Corporate Law in Canada

Overview

Corporate law in Canada governs the creation, operation, and dissolution of business corporations. The central statute is the Canada Business Corporations Act, RSC 1985, c C-44 (CBCA), enacted in 1975, which serves as the model for functionally identical legislation in all provinces and territories. Canadian corporate law is a matter of provincial jurisdiction over property and civil rights under s. 92(13) of the Constitution Act, 1867, but the federal CBCA is constitutionally valid under the trade and commerce power (s. 91(2)) for federally incorporated companies. Approximately half of Canada’s major public corporations are incorporated under the CBCA, the remainder under provincial statutes, principally Ontario’s Business Corporations Act, RSO 1990, c B.16 (OBCA) and British Columbia’s Business Corporations Act, SBC 2002, c 57 (BCBCA).

Corporate Personality and Incorporation

A corporation upon incorporation becomes a legal person distinct from its shareholders, directors, and officers. This separate legal personality, affirmed in Salomon v. A Salomon & Co Ltd [1897] AC 22 (HL) and consistently applied in Canada, protects shareholders from personal liability for corporate obligations beyond their capital contribution. The Supreme Court of Canada has recognized the corporate veil may be pierced only where the corporation is used as a “shield for fraudulent or improper conduct” (Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co (1996), 28 OR (3d) 352 (CA), aff’d [1997] 1 SCR 371).

Incorporation is effected by filing articles of incorporation (ss. 5–6 CBCA) with the relevant corporate registry, stating the corporation’s name, share structure, number of directors, and any restrictions on business. A corporation may have unlimited capacity and powers (s. 15(2) CBCA), abrogating the ultra vires doctrine that limited corporate capacity under earlier statutes. By-laws govern the internal management of the corporation (s. 103 CBCA). Directors manage the business and affairs of the corporation (s. 102(1) CBCA).

Share Structure and Capital

A corporation may issue shares in one or more classes (s. 24(4) CBCA). Shares carry the rights specified in the articles: typically the right to vote, to receive dividends, and to receive the remaining property on dissolution. Share capital may consist of common shares (residual equity interest) and preferred shares (carrying priority as to dividends or capital). The CBCA prohibits a corporation from declaring a dividend if there are reasonable grounds to believe the corporation is, or would after payment become, insolvent (s. 42 CBCA).

Directors’ Duties

Directors owe fiduciary duties and a duty of care to the corporation. Fiduciary duty requires directors to act honestly, in good faith, and in the best interests of the corporation (s. 122(1)(a) CBCA). The Supreme Court in Peoples Department Stores Inc v. Wise [2004] 3 SCR 461 held that the duty is owed to the corporation, not to specific stakeholders, and that the “best interests of the corporation” means the interests of shareholders considered in the context of other stakeholder interests. In BCE Inc v. 1976 Debentureholders [2008] 3 SCR 560, the Court elaborated that directors must consider the interests of all stakeholders — including shareholders, employees, creditors, and the community — but need not treat any particular stakeholder’s interests as determinative.

The duty of care (s. 122(1)(b) CBCA) requires directors to exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances. This objective standard, codified in the CBCA reforms of 2001, replaced the earlier subjective standard. Directors may rely in good faith on financial statements, reports of professionals, and reports of officers (s. 123(4) CBCA). The business judgment rule — that courts will defer to informed business decisions made in good faith — has been adopted in Canada (Maple Leaf Foods Inc v. Schneider Corp (1998), 42 OR (3d) 177 (CA)).

Shareholder Remedies

Canadian corporate law provides robust shareholder remedies. The oppression remedy (s. 241 CBCA; s. 248 OBCA) permits a court to rectify conduct that is oppressive, unfairly prejudicial, or unfairly disregards the interests of a shareholder, creditor, director, or officer. The remedy is broad and flexible: courts may appoint receivers, amend by-laws, order purchase of shares, or wind up the corporation. The Supreme Court in BCE Inc v. 1976 Debentureholders held that the test for oppression requires proof of a breach of reasonable expectations and that the conduct amounts to oppression, unfair prejudice, or unfair disregard.

The derivative action (s. 239 CBCA) permits a shareholder or other complainant to bring an action in the name of the corporation with leave of the court, provided the directors have not pursued the action and the complainant is acting in good faith and in the interests of the corporation. The Supreme Court in Hercules Management Ltd v. Ernst & Young [1997] 2 SCR 165 clarified the requirements for leave.

Appraisal rights (s. 190 CBCA) entitle dissenting shareholders to be paid the fair value of their shares when the corporation undertakes fundamental changes such as amalgamation or sale of substantially all assets. Shareholders may also bring personal actions for breaches of duties owed directly to them, and may apply for a compliance order (s. 247 CBCA) to enforce corporate statutes and by-laws.

Fundamental Changes

Fundamental changes — including amendments to articles (s. 173 CBCA), amalgamation (ss. 181–185), continuance into or out of another jurisdiction (ss. 187–188), and sale of substantially all assets (s. 189) — require special resolutions (two-thirds of votes cast). Dissenting shareholders may exercise appraisal rights. Arrangements under s. 192 CBCA permit court-approved reorganizations, commonly used in mergers and acquisitions and corporate restructuring.

Corporate Governance and Convergence

Canadian corporate governance has converged significantly with US and UK standards. Audit committees are mandatory for public corporations (s. 171 CBCA; National Instrument 52-110). The Canadian Securities Administrators (CSA) and the Toronto Stock Exchange (TSX) impose governance disclosure requirements, including board independence, director elections, and diversity policies. Canada has adopted a comply-or-explain model for governance disclosure, similar to the UK’s approach.

Executive compensation must be disclosed under NI 51-102 and subject to a say-on-pay shareholder vote at most public companies (non-binding). Proxy access and the regulation of proxy solicitation are governed by NI 51-102 and the CBCA.

The Supreme Court’s decisions in Peoples Department Stores and BCE align Canadian law with the enlightened shareholder value model associated with UK corporate law, rejecting both the strict shareholder primacy of US law and the multi-stakeholder model of continental European systems.

Securities Regulation Overlay

Public corporations are subject to securities regulation administered by provincial securities commissions coordinated through the CSA. The Prospectus Rule (NI 41-101) governs public offerings; the Continuous Disclosure Obligations (NI 51-102) require periodic financial statements, management’s discussion and analysis, and material change reporting. Insider trading is prohibited under provincial securities legislation and the Criminal Code (s. 382.1). The CBCA itself imposes insider reporting obligations (s. 126).

Winding Up and Dissolution

A corporation may be dissolved voluntarily (s. 211 CBCA), by court order (s. 214) on application by a shareholder or creditor where it is just and equitable to do so, or administratively by the Director under the CBCA for default (s. 212). Dissolution does not affect the personal liability of directors and officers for obligations incurred before dissolution.