The Basics of Corporate Law in Canada
It appears that many are curious about the practice of “corporate law”. What do corporate lawyers do anyway? Is there a difference between the terms “business”, “corporation”, and “company”? Why do businesses incorporate? These are just some of the questions that frequently come up when dealing with corporate law.
The best way to capture the parameters and scope of corporate law is to take a peek into a typical day in the life of a corporate lawyer.
The days of a corporate lawyer are filled with transactions related to corporate law’s several major areas of practice: mergers and acquisitions, real estate, corporate finance, and insolvency and banking. A typical day includes incorporating companies; acting on mergers and acquisitions; restructuring of corporate entities; drafting documents for shareholder agreements; conducting due diligence by researching past company filings and disclosure documents; and drafting documents, such as director’s resolutions, material change reports, articles of association, or securities memorandums.
While seemingly a more “dry” area of law, it can be highly stimulating and challenging: No two corporate transactions are the same. Each deal varies based on the type of industry, the size of the company, or whether it is a single or multi-market business. A client can be an investment bank, a privately held company, a small or medium sized business, a government or regulatory agency, or a multi-national corporation.
While a look into a corporate lawyer’s typical day offers a glimpse into the diverse and exciting area of corporate law, to truly gain an appreciation of this area of legal practice, it is instructive to define fundamental terms and concepts, such as “corporate”, “business”, and “company”, as well as discuss the benefits and features of incorporation.
What is a Corporation?
A corporation is a legal entity that is separate and distinct from its owners. The technical definition of a corporation is “an artificial creation of the law existing as a voluntary chartered association of individuals that has most of the rights and duties of natural persons but with perpetual existence and limited liability.” In other words, a corporation exists as a separate legal structure, almost as if it were a person under the law. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
While the terms “corporate law” and its colloquial counterpart “business law” are used interchangeably, the terms are slightly different. Business law refers to the wider concept of commercial law; that is, the law relating to commercial or business-related activities. However, using the term “business law” as a substitute for “corporate law” simply means that we are dealing with a business corporation or enterprise that requires capital raising, company formation, registration, etc.
A corporation may accurately be called a company; however, a company cannot necessarily be called a corporation, which has distinct characteristics. A company, which is also known as a “firm” or “business” is not necessarily a separate legal entity, the most significant defining characteristic of a corporation. This attribute also confers its owners and shareholders with its most distinctive benefit: limited liability. Limited Liability is just one of the attributes of incorporation. The others are separate legal entity, perpetual existence, and free transferability. Let’s look more closely at each of these essential aspects of incorporation.
Benefits of Incorporation
The corporate structure is most often chosen for large business operations that carry on a business for profit. Among the most significant reasons for choosing to incorporate is the benefits of limited liability.
What is limited liability? In the event a corporation becomes insolvent, the investors (i.e. shareholders), are not liable for the debts or other obligations incurred by the corporation. Yes, the shareholders will lose their investment, but they will not be responsible for its debt.
Separate Legal Entity
A corporation is recognized under corporate law in Canada as a separate legal entity. It operates separately and distinctly from its shareholders, directors, and officers. As indicated earlier, a corporation (like a person) can own property, enter into a contract, sue and be sued, and be convicted of a criminal offense (corporations pay fines in lieu of imprisonment). A corporation exists as its own entity, regardless of what happens to the individuals involved in the business.
Perpetual existence refers to a corporation’s continued existence until it is liquidated, dissolved, or acquired by another entity. When a business is incorporated, the shareholders can choose to give it an end date when the mission of the corporation has been fulfilled. More commonly, a corporation acts in perpetual existence; that is, it will continue to exist, until the organizers decide to end it. Even if the executive team and employees were to quit, the business corporation as an entity would continue to exist, and new employees could take their place. By the same token, when ownership in a corporation is transferred by sale of stock, this does not affect the existence of the corporate entity.
Perpetual existence offers stability and security to would-be investors. Because a corporation continues to exist even when employees leave, there is a greater chance that investors will see a profitable return on their investment.
Directors are more likely to create a long term plan for growth because of a corporation’s perpetual existence, thereby satisfying shareholders desire to have long term gain. Customers, likewise, benefit from a corporation’s perpetual existence because there is a greater likelihood that the corporation will innovate with new products and respond to customer feedback in a desire to build and grow into the future.
Free transferability refers to the shareholders’ ability to sell shares without the consent of the directors, officers, or other shareholders, unless otherwise restricted in the corporate constitution. This provides an ideal vehicle for investment in that it greatly enhances the liquidity of the shareholder’s investment. That being said, shareholders of privately held corporations often will want to prevent unrestricted transfer of shares and thus may provide transfer restrictions in the articles of incorporation or enter into shareholders’ agreements, further limiting transferability.
In Canada, private corporations can be incorporated under provincial laws or federally. Each province has enacted its own legislation providing for the incorporation and regulation of corporations. For example, Ontario corporations are governed by the Business Corporations Act (Ontario). Federally incorporated corporations are governed by the Canada Business Corporations Act.
Transferability of Shares in a Private Corporation
Share transfer requirements and restrictions in privately held corporations can be established for several reasons, but the most common is that the shareholders are usually also the directors, officers and employees of the company, and as such, they want to have a say about who they are going to do business with and work with.
Restrictions can apply to all transfers or only to those in specific cases, such as transfers between spouses or other family members. Shares can usually be transferred to both individuals and entities, such as partnerships and corporations.
Common share transfer restrictions include:
- who can buy or sell shares,
- how many shares can be transferred,
- a requirement that the existing shareholders must agree to the transfer, and
- a requirement that a shareholders’ resolution approving the transfer be passed.
Transferability of Shares in a Public Corporation
In a public company, shares are transferred, bought and sold on a stock exchange, such as the Canadian Securities Exchange, Toronto Stock Exchange, Montreal Exchange, Alberta Stock Exchange, Vancouver Stock Exchange, and the TSX Venture Exchange. The intention is that the shares of a publicly traded company can be freely traded on a stock exchange hence providing liquidity to its shareholders.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2021
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.