Chapter 11: Financing and Listing Securities
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CHAPTER 11: FINANCING AND LISTING SECURITIES Topic One: Types Of Business Structures 1. Three Types of Business Organizations. A. Sole proprietorship. (1) The sole proprietor has: (a) Sole ownership. (b) Total liability. (c) Taxation of business earnings at the owner’s personal tax rate. (d) Limited resources, typically. B. Partnership. (1) The partnership has: (a) Two or more contributors to the business. (b) More resources than a sole proprietorship. (c) Liability determined by the type of partner: i. General partners who have equal and total liability. They are involved in the everyday operations of the business. ii. Limited partners who have limited liability. Limited partners cannot be held liable if they do not participate in the management of the company. C. Corporation or Incorporated business. (1) The corporation has: (a) A structure that makes it a separate legal entity. (b) Ownership that is either private or public. i. Private corporations have restrictions on the right of shareholders to transfer shares, a limit of 50 shareholders, and cannot sell shares to the public. ii. Public corporations have none of the restrictions of private companies. All companies whose shares are listed on a stock exchange or trade over-the-counter are public companies. (d) Assets that are owned by the company, not the shareholders. (e) The need to pay taxes and the ability to sue (or be sued) in the courts. (f) Greater access to capital which makes it easier for a corporation to expand than a proprietorship or partnership. (g) Shareholders that are not liable for the debts of the corporation beyond the amount of equity that they have in the company. Topic Two: Incorporated Businesses 1. Incorporation. A. A charter is used to specify the structure of a company (number of shares issued, etc.). It is issued by the government after the necessary documents for incorporation are filed, depending on whether it is to be a provincially or federally incorporated company. (1) The charter can take the following forms: (a) Letters patent (b) Memorandum of association (c) Articles of incorporation (2) The charter contains the corporate name (including the word limited, corporation, or incorporated, or their abbreviations), date of incorporation, registered office, authorized capital, the characteristics of the shares, and any restrictions. B. Determining where to incorporate depends on the laws of incorporation for federal versus provincial jurisdiction, the type of business, and where the business will be active. (1) Federal incorporation is carried out under the Canada Business Corporations Act (CBCA). (a) A federally incorporated corporation can do business in any province subject to each province’s general application rules. (2) A provincially incorporated corporation can do business in its home province, but might need additional charters to operate in other provinces. C. Whether a company is incorporated federally or provincially can affect a company in the following ways: (1) Method of incorporation. (2) Provincial tax payable. (3) Corporate names available. (4) Requirements for directors’ residency. (5) Age restrictions of the directors (6) Meeting requirements of the board (7) Required number of directors (8) Required financial statements Comparison of Corporate Structures Sole Partnerships Corporations proprietorships (publicly traded) (s.p.) Ability to Based on the Based on the financial Easily done by Finance financial resources contribution of the issuing shares and of the s.p., and partners; outside debt. However, only success of the funding must be sought those companies business. Growth is through bank loans or that appeal to the for the most part the addition of new capital markets will self-funded, unless partners. find those markets business loans are receptive to new taken. issues. Thus, their growth can be easily financed. Continuity of None after death of Terminated by winding- Unlimited, except by Existence s.p., unless the up or dissolution. events such as business is bought acquisition or and continued by its bankruptcy. new owner. Financial Limited to the Limited to the financial Limited to amount Liability financial resources resources of the spent by of the s.p. and the partners. Liability will be shareholders to buy profits that reside in determined by whether shares. the business. a partner is a general partner and involved in the day to day operations. General partners have equal and total liability. A limited partner does not participate in daily operations and has limited liability to the extent of the partner’s investment. Legal Liability The owner of a s.p. A partner cannot sue a A corporation can be can sue and be partnership; neither can sued as a separate sued and will be a partnership sue a entity. Shareholders personally liable. partner. are protected from suits brought against the corporation. A shareholder can sue a corporation, and that corporation can sue the shareholder. Operational S.p.s operate Partners run the show. Shareholders with Issues independently and voting rights can report to no one. exercise some control over corporate issues and the board of directors. There are no laws sanctioning how a corporation organizes its operations. The organizational structure is influenced by the specific corporation’s size, industry, and location. Regulation Unregulated. Regulated by the extent Highly regulated, of the partnership with ever-increasing agreement. new levels of rules to be met. Taxation Business profits Business profits shared Corporations are become the income by the partners. taxed at a lower tax of the s.p., and are rate than individuals, taxed at his or her and are permitted personal income- many deductions not tax rate. Some available to business individual taxpayers. deductions are Dividends issued by allowed. corporations represent after-tax distributions, and because they are taxed in shareholder’s hands, they represent an example of double taxation. Transfer of Business must be Partnership interest or Typically highly Ownership sold; s.p. can be partnership property liquid. challenged to find a that becomes buyer willing to pay ―available,‖ due to a fair price. death or departure of a partner, must be bought out by the remaining partnership. 2. Public and Private Corporations. A. At the time of incorporation, a general bylaw is created to outline the rules of conduct for the corporation. (1) Directors pass bylaws; shareholders must give their approval of the bylaws. (2) Bylaw provisions deal with: (a) Shareholder and director’s meetings. (b) Director election, removal, and qualification. (c) Officers’ appointments, duties, and remuneration. (d) Dividend declaration and payment. (e) The fiscal year-end date. (f) Document signing authority. B. Ownership of shares in a company gives the shareholder the right to vote and contribute to the control of the company (e.g., shareholders vote to elect the directors). (1) In order to vote at a meeting, a shareholder must own shares registered in his or her own name or have a completed proxy. (a) A proxy form and information circular are sent to shareholders with notice of an shareholder’s meeting. i. A proxy gives someone the right to vote on behalf of a shareholder. ii. A proxy is good for one meeting and any adjournments of that meeting. iii. Proxies may be revoked at any time. iv. The management of public companies can solicit proxies to vote on behalf of shareholders; so too can shareholders assign their proxies to non- management. If management does not control enough votes, there is an opportunity for challengers with proxy support to take over and remove the existing management in a proxy fight. (2) Different classes of shares may have different voting privileges and some shares may have no voting rights. C. Business affairs determined at annual meetings include: (1) Electing directors. (2) Appointing auditors. (3) Distributing financial statements and the auditor’s report. (4) Considering other affairs. D. When a corporation is in financial difficulty voting shareholders may put their shares into a voting trust (held by a trustee) in which a few people control the voting privileges until the difficulties are resolved. (1) Under the voting trust agreement, the shareholders maintain all shareholder privileges except voting rights. 3. The Structure of the Organization. A. Directors. (1) Any person who is of the age of majority, of sound mind, and not an undischarged bankrupt can qualify as a director. (2) Corporations are often required to have a certain number of directors who are not officers or employees of the corporation or its affiliates. (3) Directors’ duties: (a) Appoint and supervise corporate officers. (b) Appoint those responsible for signing or banking. (c) Authorize contracts, and approve budgets and expansion plans. (d) Decide when to issue shares. (e) Declare dividends and other profit distributions. (4) Directors are: (a) Required to act in the best interests of the corporation. (b) Liable for illegal acts of the corporation that are committed with directors’ knowledge and consent. (c) Liable for dividends that are improperly declared. (d) Liable for wages of the employees of the corporation and government remittances. (e) Liable for any misrepresentation contained in a prospectus and other statutory filing, such as takeover- bid circulars or issuer-bid circulars. (f) Required to exercise care, diligence, and skill. (5) Directors and officers may also be subject to regulatory sanctions under securities legislation, or prosecution under criminal law. B. Officers. (1) Officers are employees of the corporation who have been appointed by the directors to run the business day-to-day. (2) Typically, officer titles and responsibilities are: (a) Chairman of the Board i. Elected by the board of directors and may have any/all the duties of the corporation’s president or officers. May be the chief executive officer (CEO). ii. Chairs meetings of the board and has a great deal of influence on the management of the corporation. (b) President i.