Overview (April 2003) - International Law Office

Introduction
Legislative Framework
Forms of Business Association
Principles of Contract Law
Recent Developments

Introduction

An overview of company/commercial law must begin with an understanding of the division of powers between the different levels of government in Canada. Under the Constitution Act 1867 (UK) 30 & 31 Vict c3 (reprinted in RSC 1985, App 2/5), various governing powers are divided between the federal government and the 13 provincial and territorial governments. The provincial/territorial governments have delegated some of their powers to municipal governments. The result of this division of powers is that each of these three levels of government has at least some ability to affect company/commercial relations. However, the main responsibility for company/commercial law resides with the federal and the provincial/territorial governments. Accordingly, Canadian company/commercial law involves an assessment of various federal and provincial/territorial statutes and, as in all common law systems, an understanding of the relevant legal jurisprudence.

The province of Québec, unlike the other provinces and territories, operates under a civil law system.

This Overview focuses on three general areas of company/commercial law:

• the legislative framework;

• forms of business association; and

• contract law.

A round-up of recent developments in domestic company/commercial law is also provided.

Legislative Framework
Many statutes, both federally and provincially/territorially, affect company/commercial law. Some statutes address specific areas of law, while others focus on specific industries. Although certain statutes are not focused on company/commercial law, they can impact on company/commercial law depending upon the particular factual situation.

Federal statutes

Some of the most important federal statutes dealing with Canadian company/commercial law include:

• the Canada Business Corporations Act (RSC 1985, cC-44);

• the Canada Cooperatives Act (SC 1998, c1);

• the Canada Corporations Act (RSC 1970, cC-32);

• the Companies' Creditors Arrangement Act (RSC 1985, cC-36);

• the Competition Act (RSC 1985, cC-34);

• the Government Corporations Operation Act (RSC 1985, cG-4);

• the Income Tax Act (RSC 1985 (5th Supp), c1);

• the Investment Canada Act (RSC 1985 (1st Supp), c28); and

• the Winding-up and Restructuring Act (RSC 1985, cW-11).

Provincial and territorial acts
Some of the more important provincial and territorial statutes include:

• the Business Corporations Act (RSA 2000, cB-9 (Alberta));

• the Company Act (RSBC 1996, c62 (British Columbia));

• the Corporations Act (RSM 1987, cC225 (Manitoba));

• the Business Corporations Act (SNB 1981, B-9.1 (New Brunswick));

• the Corporations Act (RSN 1990, cC-36 (Newfoundland and Labrador));

• the Business Corporations Act (SNWT 1996, c19 (Northwest Territories));

• the Companies Act (RSNS 1989, c81 (Nova Scotia));

• the Business Corporations Act ((Nunavut), SNWT 1996, c19 (Nunavut));

• the Business Corporations Act (RSO 1990, cB-16 (Ontario));

• the Companies Act (RSPEI 1988, cC-14 (Prince Edward Island));

• the Companies Act (RSQ cC-38 (Québec));

• the Business Corporations Act (RSS 1978, cB-10 (Saskatchewan)); and

• the Business Corporations Act (RSY 1986, c15 (Yukon)).

Many of the provincial/territorial statutes are similar to one another but this is not always the case. Therefore, when faced with a legal issue, it is recommended that each applicable statute be reviewed carefully in order to ensure legal compliance.

Forms of Business Association

A variety of legal arrangements are used to govern commercial activity in Canada. The most common arrangements include sole proprietorships, partnerships and corporations. Additional forms, such as joint ventures, franchises and licences and cooperatives, are also available in order to meet specific needs.

Sole proprietorships
A sole proprietorship arises when an individual carries out business for his or her benefit without employing any legal form of business association. It is the simplest and least costly method of starting a business. Although there are almost no formal legal requirements, a sole proprietor may require some type of licence from the municipal, provincial/territorial or federal government before commencing business activities. If a sole proprietor elects to carry out business in a name other than his or her own legal name, he or she must register that business name with the appropriate government office.

The main benefit of this type of business arrangement is that all of the benefits and profits of the business will be attributed to the sole proprietor. The main disadvantage is that the sole proprietor is responsible for all the liabilities of the business. However, some of this risk can be minimized either by negotiating contractual arrangements whereby liability is limited, or by purchasing insurance.

Partnerships
In all Canadian provinces/territories with the exception of Québec, a partnership is formed when two or more individuals or corporations carry out business together with a view to making a profit. In Québec, a partnership is a contractual agreement whereby two or more individuals or corporations agree to carry out an activity that may be the operation of an enterprise, by providing property, knowledge and/or activities and by sharing profits. Different types of partnership are available depending on the province/territory.

General partnerships
Two or more parties may enter into an agreement to form a general partnership. Each province/territory has a specific statute codifying the relationship between the partners and the rights of third parties against the partnership. These statutes provide default terms that can regulate a partnership. However, many partnerships opt out of such terms by having the partners execute a partnership agreement at the commencement of the partnership.

In a general partnership, each partner is held jointly and severally liable for all of the debts incurred by the partnership. This means that one partner may be held responsible for all of the debts and obligations incurred by the partnership. A partner can also be responsible for any wrongful act or omission by the other partners acting in the ordinary course of the partnership's business.

Limited partnerships
A limited partnership is formed by entering into an agreement that complies with provincial/territorial limited partnership laws. Some provinces, such as Ontario and New Brunswick, have specific legislation to govern limited partnerships. Other provinces and territories, such as British Columbia, incorporate the law regarding limited partnerships into their respective partnership acts.

While a limited partnership must have at least one general partner, it can have any number of limited partners. The general partners manage the affairs of the business and have unlimited liability. In contrast, the liability of the limited partners is restricted to the amount that they contributed to the limited partnership. An individual's status as a limited partner is based on the fact that he or she takes no active part in the management of the limited partnership. If a limited partner is seen to have an active role in the management of the limited partnership, he or she may be deemed a general partner and lose his or her limited liability status.

Limited liability partnerships
Some provinces, such as Ontario and Alberta, have amended their partnership acts to provide for limited liability partnerships. A limited liability partnership is essentially a hybrid between general and limited partnerships. A limited liability partnership allows partners to limit their liability so that each partner would not be personally liable for the negligent acts of the other partners. However, each partner would still be liable for his/her own negligent acts, the negligent acts of employees who are under his/her supervision and the actions taken by the partners in the ordinary course of business. A limited liability partnership can be formed only if certain legislative requirements are met.

Undeclared partnerships
The undeclared partnership is a de facto partnership and is available as a form of business association only in Québec. Each partner retains ownership of the property constituting his or her contribution to the undeclared partnership. Each partner is liable for the debts and obligations of the other partners on an unlimited basis, provided that the debts are incurred as a result of the operation of the common enterprise.

Corporations
Corporations are one of the most frequently used forms of business association in Canada. The main advantage of a corporation is that it is a legal entity separate and apart from its directors, officers and shareholders. Generally, a corporation is responsible for all the liabilities of the business. The shareholders incur no liability for the actions taken by the corporation. However, in certain circumstances, directors and officers may be held liable for certain business actions. Another benefit of incorporating is that the corporation has a perpetual existence; it does not cease to exist due to the death of a shareholder or director.

Incorporation of a business is possible under either federal or provincial/territorial law. One advantage of a federally incorporated corporation is that the company can carry out business throughout Canada, even though it may be required to register or obtain a licence in a province/territory in which it does business. In contrast, a company incorporated under provincial/territorial law can carry out business only in the province/territory in which it is incorporated, unless it obtains an extra-provincial/extra-territorial licence.

The main disadvantage of incorporating is that the corporation is the most expensive and difficult form of business association to set up and operate. Federal and provincial/territorial agencies closely regulate the activities of all corporations, and extensive record keeping is mandatory. Accordingly, many small businesses would not elect to use this form of business association.

Certain steps must be taken following incorporation. They include the election of directors, the enactment of bylaws, the appointment of officers, the issuance of shares and the delivery of share certificates.

A corporation is owned by its shareholders and the directors are usually responsible for the management, or the supervision of the management, of the corporation. Directors generally delegate management functions to the officers of the corporation. In some jurisdictions the shareholders of a corporation may enter into a unanimous shareholders agreement, pursuant to which certain powers of the corporation may be vested in the shareholders instead of the directors.

Joint ventures
A joint venture is a business activity carried out by two or more persons, partnerships and/or corporations. Most joint ventures are governed by a contractual arrangement between the parties involved. While this is not a necessity, it is strongly recommended that parties enter into a written contract because no domestic statutes govern the joint venture relationship and the parties may want to avoid being deemed a partnership. Typically, joint venture agreements address the following matters:

• the nature and purpose of the commercial activity;

• the amount and property contributed to the joint venture by each party;

• the share of profits and losses that will be attributed to each co-venturer; and

• the length of time that the joint venture will be in existence.
  

Cooperatives
A cooperative is created when an autonomous association of persons voluntarily unite to meet common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. Each province/territory has a statute governing the creation and regulation of cooperatives, but most are registered under the federal Canada Cooperatives Act.

Cooperatives are financed by selling shares to members, issuing securities approved by the Cooperatives Securities Board, and by debt capital. A cooperative is owned and democratically controlled by its members. Each member has only one vote regardless of the amount of money he or she has invested.

The general purpose of a cooperative business is to provide its members with goods and/or services, usually at competitive prices. In a cooperative business, any surplus at the end of the fiscal year is allocated to members' accounts as a patronage refund. As in corporations, the liability of shareholders in cooperatives is limited to the value of the shares held.

Principles of Contract Law

Like many common law jurisdictions, Canadian contract law was founded on contract principles established under English common law and equity. In addition to the common law and equity, contracts in Canada must also comply with both federal and provincial/territorial legislation.

A contract is basically an agreement between two or more parties. Three major elements are necessary in order to make a legally valid contract:

• offer and acceptance;

• an intention among the parties to be legally bound; and

• consideration.
  

Privity
The doctrine of privity states that only parties to a contract can enforce a term or a condition of a contract. However, there are exceptions to this rule. One such exception is provided by the law of agency, under which a principal can authorize an agent to enter into a contract with a third party for the benefit of the principal. The principal will then have a direct contractual relationship with the third party.

Capacity
To enter into a contract, each party must be able freely to consent to the contractual terms. Although this is generally not a problem, certain classes of persons suffer from diminished capacity under the law (ie, minors, persons with mental disabilities and intoxicated persons). The law should be reviewed carefully when dealing with such persons in order to avoid having a contract declared void. Artificial persons such as corporations have the capacity to contract; however, restrictions on the ability to contract may exist depending upon the type of corporation.

Invalidity
A contract may be declared invalid for a number of reasons including duress, undue influence, misrepresentation, mistake and illegality. The doctrine of duress requires that a contract not be induced by a physical or economic threat. Similarly, undue influence considers whether there is a special relationship between the parties in which one party's dominating influence impels the other party's consent to a contract.

Some contracts are void and unenforceable even if all requisite elements are present. Contracts that are contrary to public policy fall into this category. Examples include contracts to commit illegal acts, contracts that interfere with the administration of justice, and some contracts dealing with restraint of trade. Contracts that are expressly or impliedly prohibited by statute may also be unenforceable, depending upon the circumstances surrounding the breach of the statute.

Completion
Usually a contract is completed, or discharged, once both parties have fulfilled all of their obligations under the contract. Many contracts will provide express terms that stipulate a specific termination date. The parties may also terminate their contract by entering into an agreement to release each other from their respective contractual obligations. In addition, a contract may end if there is a breach of contract, if one party fails to fulfil the obligations to which it agreed, or if there is a change in circumstances that renders performance impossible.

Recent Developments

Some of the most important developments and trends in Canadian company/commercial law are outlined below.

Corporate governance
A number of recent developments in governance in Canada and the United States are affecting Canadian public companies. On July 30 2002 the US Sarbanes-Oxley Act was enacted in response to Enron and other US corporate scandals. The act provides for a wide range of corporate governance and accounting reforms, implemented by way of Securities and Exchange Commission (SEC) rules. The act is relevant in Canada because it affects non-US issuers whose securities are publicly traded on a US exchange. Among the new SEC rules promulgated under the act is a requirement for public companies to certify periodic reports filed with the SEC. The certification addresses material accuracy and completeness, fair presentation of financial information, and both internal and disclosure controls and procedures. The act also imposes enhanced disclosure, requiring public companies to disclose whether they have a financial expert on their audit committee and whether they have adopted a code of ethics for the chief executive officer and chief financing officer.

Concurrently with the introduction of the act, the NASDAQ (National Association of Securities Dealers Automated Quotation System) and New York stock exchange were also considering changes to their listing requirements which would affect Canadian companies listed on these exchanges. The proposed changes include the introduction of mandatory codes of conduct, a tighter definition of independent directors, and an enhanced role for independent directors on the audit committee and board. The proposed changes have been filed with the SEC and remain under consideration. The act and US stock exchange developments are also relevant because they appear to be influencing the Canadian approach to regulating governance. When the act was signed into law, regulators in Canada were considering regulatory changes in the area of corporate governance.

The Toronto Stock Exchange, Canada's national senior equities exchange, has traditionally taken a principles-based approach to corporate governance, requiring listed companies to disclose their corporate governance practices with reference to 14 best practice guidelines. While companies are not required to comply with the guidelines, they must disclose where their own practices differ from the guidelines or the extent to which a guideline may not apply in their circumstances. The Saucier Report on corporate governance, released in November 2001, recommended changes to the exchange's corporate governance guidelines. In April 2002 the exchange released proposed amendments to its existing guidelines, adopting some but not all of the report's recommendations. Not finalized when the Sarbanes-Oxley Act was passed, the April amendments were subsequently abandoned.

The Toronto Stock Exchange is now proposing to introduce corporate governance continued listing requirements and to enhance its corporate governance guidelines. While the proposals have not yet been released for public comment, they currently contemplate listing requirements relating to audit committee and board composition, audit committee mandates and codes of business conduct as well as enhanced governance guidelines addressing the definition of 'unrelated director' and recommending financial expertise and financial literacy for audit committee members.

The exchange has advised that it will publish the proposals for public comment once it has received input on its current draft proposals from the Ontario Securities Commission.

Technology
Technological advances have necessitated amendments to various corporate law statutes in Canada. For example, the Canada Business Corporations Act now allows shareholders to participate in shareholder meetings by means of telephone or other electronic devices, and allows shareholders to vote electronically unless specifically prohibited from doing so by the corporation's bylaws. Furthermore, provided that certain requirements are met, boards and intermediaries may send their corporations' annual meeting materials to shareholders electronically. To provide for more timely disclosure, recent amendments to Ontario securities law now allow public companies to post their financial statements on the System for Electronic Document Analysis and Retrieval (SEDAR) or on their corporate website. Many statutes, including the Canada Business Corporations Act, have been amended to include new provisions for documents in electronic form, internet agreements and electronic communications.

For further information on this topic please contact Michael Foulds or James Reid at Davies Ward Phillips & Vineberg LLP by telephone (+1 416 863 0900) or by fax (+1 416 863 0871) or by email (mfoulds@dwpv.com or jreid@dwpv.com).