Introduction to Corporate Law
| Author | J. Anthony Vanduzer |
| Pages | 79-124 |
CHAPTER
3
INTRODUCTION
TO
CORPORATE
LAW
In
this
chapter,
we
introduce
the
corporation
from
a
variety
of
perspec-
tives.
After
a
historical overview
of the
development
of
corporate
law
in
Canada,
we
will briefly
describe
the
current
form
of
corporate
law in
terms
of the
following
questions:
What
is the
constitutional competence
of the
federal
government
and the
provinces
in
relation
to
corporations?
What
is the
current process
of
incorporation
and
organization
of
corporations
in
Canada?
What
is the
function
of
corporate
law and
what policies underpin
it?
What
are the
implications
of the
separate legal existence
of the
cor-
poration?
To
what extent
is the
Charter
of
Rights
and
Freedoms
applicable
to
corporations?
Before
the
nineteenth
century, only
two
types
of
incorporation were
provided
for in
English
and
Canadian law. First,
a
corporation could
be
created
by
exercise
of the
royal prerogative.
This
was
done
by the
79
B.
A
BRIEF
HISTORICAL NOTE
ON
CANADIAN CORPORATE
LAW
A.
INTRODUCTION
Crown
issuing letters patent sometimes
referred
to as a
"Royal
Char-
ter."
Second, incorporation could
be
effected
by a
special
or
general
Act
of
the
legislature. Incorporation
by an
enactment
of the
legislature
rarely
occurred, though Canadian legislatures sometimes passed spe-
cial
acts
to
permit incorporation
for a
particular purpose.
A
small num-
ber of
royal charters were granted, such
as the
charter
of the
Hudson's
Bay
Company granted
by
England
in
1670.
In
1849 statutes were
passed
in
Upper
and
Lower Canada allowing
for
the
incorporation
of
companies
for the
purpose
of
building roads
and
bridges.1
Incorporation
did not
require
the
exercise
of the
royal
prerogative
but was
obtained
by the
registration
of
certain documents
in the
county
in
which
the
work
was to be
done. These
companies
did
not
resemble modern business corporations. They were organizations
set
up for a
limited
purpose,
and did not
provide
limited
liability.
In
1850
the
United Provinces
of
Canada enacted
a
general statute
for
incorporation.2
Following
the
American approach,
the new Act
permit-
ted
incorporation
for
mining, shipbuilding, manufacturing,
and
chemi-
cal
businesses
through
an
expeditious
process that
did not
depend
on
the
exercise
of the
royal prerogative. Like
the
1849
Acts,
incorporation
was
obtained simply
by the
registration
of
certain documents. Unlike
those incorporated under
the
1849
Acts,
corporations under this
Act
had two of the
defining characteristics
we
associate with
the
modern
corporation: separate legal personality
and
limited liability.
In
contrast
to
modern corporations, however, their
life
was
limited
to
fifty
years.
In
1862
the
English
Companies
Act3
was
passed.
It,
too,
was
based
on a
registration approach;
the Act
provided
for
incorporation
on the
filing
of the
documents required
by
statute:
a
memorandum
of
associ-
ation
and
articles
of
association. Unlike earlier legislation, however,
this
Act
permitted incorporation
for any
commercial purpose.
For
some reason,
the
United Provinces
of
Canada reverted
to a
model based
on the
exercise
of
royal prerogative
in a new
general
incorporation statute passed
in
1864.4
Under this Act, letters patent
1 An Act to
Authorize
the
Formation
of
Joint
Stock
Companies
for the
Construction
of
Roads
and
Other
Works
in
Upper
Canada,
S.C. 1849,
c. 84; and An Act to
Autho-
rize
the
Formation
of
Joint
Stock
Companies
in
Lower
Canada
for the
Construction
of
Macadamized
Roads,
and
of
Bridges
and
Other
Works
of
Like
Nature,
S.C. 1849,
c.
56.
2 An Act to
Provide
for the
Formation
of
Incorporated
Joint
Stock
Companies,
for
Manufacturing,
Mining,
Mechanical
or
Chemical
Purposes,
S.C. 1850,
c. 28.
3
Companies
Act
(U.K.),
1862,
c. 89.
4 An Act to
Authorize
the
Granting
of
Charters
of
Incorporation
to
Manufacturing,
Mining,
and
Other
Companies,
S.C. 1864,
c. 23.
80
THE LAW OF
PARTNERSHIPS
AND
CORPORATIONS
were issued
on
application
to the
Governor
in
Council.
The
letters
patent approach
was
followed
in the
federal
incorporation statute
enacted
in
18695
and in
provincial legislation
in
Prince Edward Island,
New
Brunswick, Quebec, Ontario,
and
Manitoba.
In
contrast,
by
1900,
Nova
Scotia, Newfoundland, Saskatchewan, Alberta,
and
British
Columbia
had
enacted corporate legislation providing
for
incorpora-
tion
through
filing
a
memorandum
and
articles
of
association
follow-
ing the
English registration approach.
There
are
certain conceptual differences between
the
registration
and
letters patent approaches.
As
mentioned above,
the
creation
of a
corporation
under
letters
patent statutes
is a
discretionary
act of the
Crown. Under
a
registration approach, incorporation must
be
granted
by the
state
so
long
as the
documents
filed
satisfy
the
statutory require-
ments. Also,
a
letters patent corporation
is
deemed
to
have
the
rights
and
powers
of a
natural person, whereas
a
corporation under
the
Eng-
lish registration system
(referred
to
here
as a
"memorandum corpora-
tion")
has
only
the
powers provided
for
expressly
or by
implication
in
its
articles.
In
effect,
this meant that actions
of
memorandum corpora-
tions
frequently
were attacked
as
outside their corporate powers
or
ultra
vires. Under English registration model statutes,
the
incorporators
have
to
provide
a set of
rules
in the
memorandum
and
articles
of
asso-
ciation governing
how the
corporation
is to
function
internally:
who is
authorized
to act for the
corporation;
how the
shareholders
and
direc-
tors exercise power;
and so on.
With
letters patent corporations, these
rules
are set out in the
corporation's by-laws
or in the
statute.
The
sig-
nificance
of
this
distinction
is
that letters patent corporations
do not
have
to
file
their by-laws with
the
state,
so
much less information con-
cerning
the
internal
working
of
such
corporations
becomes
a
matter
of
public record.
As
well, prior
to the
enactment
of
modern corporate
statutes,
persons
dealing with
a
corporation were
deemed
to
have
notice
of
what
was on the
public record, with
the
result that,
if the
requirements
of the
memorandum
or
articles were
not
satisfied
in
con-
nection with
the
creation
of an
obligation
to
such
a
person,
the
obliga-
tion
could
not be
enforced.
This
doctrine
of
constructive notice meant,
therefore,
that
the
greater public disclosure required
in
relation
to the
internal operation memorandum corporations increased
the
risk
for
third parties that their contracts would
not be
enforced where corpo-
rate porcedures were
not
followed.6
5
Canadian
Joint
Stock
Companies
Letters
Patent
Act, S.C. 1869,
c. 13.
6 See
section
D
("Liability
of
Corporations
in
Contract")
in
Chapter
5.
Introduction
to
Corporate
Law 81
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