CONTENTS

Incorporation

A company, in British Columbia, is somewhat of a privilege. It is something you ask the government to create. Before the government will create your company, there are a few things it demands that you do first.

  • Name search. The government does not want multiple companies with the same name. This would confuse the consumer and could be abused by companies as they might attempt to misrepresent themselves. So the BC Registrar of Companies requires each company to do a name search. First, the incorporators choose a name which appeals to them and which is expected to include a distinctive element followed by either "Corporation", "Incorporated" or "Limited", or an abbreviation of these, to advise people dealing with them that they are a company; that liability is limited. It is also possible to get a number name, which are issued sequentially by the Registrar (eg. 79354 B.C. Ltd.).

    There are limitations on what names you can use. The Registrar can refuse a name which may lead to confusion with an existing name, which tends to indicate some kind of government affiliation or which might be contrary to public policy. Some words are not available and reserved such as "bank" or "park."

    The name must be demonstrated to be available before the Registrar of Companies will accept the memorandum of incorporation. For that reason, the process involves a name search. Several private companies will do a name search in which they search databases and come up with other names similar to yours. From there, you can see if the name you have chosen is already taken and not available. It is not unusual for several name searches to be conducted before a name finally shows as available. The first step, then, is to submit your company name to the Registrar for approval. If approved, the Registrar will reserve the name for you for 56 days to give you some time to them submit your entire registration package. If you submit your registration package without clearing the name first, your registration risks significant delay if the name is rejected.

    These are just some brief remarks on corporate names. There are many other technical rules governing the choice of names. For more information, contact a member of the Law Society of British Columbia or the office of the Registrar of Companies listed in the blue pages of BC phone books.

  • Incorporation forms. The founders complete and electronically file an Incorporation Application and an Incorporation Agreement which include the name of the proposed company and details of the first distribution of shares. Think of the Incorporation Application, the Incorporation Agreement and the articles (i.e. the by-laws) as the constitution of the company, the basic documents upon which the company will conduct its business. A single person can be the founder of the company.

    The incorporation documents allow the company to restrict its business but remember that the more restrictions you put in, the more your company will be restricted. Once incorporated, amending the memorandum is more difficult than a simple company resolution.

  • Registration. To the incoporation documents, the incoporators would include a fee. The Registrar will then review the package and if satisfied that the requirements of the Company Act have been complied with, a company is born by the issue of a certificate of incorporation.

Shares, Shareholders & Dividends

One of the first things to do after incorporation is to issue at least one share. This requires a resolution in writing of the director(s).

A share is a portion of ownership and cannot be issued unless fully paid for. Entitlement to profit is pro rata to the number of shares owned. Take, for example, a company with 400 shares sold (issued), and Joe owns 40 shares; in other words, Joe owns 10% of the company.

Under normal circumstances, if there was only one kind of share, Joe would be entitled to 10% of the company's profits.

A company distributes profits, from time to time, by paying out dividends to those people who hold shares.

So if Duhaime Legal Information Corporation sells $1-million worth of goods and services between January and June of 1997 and has $900,000 of expenses for the same period, that is a net profit of $100,000. The board of directors may meet in July and decide to distribute this profit by paying dividends to the shareholders. Joe would receive $10,000, or 10% of the profit of $100,000.

Shareholders are also the residual owners of the assets of the company. While in operation, the assets of the company belong to the company but if the company is wound-up or dissolved, the shareholders get to divide up the assets pro-rata amongst them (whatever is left after the creditors have been paid).

Companies are allowed to create different kinds of shares with different rights and privileges attached to each. A company may decide to have a Class A share and a Class B share. Class A might give their owners first crack at any dividends but no voting rights. Class B might have voting rights but no entitlement to dividends until the owners of Class A shares have received theirs. There is no limit to the different combinations you can have (you could even say, for example, that only holders of Class C shares may use the company car). The summary above is actually typical. In our example, Class A shares would be known as "preferred shares" because of their preferred status, having some type of special right or restriction. Class B shares would be known as "common" or "ordinary shares."

Sample extract from company documents restricting a certain class of share
Holders of Class B shares will not have voting rights in the company nor may they attend annual meetings or receive notice of shareholder meetings.

Dividends are declared by the board of directors as mentioned above.

A legal distinction is worthy of note here. As we mentioned above, preferred shares typically give their holders a preference on any declared dividend. This means that their share is paid out in full before any common shares holders receive any dividends. The law says that holders of preferred shares are presumed to be entitled to cumulative dividends. This means that if a dividend is not declared in a given fiscal year, the holders of the preferred shares are allowed to demand back-payment for years where no dividend was paid before any future dividend can be paid out.

British Columbia's Company Act also says that for companies which are not "reporting companies" (i.e. for which shares are not listed on a stock exchange; also known as a "public company"), shareholders get a right of first refusal on any new shares being issued. And:

" ... where there are classes of shares, the directors shall first offer the shares to be allotted pro rata to the members holding shares of the class proposed to be allotted and, if any shares remain, the directors shall then offer the remaining shares pro rata to the other members."

Other special rights that can sometimes be attached to shares include the right to redemption or retraction. Redemption rights means that a company has buy-back rights; the shareholder can be forced to sell the shares back to the company. The Company Act regulates redemption rights and requires that they be redeemed pro rata unless the incorporation documents or articles provide otherwise. Note that the Company Act prohibits repurchase if to do so would render the company insolvent. Rights of retraction means that a shareholder can force the company to buy-back his or her shares.

As far as the running of the company goes, the rights of the shareholders in this regard is generally restricted to the annual election of the board of directors. There are some exceptions. For example, the directors are not allowed to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company unless they have the approval of the members given by special resolution (i.e. three-quarters majority vote of the shareholders). Other exceptions include amalgamations, changes to the memorandum or articles of the company. From this, you can see the importance of having at least 76% of the voting shares.

Note also the distinction between par value shares, which have a minimum price, and shares which are without par value (shares which may be sold at whatever price the company's board of directors decides at the time of issue).

Shareholders are entitled to a share certificate, the mandatory contents of which is detailed in the Company Act.

Every company holds an annual shareholder meeting at which time financial statements are tabled and the board of directors presents an annual report. Shareholders can also force a shareholder meeting by the requisition of the holders of at least 20 per cent of the shares. At these meetings, each member gets one vote per share unless, as explained above, some shares have been issued with special or no voting rights. The Company Act allows proxies under certain conditions (for more, see the Company Act).

It is impossible to review all the different variations that a company can make upon its shares. The reader should be aware, however, that if special rights and restrictions are not imposed on shares, then all shares, by whatever name they may go, have an equal right to vote and to share dividends or, upon winding up, the assets of the company.

The Board of Directors

A company is managed and administered by a board of directors. At least one director must reside in BC and it is acceptable to have only one director. Bankrupts or incapacitated persons (infants or mentally-challenged) are disqualified. Note also that what follows may be altered by a shareholders agreement.

Directors must consent in writing before they are appointed. The procedures differ for reporting companies (see the Company Act for more detail). Once appointed, the directors meet as a committee called the board of directors. Prior notice of board meetings is required and quorum must then be present. A resolution signed by all the directors is as valid as if passed at a meeting. Meetings by teleconference are acceptable provided the articles or memorandum allow it.

Directors owe a duty of honesty, good faith and to always act in the best interests of the company. They must not vote on matters which present a conflict of interest to their duties elsewhere. While in theory they are not liable for the debts of the corporation, access to their personal assets has been opened by several laws. One example is if directors consent to prohibited resolutions such as the buy-back of shares when the company is insolvent or allow an issue of shares before being fully paid. Personal liability can sometimes be avoided is a dissent is recorded in the minutes. Other legislation to be wary of include those which may make the director liable for back wages in case of a bankruptcy or environmental laws.

REFERENCES:

  • Bird, G. and others, Professional Legal Training COurse 2009, Practice Material: Company Law (Vancouver: Law Society of Breitish Columbia, 2009)
  • Lundell, J., and others, British Columbia Company Law Practice Manual, 2009 (Vancouver: CLEBC, 2009)