Pay fees to provide corporation’s capital Members have rights, including right to elect directors Unlimited Liability Limited Liability Valuation Check earning capacity (future cash flow) & investors’ wealth Only need to earning capacity Monitoring Costs Check on changes in wealth of investors - Managers risking wealth Less need to control managers because potential for loss smaller Diversification Each investment risks all personal wealth Can reduce overall risk without putting personal wealth at risk Liquidity Less: Costs of assessing investment cost & restrictions on moving interests/shares More liquidity Optimal Investment Decisions Obstacle to these decisions: accounting for risk to personal wealth No obstacle to diversification and optimal money making decisions Market Price No single price for investment, need to check each one Standard price for units of investment with no personal risk Economies of Scale Costs rise with more investors (more due diligence to do) No increased costs with number of investors Transaction costs higher with unlimited liability – need to negotiate limited liability into every deal Tort liability: negligence - don’t negotiate limited/unlimited liability before negligence occurs normally – what should starting point be? England Medieval times-form of corporation used for public and ecclesiastical bodies, given charter from the Crown, were seen as separate legal persons, but not for business Merchant traded and guild regulated behaviour of individual members, not separate legal entity formed for foreign trade, Crown charters given that typically provided monopoly on trade in given area Joint stock companies-formed without reliance on Crown charter, make investments which would be used to buy goods for voyage, partnerships with provisions to make shares transferable, not separate legal entity 17th/18th centuries-Crown charters used to create domestic companies, also separate modern corporations
CBCA ss. 82-93 Typical ways of debt finance: Bank loans, commercial paper (promissory note), bonds/debentures (evidence of indebtedness – pay back principal & specified interest) Bond typically means payment obligation secured in assets Trustee normally appointed to enforce bond/debenture: Without trustee, bond/debenture holders would need to individually enforce debt obligations (some may try to free ride) Trustee must be incorporated, no conflict interest, access to list of debenture holders, power to demand evidence of compliance Trustee give notice of default, duty of loyalty to interests of debt holders Securities under provincial jurisdiction Canadian Securities Administrators – harmonizes securities law, make national policy statements Security is an investment To determine if something is a security, use the Howey-Foreman test: (Pacific Coast Coin Exchange) i) A contract, transaction, or scheme whereby a person invests ii) in a common enterprise; and iii) the efforts of a promoter or third party are undeniably significant in providing the profits the person expects from the investment Distribution of a security of issuer that hasn’t been previously issued Exemptions from prospectus: Small businesses under private issuer exemption, can sell to certain people (e.g. director, officer, employee, associate, family, friend accredited investor) Important because establishing prospectus costly Private issuer = Issuer of securities with less than 50 shareholders other than employees & Issuer that have publicly traded securities: Exemption to issuing security to accredited investors (they don’t need protection of prospectus) Process for distributing securities under prospectus: Disclosure on enterprise -> securities administrator vets the disclosure Disclosure is continuous obligation for reporting issuer (a normal issuer that distributes securities under a prospectus) Insider trading: Can’t trade with issuer when you know info not disclosed, can’t tell others this info unless it’s required in normal course of business Applies to people with special relationship with issuer Takeover bid rules: Bid must be made to all targets of issuer’s shares, kept open 35 days, shares tendered can be withdrawn within bid period Bid for less than all shares handled pro-rata