Section 51 210
[§19.04] Estate Planning 211
[§19.05] Attribution Rules 212
1. Conceptual Outline of the Rules 212
2. Loans or Transfers to Spouses or Minors 212
3. Attribution Arising from Transfers to Corporations 214
4. Attribution Arising from Interest Free or Low Interest Loans 216
[§19.06] Income Splitting Tax 216
[§19.07] Dispositions of Property 217
1. Spousal Rollovers 217
2. Rollovers to Minors 218