Management and Control of the Corporation

• Author: J. Anthony Vanduzer
• Pages: 214-268

CHAPTER

7

MANAGEMENT

AND

CONTROL

OF THE

CORPORATION

A.

INTRODUCTION:

SHAREHOLDERS,

DIRECTORS,

AND

OFFICERS

— THE

LEGAL

SCHEME

OF

CORPORATE

GOVERNANCE

In

this

chapter,

we

discuss

how

powers

are

allocated among sharehold-

ers,

directors,

and

officers.

The

CBCA

and

most other modern corpo-

rate

statutes

in

Canada provide

for a

clear division: shareholders

choose directors

who

have

the

power

and

responsibility

to

manage

or

supervise

the

management

of the

corporation;

directors

appoint

offi-

cers

and

delegate

to

them some

of

their powers

and

responsibilities

relating

to

management. Shareholders' control over

who the

directors

are

is

intended

to

render

the

directors accountable

to

shareholders.

In

many

situations, however, this division

of

powers operates somewhat

differently

from

what

the

corporate statutes appear

to

contemplate.

The

powers given

to

shareholders

do not

provide them with

the

prac-

tical

ability

to

ensure that management

is

accountable

to

them.

As

well,

boards

of

directors

often

do not

play

the

pivotal role

in

managing

the

corporation contemplated

by the

legislation.

In

many large corpora-

tions,

the

officers

dominate decision making

in a

manner

not

specifi-

cally

addressed

in the

legislation

in any

significant

way.

We

will

set out

first

the

basic allocation

of

powers under Canadian

corporate

statutes

and

then discuss some

of the

problems with

the

oper-

ation

of the

statutory scheme

in

practice.

The

remainder

of the

chapter

214

Management

and

Control

of the

Corporation

215

consists

of a

more detailed

and

technical exposition

of how

directors

and

shareholders exercise power under

the

CBCA,

followed

by a

discus-

sion

of

some qualifications

to the

legal model

of

corporate governance.

B.

MANAGEMENT

AND

CONTROL UNDER

THE

CBCA

The

traditional breakdown

of

power

to

manage

and

control

the

corpo-

ration

is as

follows:

•

directors

are

responsible

for

managing,

or

supervising

the

manage-

ment

of, the

business

and the

affairs

of the

corporation;

•

officers

exercise

the

power

to

manage delegated

to

them

by the

directors,

and

serve

at the

pleasure

of the

board;

and

•

shareholders

are the

residual claimants

to the

assets

of the

corpora-

tion,

but

their only power

is to

vote

for the

election

of

directors

and

to

vote

on

proposals made

to

them.1

Under

this

breakdown, shareholders

are

essentially passive; they have

no

power

to

initiate action,

to

control management,

or to act in

rela-

tion

to the

ordinary

business

of the

corporation except

as

specifically

provided

in the

articles

or

by-laws.

In

general,

the

CBCA

and the

statutes modelled

after

it

adopt this

traditional breakdown

(CBCA,

ss.

102, 115,

&

121)2

but

enhance

the

shareholders' traditional passive role

in

several ways. Approval

by

share-

holders

is

required

before

certain significant changes

can

occur

to the

corporation,

and the

CBCA

gives shareholders

a

limited scope

for

active-

ly

initiating corporate action.

To

facilitate

shareholder action,

the

CBCA

gives

shareholders certain rights

of

access

to

information. Finally,

the

CBCA

improves shareholders' ability

to

seek

relief

from

the

behaviour

of

management

by

providing

a

broad range

of

remedial

options.

Automatic

Self-Cleansing

Filter

Syndicate

v.

Cunninghame,

[1906]

2 Ch. 34

(C.A.)

(shareholders cannot,

by

ordinary resolution, vary

the

mandate

of the

directors;

amendment

of the

articles required);

Kelly

v.

Electrical

Construction

Co.

(1907),

16

O.L.R.

232

(H.CJ.)

(shareholders cannot initiate

the

creation

of a

by-law).

E.g.,

Ontario

Business

Corporations

Act,

R.S.O.

1990,

c.

B-16

[OBCA];

Alberta

Business

Corporations

Act,

R.S.A.

2000,

c. B-9

[ABCA];

Saskatchewan

The

Busi-

ness

Corporations

Act,

R.S.S.

1978,

c.

B-10;

Manitoba

The

Corporations

Act,

R.S.M.

1987,

c.

C225;

the

Northwest Territories

and

Nunavut Business

Corpora-

tions

Act,

S.N.W.T.

1996,

c. 19; the

Yukon

Business

Corporations

Act,

R.S.Y.

1986,

c.

15;

Newfoundland

Corporations

Act,

R.S.N.

1990,

c.

C-36;

and New

Brunswick

Business

Corporations

Act,

S.N.B.

1981,

c.

B-9.1.

1

2

216 THE LAW OF

PARTNERSHIPS

AND

CORPORATIONS

The

situations

in

which

the

CBCA

specifically

provides

for

share-

holder approval include

the

following

fundamental

changes

to the

corporation:

•

amendment

of

articles

(CBCA,

s.

173);

•

creation, amendment,

and

repeal

of

by-laws

(CBCA,

s.

103);

•

sale, lease,

or

exchange

of

"all

or

substantially

all the

property

of a

corporation" other than

in the

ordinary course

of

business

(CBCA,

s.

189(3));

•

amalgamation with another corporation

(CBCA,

s.

183);

and

•

dissolution

of the

corporation

(CBCA,

s.

211).3

The

CBCA

also provides

for an

active role

for

shareholders

in two

ways.

•

Proposals: shareholders

can

have matters

put on the

agenda

for

dis-

cussion

at

shareholders' meetings, including making, amending,

or

repealing by-laws

(CBCA,

ss. 137 &

103(5));

•

Unanimous shareholders' agreements: shareholders

can

assume

all

powers

of the

board

of

directors, completely altering

the

allocation

of

powers

as

between directors

and

shareholders,

if

they unanimous-

ly

agree

(CBCA,

s.

146). Such

an

agreement

may

then allocate

the

assumed powers among

the

shareholders.

Both

proposals

and

unanimous shareholders' agreements

are

discussed

later

in

this

chapter

in

detail.

The

CBCA

gives shareholders rights

of

access

to

information about

the

corporation, including information about past meetings

of

share-

holders

and

financial

records

(CBCA,

ss. 20, 21,

143, 160,

&

243; Part

XIX).

These shareholder rights

are

discussed later

in

this chapter.

The

CBCA

provides remedies

for

abuse

of

directors' power

to

man-

age

such

as the

following:

• a

right

to

apply

to

have

the

corporation's existence terminated

(s.

214);

• a

right

to

bring

an

action

on

behalf

of the

corporation,

in

some cir-

cumstances,

for

breach

by

directors

or

officers

of

duties owed

to the

corporation

(a

"derivative action,"

s.

239);

• a

right

to

seek

relief

from

"oppression"

of the

interests

of

sharehold-

ers or

others

by the

corporation

or the

directors

(s.

241);

• a

right

to

seek

an

order directing directors

and

officers

to

comply

with

or to

restrain them

from

breaching

the

CBCA,

the

articles,

by-

laws,

or any

unanimous shareholders' agreement

(s.

247);

and

3 All

these corporate changes

are

discussed

in

Chapter

10.