Banks as Business Corporations

• Author: M.H. Ogilvie
• Profession: Chancellor's Professor and Professor of Law, Carleton University
• Pages: 87-152

87

CHAPTER 4

BANKS AS BUSINESS

COR P OR AT IONS

A. INTRODUCTION

Banks are business corporations, albeit of a specialized nature and

regulated to a far greater extent than any other business corporations

in Canada. Doubt about their legal nature as business corporations is

quelled immediately by perusal of the Bank Act, which is largely devot-

ed to the corporate governance of banks and which is modelled on the

Canada Business Corporations Act (CBCA).1 Section 91(15), “Banking

and the Incorporation of Banks,” of the Constitution Act, 1867,2 clearly

identif‌ies Parliament as having exclusive jurisdiction to incorporate

and regulate banks, and there is no provincial legislation applicable

to banks as business corporations. Perusal of the Bank Act also shows,

however, that a “bank” can be one company or a family of interrelated

companies involved in f‌inancial intermediation; a bank can be owned

by a bank holding company; and a bank is permitted to own or control

other f‌inancial institutions offering f‌inancial services beyond the nar-

row scope of deposit taking, such as trust and loan companies, mutual

fund corporations, or brokerages. The evolution of banks into groups

of f‌inancial institutions has occurred since the 1991 Bank Act, which

authorized banks to purchase other f‌inancial institutions as they move

1 R.S.C. 1985, c. C-44 as am [CBCA].

2 Enacted as t he British North America Act, 1867 (U.K.) 1867, 30 & 31 Vict., c. 3,

reprinted in R .S.C. 1985, App. II, No. 5.

BANK AND C USTOMER LAW IN C ANADA88

toward universal, or “one-stop,” banking. The MacKay Task Force3 ap-

proved the trend, which was continued in subsequent amendments to

the Act.

The purpose of this chapter is to describe and analyze the legal na-

ture of banks as bu siness corporations, while the next chapter (Chapter

5) will discuss the types of businesses in which banks are permitted to

engage either directly or indirectly pursuant to the Bank Act.4

B. INCORPORATION

Since 1997, banks have been required to be incorporated by letters pat-

en t only, 5 that is, the decision is to be made by the Minister of Finance,

which means, effectively, that it is a decision within the Cabinet. Prior

to the 1980 Bank Act, the only means of incorporating a new bank was

by a private act of Parliament, a more public process, but in 1980 incor-

poration by letters patent was added to facilitate an anticipated rush to

incorporate Schedule II foreign banks once foreign banks were permit-

ted to do business legally by the 1980 Act. The 1991 Act continued to

permit incorporation by private act or by letters patent, but the 1997

Act restricted incorporation to letters patent. This appears to be part of

the increasingly centralized control of the banking sector in the gov-

ernment through the Minister of Finance.6

The application for incorporation is f‌iled with the Superintendent

and should contain all the information the Superintendent requires,

including the names of the f‌irst directors.7 For at least four consecutive

weeks prior to the application, public notice of an intention to apply

is to be published in the Canada Gazette and in a general circulation

newspaper at or near the place of the head off‌ice,8 so that any person

3 Task Force on the Future of the Can adian Financial S ervices Sector, Change,

Challenge, Oppor tunity: The Future of the Canadian Financia l Services Sector (Ot-

tawa: Depar tment of Finance, 1998).

4 These two chapter s will offer an overvie w of the Bank Act provisions. For a

detailed di scussion of the provision s, see M.H. Ogilvie, Canadian Banking Law,

2d ed. (Toronto: Carswell, 1998) cc. 3–27.

5 Bank Act,S.C. 1991, c. 46, s. 22.

6 For a larger discussion of t his trend in the 2001 legisl ation, see M.H. Ogilvie,

“Change, Challe nge, Opportunity: Can adian Banking Sec tor Restructured Agai n”

(2003) J. Bus. L. 487.

7 Above note 5, s. 25(1). OSFI ha s issued guidelines for the pr ocess of incorpora-

tion, which should be con sulted on its website for the curre nt version.

8 Ibid., s. 25(2).

Banks as B usiness Corporation s89

may object in writing to the Superintendent.9 The Minister is to be

informed of any objection, and if the Superintendent thinks it in the

public intere st, should hold a public inquir y,10 the f‌indings of which are

to be reported to the Minister11 and the public.12 Prior to issuing letters

patent, the Minister is required to consider the f‌inancial resources, the

soundness of the business plan, business record, character and integ-

rity, and competence of the applicant, as well as the feasibility of the

plans and the best interests of the f‌inancial system in Canada.13 If the

applicant is a subsidiary of a foreign bank, the Minister must be satis-

f‌ied that its home country wi ll provide favourable reciprocal conditions

for domestic Canadian banks.14 Applications from governments and

from government agencies or entities, whether Canadian or foreign,

must be rejected.15 Once the Minister has satisf‌ied these requirements,

the letters patent may be issued, in t he discretion of the Minister. There

is no prima facie entitlement to incorporation on application as permit-

ted by business corporations legislation.16

In addition to incorporation by letters patent of a new body cor-

porate, the Bank Act provides for existing corporations to continue as

a bank, including trust and loan companies, insurance companies,17

and any other federally incorporated corporation,18 provided certain

requirements are met. At least two-thirds of the shareholders of these

corporations must approve the conversion to a bank,19 and once the

bank comes into existence,20 sha res are to be transferred to the exist ing

shareholders on a share-for-share basis with the s ame rights, privileges,

and restrictions as the shares of the corporation.21 The Act protects

existing shareholder rights into the newly incorporated bank for a per-

iod of ten years from the issuance of the letters patent.22

9 Ibid., s. 26(1).

10Ibid., ss. 26(2), (3), and (5); Rules Governing Pro ceedings at Public Inquir ies

into Objections (Ba nks), SOR/ 92-308, as am. SOR /98-532.

11Bank Act, ibid ., s. 26(3).

12Ibid., s. 26(4).

13 Ibid., s. 27.

14Ibid., s. 24.

15Ibid., s. 23.

16CBCA, above note 1, ss. 5, 7, and 8.

17Bank Act,above note 5, s. 29(1).

18Ibid., ss. 33(1) & (2) and 34(1).

19Ibid., ss. 29(5) and 34(2) & (3).

20Ibid., ss. 32 and 36.

21Ibid., ss. 29(2), (3), (6), (7), & (8), and 38.

22Ibid., s. 29(4).