Banks as Business Corporations

• Author: M.H. Ogilvie
• Profession: Professor of Law, Carleton University
• Pages: 83-147

83

CHAP TER 4

BANK S AS BUSINESS

CORPOR ATIONS

A. INTRODUCTION

Banks are busi ness corporations, albeit of a specialized n ature and

regulated to a far greater extent than any other busines s corporations

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

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

voted to the corporate governance of bank s and which is modelled on

the Canada Bu siness 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 jur isdiction to incorporate

and regul ate banks, and there is no provincial legisl ation 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 f‌inancia l intermediation; a bank can be owned

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

other f‌inancial institutions offering f‌inancial services beyond the nar-

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

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

of f‌inancial institutions has occur red since the 1991 Bank Act, which

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 L AW IN CA NADA84

authorized bank s to purchase other f‌inancial in stitutions as they move

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

proved the trend, which was continued in t he 2001 and 2007 amend-

ments to the Act.

The purpose of this ch apter is to describe and a nalyze the legal na-

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

5) will discus s the types of businesses in which banks are per mitted to

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

B. INCORPOR ATION

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

ent only,5 that is, the decision is to be made by the Mi nister 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 a nticipated rush to

incorporate Schedule II foreign banks once foreign ban ks were permit-

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

permit incorporation by pr ivate act or by letters patent, but the 1997

Act restricted incorporat ion to letters patent. This appears to be par t of

the increasingly centralized control of the ban king 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 c irculation

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

3 Task Force on the Future of the Ca nadian Financia l Services Sector, Change,

Challenge, Oppor tunity: The Future of the Canadia n Financial Services Sector (O t-

tawa: Depar tment of Finance, 1998).

4 These two chapte rs will offer an overv iew of the Bank Act provisions. For a

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

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

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

6 For a larger disc ussion of this trend in t he 2001 legislation, see M.H. Ogilv ie,

“Change, Challenge, Opportunity: Canadian Bank ing Sector Restructured

Again” (2003) J. Bus. L. 487.

7 Above note 5, s. 25(1).

8Ibid., s. 2 5(2).

Banks as Business Corporations 85

may object in writi ng to the Superintendent.9 The Minister i s to be

informed of any objection, a nd if the Sup erintendent thin ks it in t he

public interest, should hold a public inquiry,10 the f‌indings of which

are to be reported to the Mini ster11 and the public.12 Prior to issuing

letters patent, the Minister is required to consider the f‌inanci al resour-

ces, business record, character and integrity, and competence of the

applicant, as well as t he 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 Mini ster must be satisf‌ied that its home country

will provide favourable reciprocal conditions for domestic Can adian

banks.14 Application s from govern ments and f rom governme nt agen-

cies or entities, whether Canadian or foreign, must be rejected.15 Once

the Minister has satisf‌ied these requirements, the letters patent may be

issued, in the dis cretion of the Minister. There is no prima facie entitle-

ment to incorporation on application as permitted b y business corpora-

tions leg islation.16

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

porate, the Bank Act provides for exi sting corporation s to continue as

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

and any other federally incorporated corporation,18 provided certain

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

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

bank comes into existence, 20 share s are to be transferred to the exist ing

shareholders on a share-for-share basis with t he same rights, privileges,

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

existing shareholder right s into the newly incorporated bank for a per-

iod of ten years from the issu ance of the letters patent.22

9 Ibid., s. 26(1).

10 Ibid., ss. 26(2), (3), and (5); Rules Gover ning Proceedings at Publ ic Inquiries

into Objections (B anks), SOR /92-308.

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

12 Ibid., s. 26(4).

13 Ibid., s. 27.

14 Ibid., s. 24.

15 Ibid., s. 23.

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

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

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

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

20 Ibid., ss. 32 and 36.

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

22 Ibid., s. 29(4).