Management and Control of the Corporation: the Basic Legal Framework

• Author: J. Anthony VanDuzer
• Pages: 279-333

279

CHA PTER 7

MANAGEMENT AND

CONTROL OF THE

COR POR ATION:

THE BASIC LEGAL

FR A M EWOR K

A. INTRODUCTION: SHAR EHOLDERS,

DIRECTORS, AND OFFICERS — THE LEGAL

SCHE ME OF COR POR AT E GOVER NANCE

In this chapter, we discus s how powers are allocated among sharehold-

ers, directors, and off‌icers and how their powers a re exercised. The

CBCA1 and most other modern corporate statutes in Canada provide for

a clear division: shareholders elect directors who have the power and re-

sponsibility to man age or supervis e the management of the corporation;

and directors appoint off‌icers 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 cor porate statutes appear

to contemplate. In corporations with many sha reholders, the powers

given to shareholders may not provide them with the practical ability

to ensure that man agement is accountable to them. As well, boards of

directors often do not play the pivotal role in managing the corporation

that would appear to be contemplated by the legislation. In many large

corporations, the off‌icers dominate deci sion making in a manner not

specif‌ically addre ssed in the legislation in any sig nif‌icant way.

1 Canada Busine ss Corporations Act, RSC 1985, c C-44 [CBCA].

THE LAW OF PARTNERSHIPS AND COR PORATIONS280

In this chapter we wi ll f‌irst set out the basic allocation of powers

under Canadian corporate statutes. The remainder of the chapter con-

sists of a more detailed and technical exposition of how directors and

shareholders exercise their power and t he role played by off‌icers under

the CBCA. In the following ch apters of the book, we build on this basic

foundation to develop a more complete picture of the determinant s of

corporate governance. In Chapter 8, we describe the specif‌ic rules re-

lated to the approval of major corporate transact ions. In Chapter 9, the

f‌iduciary duty, the duty of care, and other fundamental norms for the

behaviour of directors and off‌icers are discussed. Chapter 10 deals w ith

shareholder remedies, which are one of the ways in which these norms

are enforced. Chapter 11 provides an introduction to securitie s regu-

lation, which provide increasingly comprehensive r ules for corporate

governance that are of particular signif‌icance for corporations whose

shares are w idely held and traded in public markets. In Chapter 12, we

present some qualif‌ications regarding the legal model of corporate gov-

ernance operates ba sed on insights from corporate law theor y and prac-

tice and discuss some of the other determinants of how corporations

and their directors and off‌icers behave. Chapter 13 is devoted to the in-

creasingly import ant governance issue of corp orate social responsibility.

B. M ANAGEMENT AND CONTROL UNDER

THE

CBCA

The traditional breakdown of power to manage and control the cor-

poration is as follows:

• directors are responsible for managing, or supervising t he manage-

ment of, the business and the affairs of the corporation;

• off‌icers exercise the powers of man agement delegated to them by the

directors, and serve at the pleas ure of the board; and

• shareholders are the residual cl aimants to the assets of the corpora-

tion, but their only governance power is to vote for the election of

directors and to vote on proposals made to them.2

2 Automatic Self-Clea nsing Filter Syndicate v Cunninghame, [1906] 2 Ch 34 (CA)

(shareholders can not, by ordinary resolut ion, vary the mandate of t he directors;

amendment of the ar ticles is required); Kelly v Electric al Construction Co (19 07),

16 OLR 232 (HCJ) (shareholders cannot init iate the creation of a by-law). As noted

below, this latter r ule has been changed by st atute. Shareholders can in itiate a

change to the by-law s (CBCA, ss 103(5) and 137).

Management and Cont rol of the Corporation: The Basic Le gal Framework 281

Under this breakdown, sha reholders are essentially pa ssive; they have

no power to initiate action related to the man agement of the corpora-

tion, to control management directly, or to decide on any matter related

to the ordinary business of the corporation except as speci f‌ically pro-

vided in the articles or by-laws.

In general, the CBCA and the statutes modelled after it adopt this

breakdown (CBCA, ss 102, 115, and 121)3 but enhance the shareholders’

passive role in several ways. Approval by shareholders is required be-

fore certain signif‌ic ant changes can occur to the corporation. The CBCA

also gives shareholders a limited ability to initiate corporate action. To

facilitate shareholder action, the CBCA give s shareholders certain rights

to access corporate informat ion. Finally, the CBCA improves the abil-

ity of shareholders to seek relief from the behav iour of management by

providing a broad range of remedial options to ag grieved shareholders.

The situations in which the CBCA specif‌ically requires shareholder

approval include the following fundamental ch anges to the corporation:

• amendment of a rticles (s 173);

• creation, amendment, and repeal of by-laws (s 103);

• “sale, lea se, or exchange of all or substantially all of the property of a

corporation other than in t he ordinary course of busine ss” (s 189(3));

• amalgamation with another corporation (s 183);

• continuance (s 188); and

• dissolution of the corporation (s 211).4

As discussed in Chapter 6, in some cases non-voting shares get voting

rights and part icular classe s of shares may have the right to vote sep-

arately as a class in connection with shareholder votes on these funda-

mental changes.

The CBCA also provides for an active role for shareholders in two

ways.

3 For example, Onta rio Business Corporations Act, RS O 1990, c B-16 [OBCA];

Alberta Bu siness Corporations Act, RSA 2000, c B -9 [ABCA]; Saskatchewa n The

Business Corporations A ct, RSS 1978, c B-10 [SBCA]; Manitoba The Corporations

Act, CCSM c C225 [MCA]; the Northwest Territorie s Business Corporations Act,

SNWT 1996, c 19 [NWTBCA]; Yukon Business Corporations Ac t, RSY 2002, c 20

[YBCA]; Newfoundland & Labrador Corporat ions Act, RSNL 1990, c C-36 [NLCA];

and New Bruns wick Business Corporations Act, SNB 1981, c B-9.1 [NBBCA].

4 All these cor porate changes are dis cussed in Chapter 8. Shar eholder approval is

also requi red for “going private transaction s,” discuss ed in Chapter 8, section G

(“Going Private Transactions”).