Private Corporations

• Author: Christopher C. Nicholls
• Pages: 91-121

91

CHAPTER FOUR

Private Corporations

INTRODUCTION

In the lexicon of social democrats and free-trade protesters, the word “corporation” has

come to be associated with “big business.” This association is neither new nor entirely

without some historical justification. At least one academic commentator has suggested

that there may be a link between the development of the modern legal conception of the

corporation, and apologies for the growth of very large businesses, especially in the

period beginning after the First World War.1

Certainly the corporate form does facilitate the accumulation of pools of capital that

would be too large for even the wealthiest of individuals and families to purchase with their

personal assets. Defying the logic of Adam Smith (who saw little future for corporations in

all but a handful of industries),2 these modern corporate behemoths and leviathans appear

to have provided the opportunity for wealthy capitalists to lever already large fortunes to

achieve economic control over enterprises of almost incomprehensible size. Their growth

is surely one of the most important economic phenomena of the past century.

Of the economic, social, and political implications of such corporate giantism, no

more will be said here. From the necessarily more narrow and pragmatic lawyer’s

perspective, it is of principal importance to offer this gentle reminder. Although large

public corporations are certainly the most visible manifestations of the corporate form,

they are not the most common. Most Canadian corporations are actually small enterprises

with few shareholders.

Corporations that have never sold their shares or other securities to the public are

often referred to as “private,” “closely held,” or “close” corporations—all terms that are

discussed in more detail below. To be sure, not all of these ostensibly “small,” private

corporations are running corner grocery stores and video shops. Many are merely sub-

sidiaries of (much larger) corporate entities3—their corporate “parents”—and have been

1Morton J. Horwitz, “Santa Clara Revisited: The Development of Corporate Theory” (1986), 88 West

Virginia Law Review 173.

2Adam Smith, Wealth of Nations, book V, chap. 1 (Amherst, NY: Prometheus Books, 1991), at 482.

3That one corporation is permitted to incorporate another is typically permitted expressly by Canadian

corporate statutes. See, e.g., Canada Business Corporations Act (CBCA), s. 5(2).

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.

92 Chapter 4 Private Corporations

established to accommodate some specific corporate transaction, to hold particular cor-

porate assets, or to fulfill some other tax or operational purpose.

But a considerable number of private corporations are not merely the instruments of

big business. They are the vehicles of closely held, often family owned, businesses. They

have been incorporated to gain the corporate benefits of limited liability, estate planning,

and often certain favourable income tax treatment.

THE DISTINCTION BETWEEN PRIVATE

AND PUBLIC COMPANIES

Commentators and business people have long recognized the absurdity of purporting to

treat alike, for corporate law purposes, widely held billion-dollar, multinational businesses,

on the one hand, and small, family owned corner stores, on the other. Accordingly,

corporate legislation, in Canada and elsewhere, occasionally distinguishes between public

and private corporations for various purposes.4 Historically, one of the most important

legal consequences of such a distinction related to the different rules to which corporations

of each sort were subject concerning public disclosure of financial statements: public

corporations were required to make such disclosure; private corporations were not.5

Recognizing that some private corporations are in truth, however, merely part of larger

corporate enterprises, the special exemption from such public filing requirements was

frequently denied to these offspring of public corporations. So, for example, company

legislation in the United Kingdom once categorized private companies as either “exempt”

(that is, exempt from the requirement to file financial information) or “non-exempt.” And

although this same terminology was not adopted in Canada, Canadian corporate statutes

in the past have also drawn distinctions between private corporations based on the

aggregate size of those corporations when considered together with their affiliates.6

Times have changed. The requirement to file financial and other information publicly

has increasingly come within the ambit of Canadian securities regulation, rather than

corporate law; so the need for corporate statutes to draw distinctions between corpora-

tions for this particular purpose has diminished.7 In the meantime, business practice and

investor concerns have brought to light other policy reasons to differentiate between

widely held (that is, public) and closely held (or private) corporations.

4The terms “public” and “private” corporation have also occasionally been used to distinguish between

public sector (i.e., government) and private sector entities. This book, however, is concerned only with

business corporations operating within the private sector, and so the discussion in this chapter is limited

to the distinction between those private sector firms that are, nevertheless, categorized as either public or

private corporations.

5For a succinct summary of the historical distinctions between private and public companies in English

law, see Report of the Committee on Company Law Amendment (London: Her Majesty’s Stationery

Office, 1945) (“Cohen committee report”), at para. 49, p. 26.

6See, e.g., (old) CBCA, RSC 1985, c. C.44, s. 160.

7The distinction is not, however, wholly irrelevant in Canada. See, e.g., CBCA, supra note 3, s. 160.

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.