Introduction to Corporate Law

• Author: J. Anthony VanDuzer
• Pages: 96-158

96

CHA PTER 3

INTRODUCTION

TO COR POR ATE L AW

A. INTRODUCTION

In this chapter, we introduce the corporation from a var iety of perspec-

tives. After a historic al overview of the development of corporate law

in Canada, we wi ll brief‌ly describe the current state of corporate law i n

terms of the following questions:

• What is the constitutional competence of the federal govern ment

and the provinces in relat ion to corporations?

• To what extent is the Charter of Rights and Freedoms1 applicable to

corporat ions?

• What is the current proces s of incorporation and organization of

corporat ions in Ca nada?

• What is the function of corporate law a nd what policies underpin it?

• What is the nature of the separate legal existence of the corporation?

B. A BRIEF HISTORICAL NOTE ON

CA NADI AN COR POR ATE L AW

Before the nineteenth century, only two typ es of incorporation were

provided for in English and Canadi an law. First, a corporation could

1 Canadian Char ter of Rights and Freedoms, Part I of the Constitution Act, 1982, be-

ing Schedule B to th e Canada Act 1982 (UK), 1982, c 11.

Introduction to Cor porate Law 97

be created by exercise of the royal prerogative. This was done by the

Crown issuing letters patent, sometimes referred to as a “Royal Char-

ter.” Only a small number of royal charters were granted, such as the

charter of the Hudson’s Bay Company granted by Engla nd in 1670.

These corporations, which were created for colonization purposes as

much as for trade, did not resemble modern business cor porations. For

example, the shareholders remained liable for the corporation’s obliga-

tions. A second way in which incorporation could be effected was by a

special act of the legislature. Canadian legislatures have passed special

acts to permit incorporat ion of a corporation for a particular purpose,

but this has not been a common practice.

A new approach to incorporation was adopted with the Engli sh

Joint Stock Companies Act2 which came into force in 1844. It permitted

incorporation for any type of busine ss simply upon registration of cer-

tain documents specif‌ied in the statute. This regist ration approach to

the formation of corporations has b een followed in England ever since.

Early Canadian statutes also followed a registration approach. In

1849, statutes were passed in Upper and Lower Can ada allowing for

the incorporation of companies for the purpose of building roads and

bridge s.3 Incorporation did not require the exercise of t he royal pre-

rogative but was obtained by the regist ration of prescribed documents

in the county in which the work was to be done. In many respects,

however, these companies still did not resemble modern business cor-

porations. They were organizations set up for a limited purpose, and

did not provide their shareholders with limited liability.

In 1850, the United Provinces of Canada enacted a more gener-

ally applicable statute for incorporation.4 Following the American ap-

proach, the new Act permitted incorporation for mining, shipbuilding,

manufacturing, and chemical businesses t hrough an expeditious pro-

cess that, like t he 1849 Acts, did not depend on the exercise of t he royal

prerogative. Incorporation was obtained simply by the registration of

certain documents. Unlike those incorporated under the 1849 Acts,

2 7 & 8 Vict, cc 110 & 111. Limited li ability was granted to cor porations under

the Limited Liability Act (18 & 19 Vict, c 133) in 1855.

3 An Act to Authorize the Format ion of Joint Stock Companies for the Constructio n of

Roads and Ot her Works in Upper Canada, SC 1849, c 84; and An Act to Auth orize

the Formation of Joint Stock Comp anies in Lower Canada for the Constr uction of

Macadamized Roa ds, and of Bridges and Other Works of Like Nature, SC 1849, c

56. For a general disc ussion of early Canadia n corporate legislation see F W

Wege nast, The Law of Canadian Companies (Toronto: Burroughs, 1931).

4 An Act to Provide for the Format ion of Incorporated Joint Stock Companies, for

Manufacturing, Mining, Mech anical or Chemical Purposes, SC 1850, c 28.

THE LAW OF PARTNERSHIPS AND COR PORATIONS98

however, corporations under this Act had two of the def‌ining char-

acteristics we associate with the modern corporation: separate legal

personality and limited liability. In contrast to modern corporations,

however, their life was limited to f‌ifty yea rs.

In 1862, the English Companies Act5 was passed, replaci ng the 1855

Act. It, too, was based on a registration approach; the Act provided for

incorporation on the f‌iling of a memorandum of association and articles

of association. This Act continues to provide the model for contempor-

ary English law a nd subsequently became the model for Canadian

legislat ion in some juri sdictions.

For some reason, the United Provinces of Can ada reverted to a

model based on the exercise of royal prerogative in a new general i n-

corporation statute passed in 1864.6 While permit ting incor poration for

any commercial purpose, i ncorporation occurred only upon the issue of

letters patent by the Gover nor in Council, a discretionary act of the state.

The letters patent approach was followed in the federal incorporation

statute enacted in 18697 and in provincial legi slation in Prince Edward

Island, New Brunsw ick, Quebec, Ontario, and Manitoba. In contrast, by

1900, Nova Scotia, Newfoundland, Saskatchewan, Alberta, and British

Columbia h ad enacted corporate leg islation providing for incorporat ion

through f‌iling a memorandum and articles of association following the

English registrat ion approach.

There are certain conceptual di fferences between the registr ation

and letters patent approaches. As mentioned above, the creation of a

corporation under a letters patent statute 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, wherea s 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, t his meant that actions of memorandum corpora-

tions could sometimes be attacked a s outside their corporate powers, or

5 Companies Act (UK), 1862, c 89. This model, with man y additions and improve-

ments, continues t o be followed in the United Kingdom: Compani es Act 2006

(UK), 2006, c 46.

6 An Act to Authorize the Granting of Charters of Incor poration to Manufacturing,

Mining, and Other Companie s, SC 1864, c 23. Harris et al sugge st that the inspi-

ration may have come f rom an English act dealing w ith the incorporation of

banks (D Har ris et al, Cases and Mater ials on Partnerships and Canadi an Business

Corporations, 4th ed (Toronto: Thomson Carswe ll, 2004) at 56 [Harris].

7 Canadian Joint Stock Compa nies Letters Patent Act, SC 1869, c 13.