Fundamental Characteristics of the Modern Canadian Business Corporation

• Author: Christopher C. Nicholls
• Pages: 59-89

59

CHAPTER THREE

Fundamental Characteristics

of the Modern Canadian

Business Corporation

INTRODUCTION

Any seasoned business lawyer can compile a lengthy list of corporate characteristics. If

the list prepared by one such lawyer were closely compared to a list drafted by another,

one would no doubt notice a few differences. But there would be many more similarities.

In fact, the following six fundamental features of every Canadian business corporation

would be most likely to appear on every list:1

•operated for profit,

•separate legal entity,

•limited liability,

•perpetual existence,

•transferability of share interests, and

•centralized management.

OPERATED FOR PROFIT

The first attribute—that a business corporation is operated for the purpose of making a

profit—is definitional.2 A profit motive distinguishes the business corporation from

other incorporated entities such as non-profit corporations and societies, incorporated

1Prior to changes made to US tax law in 1996, the US Internal Revenue Service used a six-factor test,

very similar to this list, to determine whether a business enterprise should be treated as a “corporation”

for US tax purposes. Two of these factors are common to all for-profit associations, and so the test came

to be known as the “four-factor” test—those four factors being: centralized management, continuity of

existence, limited liability, and transferability of interests. See Treas. reg. 301.7701-2(a)(1). See also

David A. Skeel Jr., “Corporate Anatomy Lessons” (2004), 113 Yale Law Journal 1519, at 1525, listing

the “traditional five-factor description of the corporation,” at note 13.

2See, e.g., Roberta Romano, The Genius of American Corporate Law (Washington: The AEI Press, 1993),

at 2: “Corporate law presumes that firms should be managed for shareholders’, and not managers’,

interests when those interests conflict. Profit maximization (in a world where cash flows are uncertain,

this is equivalent to maximizing equity share prices) is the goal.”

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.

60 Chapter 3 Characteristics of the Modern Canadian Business Corporation

municipalities, universities, and so on. The for-profit mission of business corporations is

not a goal explicitly stated in or mandated by Canadian business corporation statutes. It

was, however, clearly understood to be the basis on which companies registered under

early English companies legislation were operated,3 and remains an implicit and defining

feature of the business corporation.4

Of course, to say that a business corporation is invariably a for-profit enterprise does

not necessarily imply that the corporation’s exclusive goal is to maximize corporate

profits. Indeed, an extensive body of financial economic and governance literature has

developed around the question of precisely what the duties of corporate managers are,

and how those duties are to be carried out. It would not at all be inconsistent with a

profit-making mandate, for example, to argue that the ultimate end of business corpora-

tion managers is

1. to maximize shareholder value (an end to which pursuing corporate profits is the

well-understood means);

2. to maximize enterprise value; or

3. to optimize shareholder value in light of the competing (or, ideally, complemen-

tary) need to recognize the interests of other non-shareholder stakeholders or

constituents.

In other words, one might distinguish between ultimate corporate goals (the “ends”)

and the corporate profit-making objective (the “means”). How one defines the ultimate

corporate goal, of course, may well influence the interpretation of the profit-making

objective as well. In fact, differing views on the corporation’s ultimate corporate goal

might even affect how the term “profit” is properly to be defined. About lofty questions

of “ultimate corporate ends” reasonable people (including reasonable judges) may well

3Section 4 of the Companies Act, 1862, 25 & 26 Vict., c. 89, provided that companies, associations, or

partnerships with more than 20 members (or 10, in the case of banks) were required to be registered

under the Act (unless formed under some other act of Parliament or letters patent) if “formed … for the

Purpose of carrying on any other Business that has for its Object the Acquisition of Gain by the

Company, Association, or Partnership, or by the individual Members thereof.”

4In Anderson Logging Co. v. The King, [1925] SCR 45, at 56, Duff J stated:

The sole raison d’être of a public company is to have a business and to carry it on. If the

transaction in question belongs to a class of profit making operations contemplated by the

memorandum of association, prima facie, at all events, the profit derived from it is a profit

derived from the business of the company.

This passage was later cited with approval by the Supreme Court of Canada in Canadian Marconi v. R,

[1986] 2 SCR 522, at para. 9. At one time, it was common for business corporations and not-for-profit

corporations to be incorporated in Canada under the same statutes, albeit pursuant to separate sections, and

in some cases separate parts of such statutes. This is still true in some jurisdictions. Today, however, in

some jurisdictions, the incorporation of business corporations and not-for-profit corporations is provided

for by separate statutes. So, for example, the federal Canada Business Corporations Act is the statute

under which a business corporation may be incorporated federally, while the Canada Corporations Act,

RSC 1970, c. C-32—the statute that at one time provided for the incorporation of both for-profit and not-

for-profit entities—is the statute under which federal not-for-profit corporations may be formed today.

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.