The Mechanics of Incorporation

• Author: Christopher C. Nicholls
• Pages: 39-57

39

CHAPTER TWO

The Mechanics of

Incorporation

CHOICE OF INCORPORATING JURISDICTION

As seen in chapter 1, once business people have decided to incorporate, they have further

choices to make. They may choose to incorporate under any one of Canada’s provincial

or territorial corporate statutes (regardless of where they actually intend to carry on

business); or they may choose, instead, to incorporate under the federal corporate statute,

the Canada Business Corporations Act (CBCA). On what basis would a business person

choose to incorporate under the statute of one jurisdiction rather than another?

The answer to this question is not a simple one. In the United States, as discussed in

chapter 1 under the heading “Charter Competition and the Delaware Phenomenon,” it is

clear that the state of Delaware has attracted a wildly disproportionate number of incor-

porations of large, public corporations. It seems equally clear, however, that no single

Canadian province can realistically claim to be the “Delaware of Canada” (although, on

at least one measure—attracting a disproportionate number of public corporations—the

federal CBCA has enjoyed some Delaware-like success; and, as discussed in chapter 3, a

unique type of corporation available as an option under Nova Scotia’s Companies Act—

the unlimited (liability) company—has recently been found to be especially useful for

certain cross-border ventures from a US tax perspective).

Legal practitioners are well aware of the sometimes technical variations among corpor-

ate statutes that might, in some circumstances, and for some companies, tend to make one

jurisdiction more desirable than another.1 This chapter begins at the most abstract

level, by surveying the three different “models” of corporate statute in Canada, before

turning to some of the more specific statutory differences that have been identified

from time to time.

Types of Canadian Business Corporation Statutes

There are three basic theories or models of incorporation statutes, and examples of all

three may be found among Canada’s federal and provincial incorporation statutes.

1For a canvass of many of these considerations, see Wayne D. Gray and Casey W. Halladay, Guide to

CBCA Reform: Analysis and Precedents (Toronto: Carswell, 2002), at 73-77.

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.

40 Chapter 2 The Mechanics of Incorporation

Memorandum2 and Articles of Association

This is the model of corporate law that characterizes the UK Companies Act, and the

Canadian corporate statutes that were originally based on the UK model (namely, the BC

Business Corporations Act and the Nova Scotia Companies Act). This model has two

fundamental characteristics. First, it is premised on the theory that the corporation’s

constating documents constitute a contract between the members. This contractual orienta-

tion is made explicit in the statutes.3 Second, these statutes provide for incorporation by

“registration,” which means that they permit a corporation to be formed as of right by those

incorporators who have complied with the statutory provisions and paid the necessary

fees. There is no discretion, in other words, granted to any government official to refuse

to incorporate a company as long as all of the statutory requirements have been satisfied.

Letters Patent

Incorporation by letters patent, pursuant to a general incorporation statute, is the model

of corporate law that, according to Wegenast,4 was a uniquely Canadian invention, but

that today survives only in the Companies Act of Prince Edward Island. In a letters patent

jurisdiction, the corporate constitution does not constitute a contract between the mem-

bers. It is embodied in “letters patent” granted to the incorporators. Moreover, what the

government has power to “grant,” it also has power (at least theoretically) to withhold.

Thus, the government retains the discretion to refuse to issue letters patent to applicants,

although whether this discretion would ever be exercised today is unclear.

Articles of Incorporation/“Division of Powers”

This third model of corporate law, essentially derived from the US approach, is now the

most common in the common law provinces of Canada. It is the basis for the corporate

law statutes of Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, and New-

2When British Columbia recently enacted a new corporate statute, the legislature replaced the concept of

“memorandum” with a so-called notice of articles. However, the underlying contractual theory of

incorporation from the BC Company Act was retained.

3See, e.g., Companies Act (UK), s. 14; Business Corporations Act (BC), s. 19(3); and Companies Act

(NS), s. 24(1).

4F.W. Wegenast, The Law of Canadian Companies, reprinted with an introduction by Margaret P. Hyndman

(Toronto: Carswell, 1979), at 22. Corporations had certainly been granted letters patent in the United

Kingdom as well, but not pursuant to a general statute akin to the UK Companies Act. Wegenast does not

suggest how Canadian legislatures happened upon this idea. One possibility is that the idea was an

extension of a concept found in two English statutes that pre-dated passage of the first English general

incorporation statute in 1844. These two “trading companies” acts (4 & 5 Wm. IV, c. 94 and 1 Vic., c. 73)

empowered the King and the Queen, respectively, to grant letters patent to any company of persons, and

to provide to those companies certain corporation-like privileges. Of course, it is clear that neither of

these English statutes (the second, it should be mentioned, repealed and replaced the first) provided for

the creation of corporations. To the contrary, the purpose of the legislation seemed, in fact, to be to

extend certain useful trading privileges to unincorporated companies. The language used in the 1834

statute, for instance, states that “it would be expedient to confer upon such Associations, or some of

them, some of the Privileges of and incident to Corporations created by Royal Charters” (emphasis added).

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.