8.1 Corporate Structures & Corporate Governance

Corporate Structures: Public vs. Private Corporations in Canada

A corporation is a distinct legal entity created under statute—either federally under the Canada Business Corporations Act (CBCA) or provincially under statutes such as the Ontario Business Corporations Act (OBCA) or the British Columbia Business Corporations Act (BC BCA). As a separate legal "person," a corporation possesses perpetual succession, can enter into contracts, incur debt, sue or be sued, and own property independently of its owners.

A fundamental feature of corporate status is limited liability. Shareholders risk only the capital they have invested in corporate shares; their personal assets remain insulated from corporate creditors and statutory liabilities. However, Canadian law distinguishes sharply between public corporations and private corporations across governance, capitalization, and disclosure dimensions.

Defining Public and Private Corporations

• Public Corporations: A public corporation has distributed securities to the general investing public and is designated as a reporting issuer under provincial securities legislation (such as the Ontario Securities Commission [OSC] or the British Columbia Securities Commission [BCSC]). Its shares typically trade on secondary equity exchanges such as the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), or the Canadian Securities Exchange (CSE). Public companies face extensive statutory continuous disclosure mandates, quarterly financial reporting, and strict corporate governance standards.
• Private Corporations: A private corporation restricts the transfer of its shares, limits its total shareholder base (traditionally capped at no more than 50 non-employee shareholders under classic securities regulations), and is legally prohibited from offering its shares or debentures to the public. Private corporations enjoy substantial operational privacy, face significantly lower regulatory filing costs, and are not subject to public continuous disclosure regimes.

Comparative Matrix: Public vs. Private Corporations

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The Corporate Governance Framework

Corporate governance refers to the system of rules, practices, processes, and institutional checks by which a corporation is directed, monitored, and held accountable. Effective governance balances the competing interests of diverse stakeholders—including common shareholders, preferred shareholders, bondholders, management, employees, customers, suppliers, and the broader community.

The Tripartite Corporate Hierarchy

The fundamental corporate structure in Canada consists of three distinct groups:

Corporate Governance Architecture
 ├── 1. Shareholders: Legal owners of the equity; elect directors and approve major corporate transactions
 ├── 2. Board of Directors: Elected stewards of corporate assets; establish strategy, hire executive leadership, and declare dividends
 └── 3. Executive Management: Professional officers (CEO, CFO, COO) running day-to-day operations and executing strategy

1. Shareholders: As residual owners, shareholders provide equity capital. While they do not directly manage operations, they exercise democratic corporate power by voting on director candidates, appointing the independent external auditor, and approving fundamental corporate amendments (such as mergers, amalgamations, sales of substantially all assets, or alterations to articles of incorporation).
2. Board of Directors: Directors act as the governing body representing corporate interests. The board is responsible for appointing and evaluating the Chief Executive Officer (CEO), approving strategic corporate plans, monitoring enterprise risk management, ensuring the integrity of internal controls and financial reporting, and authorizing capital actions (such as share issuances, debt financings, and dividend declarations).
3. Executive Officers (Management): Led by the CEO, Chief Financial Officer (CFO), and Chief Operating Officer (COO), executive officers manage daily business activities within the strategic parameters established by the board.

Directors' Statutory Duties under Canadian Law

Under the CBCA and provincial corporate statutes, directors and officers are held to two foundational legal standards:

• Fiduciary Duty (Duty of Loyalty): Every director and officer must act honestly and in good faith with a view to the best interests of the corporation. Under Canadian jurisprudence—most notably the landmark Supreme Court of Canada ruling in BCE Inc. v. 1976 Debentureholders (2008)—the fiduciary duty is owed to the corporation as an ongoing commercial enterprise, not exclusively to short-term common shareholders. Directors are legally entitled to consider the reasonable expectations of various stakeholders (including debt holders, employees, consumers, and the environment) provided they are acting in the long-term interest of the entity.
• Duty of Care: Directors must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Under the Business Judgment Rule, Canadian courts will not second-guess well-informed, good-faith business decisions made by directors, even if the decision later produces adverse financial results. To rely on this protection, directors must demonstrate that they acted prudently, considered relevant advice from professional experts, and conducted appropriate due diligence.

Board Committees and Independence Mandates

To ensure rigorous oversight, modern corporate governance relies heavily on specialized board committees. Under Canadian securities regulations—specifically National Instrument 52-110 (Audit Committees)—the governance structure must prioritize independent oversight:

1. Audit Committee:
   • Regulatory Mandate: NI 52-110 requires that every public issuer on the TSX have an audit committee consisting of at least three directors, all of whom must be independent (having no direct or indirect material relationship with the issuer) and financially literate (possessing the ability to read and understand a balance sheet, income statement, and cash flow statement of comparable complexity).
   • Responsibilities: Oversees the integrity of financial statements, selects and recommends the external auditor to shareholders, pre-approves non-audit services, oversees internal accounting controls, and establishes "whistleblower" procedures for accounting complaints.
2. Compensation Committee:
   • Reviews and recommends executive remuneration structures, including base salaries, performance bonuses, and stock option or equity grants. Ensures executive incentives align with long-term enterprise value rather than short-term metric inflation.
3. Nominating and Governance Committee:
   • Identifies and evaluates qualified director candidates, establishes board diversity criteria, evaluates overall board and committee effectiveness, and develops ongoing corporate governance guidelines.

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Shareholder Democracy: AGMs, Proxy Circulars, and Voting Mechanics

Corporate statutes mandate that public companies hold an Annual General Meeting (AGM) of shareholders every year. Under the CBCA, the meeting must be held no later than 15 months after the previous AGM and no later than 6 months after the end of the corporation's preceding financial year.

The Management Information Circular (Proxy Circular)

In advance of the AGM, management must distribute a comprehensive Management Information Circular (often referred to as the Proxy Circular) to all voting shareholders of record. This regulatory disclosure document contains crucial governance information:

• Detailed biographies, qualifications, shareholdings, and committee memberships of director nominees.
• Executive compensation disclosures for the CEO, CFO, and the three highest-paid other executive officers (known collectively as Named Executive Officers, or NEOs).
• Detailed discussion of corporate governance practices, compliance with national guidelines, and potential conflicts of interest.
• Proposed resolutions subject to shareholder approval, such as executive compensation advisory votes ("Say-on-Pay"), equity incentive plans, and the reappointment of the external auditor.

Proxy Voting and Proxy Battles

Because the vast majority of retail and institutional shareholders cannot physically attend the AGM, voting is primarily executed via proxy:

• Proxy Instrument: A legal authorization by which a registered shareholder appoints a designated proxyholder (typically management nominees, though the shareholder retains the right to appoint any other individual) to attend the meeting and vote their shares according to their instructions.
• Majority Voting Policies: TSX-listed companies are required to maintain a majority voting policy for uncontested director elections. Under this rule, each director must receive more "for" votes than "withheld" votes; any nominee failing to achieve a majority must immediately tender their resignation to the board.
• Proxy Contests (Proxy Fights): When dissident shareholders (such as activist hedge funds) disagree with corporate strategy or capital allocation, they may solicit voting proxies from other shareholders via a Dissident Information Circular to vote out incumbent directors and elect an alternate slate of directors to the board.