October 5, 2026
Host
Welcome to our discussion on the legal model of the corporation. Today we explore how corporate governance divides power between shareholders and directors under Canadian law. We will examine the Canada Business Corporations Act and the British Columbia Business Corporations Act. We will ask who really controls a company. Is it the shareholders in a general meeting, or the board of directors managing daily operations? We will look at constating documents, voting rights, removal of directors, delegation, and committees. Our goal is to make these complex rules clear and practical. Let us begin with the classic debate about corporate control.
Guest
Thanks for setting the stage. The classic debate starts with Berle and Means. They argued shareholders have little direct control over management. Managers and directors control the corporation’s operations and decisions. In contrast, contractarians see the corporation as a nexus of contracts. Parties voluntarily agree to terms, and law provides default rules they can modify through contracts or corporate documents. This contractarian view emphasizes private ordering. It asks whether corporate law should force a structure or simply fill gaps. Both views shape how courts interpret ambiguous governance rules. They affect how third parties are impacted by internal codes of conduct.
Host
Let us dig into that third-party question. How are outsiders affected by a corporation’s internal code of conduct? For example, if a company’s by-laws say directors must approve all contracts above a certain amount, does a supplier need to know that rule? Generally, internal governance rules are not automatically binding on third parties unless the third party has notice or the rule is part of a public document. Courts often protect innocent third parties who rely on apparent authority. But the internal division of power can still matter. It can determine whether an officer had authority to bind the company.
Guest
Now let us compare constating documents. Under the CBCA, the articles establish the corporation’s basic constitutional framework. They include the company name, share classes and rights, restrictions on share transfers, minimum and maximum number of directors, and any restrictions on business. The by-laws govern how the corporation operates. They cover directors’ and shareholders’ meetings, quorum, election of directors, appointment of officers, signing authority, procedures for issuing shares and paying dividends, and other governance rules. Together, articles and by-laws form the internal rulebook. They are crucial for understanding where power lies and how it can be exercised. This matters greatly. Indeed.
Host
Under the BCBCA, the structure is a bit different. There is a Notice of Articles, which is a short public document. It contains the company name, registered office, records office, directors, and authorized share structure. The Articles contain almost everything that would appear in CBCA articles and by-laws. That includes meeting procedures, directors’ powers, officer appointments, share transfers, share rights if not in the Notice of Articles, and other governance rules. So in British Columbia, the Articles are more comprehensive. The Notice of Articles is a snapshot for the public. This split can affect how third parties find information. Indeed.
Guest
Shareholder powers are mostly exercised through voting rights. Shareholders typically elect directors. In certain circumstances, they can remove directors. They approve amendments to by-laws or articles. They also approve a sale of all or substantially all of the corporation’s assets. But there are limits to shareholder powers. Directors manage or supervise the corporation. Shareholders cannot usually interfere with day-to-day management. The division of power is often called divided control. The general meeting gives ultimate control to shareholders for fundamental changes. Directors control all matters not specifically reserved to the general meeting. This balance is central to corporate governance. Balance matters.
Host
Let us focus on removal of directors. Shareholders may have a right to remove a director before the expiration of their term if the corporate constitution creates that power or a statute provides it. Under the CBCA, directors can be removed by ordinary resolution at a special meeting under section 109. The articles cannot provide for a greater number of votes than section 109 to remove a director, per section 6(4). Unless the articles provide otherwise, each share entitles the holder to one vote at a shareholders’ meeting under section 140(1). This is a significant shareholder check on director power. It can be exercised even without cause.
Guest
Under the BCBCA, removal is different. Directors can be removed by special resolution under section 128(3). The articles can provide for a lower majority. Unless otherwise provided in the articles, each shareholder is entitled to one vote for each share they hold under section 173. A special resolution generally requires two-thirds to three-quarters of votes cast. The articles must set out the special majority as a majority of two-thirds to three-quarters. This is a higher threshold than the CBCA ordinary resolution. It gives directors more protection in British Columbia. The case of Bushell v. Faith is also important. It matters.
Host
By-law amendments also show the division of power. Under the CBCA, directors have the power to make by-laws under section 103. That power is subject to the articles, by-laws, or a unanimous shareholder agreement providing otherwise. Directors can initiate changes. But shareholders must approve changes under CBCA section 103(2). Under the BCBCA, directors can alter articles by following the requirements of section 259. Again, directors initiate change, and shareholders must approve. This is a yield to shareholders. It ensures that fundamental governance changes require shareholder consent. It also prevents directors from entrenching themselves without accountability. This balance is a recurring theme in corporate law.
Guest
A unanimous shareholder agreement is a powerful tool. It is a written agreement among all shareholders that restricts, in whole or in part, the powers of the directors. When a USA is in place, shareholders can take over management powers. They can also limit the board’s authority. This is a contractual deviation from the default statutory model. It reflects the contractarian view. Shareholders can tailor governance to their needs. But a USA must be unanimous. That makes it difficult to achieve in public companies with many shareholders. It is more common in private companies. It can shift liability from directors to shareholders who assume those powers.
Host
Shareholder proposals are another avenue. Qualifying shareholders can propose by-laws through a shareholder proposal under CBCA section 137. Under the BCBCA, qualifying shareholders can submit proposals for changes to be considered at annual general meetings under sections 187 to 189. This gives shareholders a voice beyond voting. It allows them to put governance changes on the agenda. But there are thresholds and procedural rules. The case of Kelly v. Electrical Construction Co. from 1907 is relevant. It dealt with shareholder proposals and the limits of shareholder power. Courts often balance shareholder rights against board authority. This area continues to evolve.
Guest
The case of Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame from 1906 is foundational. It established that the division of power in a company is divided control. Shareholders in a general meeting have ultimate control over certain fundamental matters. These include amending articles and removing or electing directors. But directors control all matters not specifically reserved to the general meeting. Shareholders cannot simply instruct directors on how to manage the business. The board has independent authority. This principle is still influential. It helps courts interpret ambiguous governance rules. It also explains why shareholder resolutions that interfere with management may be invalid.
Host
Let us talk about proxy voting and voter apathy. In theory, shareholders control the general meeting. In practice, many shareholders do not attend. Imagine a company with ten thousand shareholders. Only one hundred attend the annual general meeting. Nine thousand nine hundred vote by management proxy. Management can effectively control the meeting. This can allow directors to usurp shareholder powers. They can influence the proxy voting process. This is a real-world limit on shareholder democracy. It shows that formal rights do not always translate into actual control. Courts and regulators have tried to address this through proxy rules and disclosure requirements. But the gap remains.
Guest
Now let us examine delegation of directors’ powers. Under the CBCA section 115, directors must supervise the affairs of the corporation. Before 2001, the statute required directors to manage the affairs. The change to supervise reflects modern practice. Directors can delegate to a managing director or a committee. But there are limitations. Delegation is subject to the articles and by-laws. It is limited to powers in the ordinary course of business. Directors cannot delegate certain key powers. These include issuing securities, declaring dividends, adopting by-laws, and approving a take-over bid circular. These restrictions protect shareholders and ensure accountability. Delegation is useful but cannot be total.
Host
Under the BCBCA, delegation is broader. Section 136(1) says directors must manage or supervise the management of the business and affairs of the company. Section 137(1) allows the articles to transfer, in whole or in part, management or supervision of management to one or more other persons. Those other persons can be shareholders or persons who are not shareholders or directors. The articles must clearly indicate, by express reference to section 137, the intention to transfer powers. This can be included at incorporation or later by special resolution. The transferee will have all rights, powers, duties, and liabilities of directors to the extent of the transfer. This is a significant shift.
Guest
Common law restrictions on delegation are important. There are three main rules. First, the time rule: you cannot contract away substantially all powers for a long period. Second, the control rule: you cannot delegate control of the company. Third, the appointment rule: you can contract to keep someone in office, provided directors retain management control. In Hayes v. Canada-Atlantic & Plant SS Co., the court said “full powers” must be limited to ordinary business operations. It is intolerable that “full powers” mean a divesture of all director’s functions. This protects the board’s core role. It prevents abdication of statutory duties. Courts scrutinize delegation carefully.
Host
Let us look at Sherman & Ellis, Inc. v. Indiana Mutual Casualty Co. The court said the boundary between permissible and impermissible delegation can be unclear and hard to follow. Corporations may, for a limited time, delegate some managerial functions to outsiders. But transferring all meaningful management authority to substitutes for twenty years is too long. You cannot strip directors or officers of their statutory responsibilities. This case illustrates the time rule. It shows that duration matters. A short delegation may be fine. A long one may be invalid. Courts will ask whether the board retained meaningful oversight. They will also ask whether the delegation was reasonable.
Guest
Kennerson v. Burbank Amusement Co. addresses the control rule. The court held that directors must exercise and maintain control over corporate affairs in good faith. In that case, contractual terms would allow the delegate to change the nature of the enterprise and assign powers to others. The fact that the delegate must make periodic reports to the board did not constitute sufficient retention of control. This is a strong statement. It means directors cannot simply rubber-stamp decisions. They must actively oversee. If they give up control, the delegation is invalid. This protects shareholders and the public. It ensures accountability remains with the board.
Host
Realty Acceptance Corp. v. Montgomery addresses the appointment rule. The court said a board may bind future boards through a reasonable contract if there is no evidence of fraud and the term is reasonable. This means you can contract to keep someone in office for a reasonable period. But directors must retain management control. The appointment rule allows some continuity. It prevents constant turnover. But it cannot be used to entrench a delegate permanently. The key is reasonableness. Courts will look at the length of the term and the scope of powers. They will ask whether the board still has meaningful authority. This balances stability and accountability.
Guest
Committees are another part of corporate governance. Public companies must have an audit committee. Under the BCBCA section 224 and CBCA section 171, the audit committee must have at least three directors. A majority of the members must be outside directors. Outside directors are directors who are not officers or employees of the company. The audit committee has important duties. It must review financial statements before they are approved. It must notify each director of any errors found. It must prepare and issue revised financial statements or otherwise inform shareholders. This is a key oversight function. It helps ensure accurate financial reporting.
Host
Non-compliance with audit committee rules is serious. Knowingly failing to comply is an offence. The fine can be up to five thousand dollars or six months imprisonment. This shows that governance is not just optional. It has legal teeth. But enforcement varies. Some argue these penalties are too low to deter large corporations. Others say reputational damage is the real deterrent. What do you think? Are these penalties sufficient? Or should they be higher? This is a good example of how law tries to balance flexibility and accountability. It also shows the limits of formal rules. Indeed, it does. Yes.
Guest
I see your point. The penalties may seem low, but they are criminal sanctions. They can apply to individuals. That can be a strong deterrent. Also, securities regulators can impose additional penalties. The real issue is whether the audit committee has enough independence and resources. If outside directors are not truly independent, the committee may fail. Governance is about culture as much as rules. The law sets minimum standards. But best practices go further. Companies with strong governance often exceed statutory requirements. They see it as good business. So the legal model is a floor, not a ceiling. That is an important distinction.
Host
Let me challenge the contractarian view. If the corporation is just a nexus of contracts, why do we need mandatory rules at all? Why not let parties agree to anything? The contractarian answer is that default rules save transaction costs. But mandatory rules protect third parties and society. For example, audit committee requirements protect investors. Removal rights protect shareholders. Fiduciary duties protect the corporation. So even contractarians recognize some mandatory rules. The debate is about how many and how strict. Courts often interpret ambiguous rules by looking at the statutory purpose. They ask whether a rule is a default or a constraint. This is a key analytical skill for lawyers.
Guest
That is a fair challenge. I would say mandatory rules exist to correct market failures. Not all parties have equal bargaining power. Third parties cannot easily contract with every internal governance rule. Mandatory rules also protect the integrity of the market. They ensure minimum standards. But you are right that contractarians do not oppose all mandatory rules. They just want them to be justified. The burden is on the regulator to show why a rule cannot be default. In practice, corporate law is a mix. Some rules are default, some are mandatory. The CBCA and BCBCA reflect this mix. Courts must determine which is which. That is why interpretation matters.
Host
Let us return to the basic structure of corporate governance. Berle and Means argued that shareholders have little direct control. Managers and directors control operations. Contractarians see the corporation as a nexus of contracts. The law provides default rules that parties can modify. How are third parties impacted by internal codes of conduct? Generally, internal rules do not bind third parties unless they have notice. But they can affect apparent authority. The CBCA and BCBCA have different constating documents. The CBCA uses articles and by-laws. The BCBCA uses a Notice of Articles and Articles. These documents define the division of power. They are the foundation of corporate governance.
Guest
Shareholder powers include voting rights. They elect directors. They can remove directors in certain circumstances. They approve amendments to by-laws or articles. They approve sales of all or substantially all assets. But there are limits. Directors manage or supervise the corporation. Shareholders cannot usually interfere with day-to-day management. Delegation of director’s powers to shareholders is possible through a unanimous shareholder agreement. Under the CBCA, directors must supervise under section 115. They can delegate to a managing director or committee, but not certain key powers. Under the BCBCA, section 137 allows broader transfer to other persons. Common law restricts delegation. These rules shape the balance of power.
Host
Removal of directors is a key shareholder power. Under the CBCA, directors can be removed by ordinary resolution at a special meeting under section 109. The articles cannot require a greater number of votes than section 109. Each share generally gives one vote under section 140(1). Under the BCBCA, directors can be removed by special resolution under section 128(3). The articles can provide a lower majority. Each shareholder has one vote per share under section 173. A special resolution requires two-thirds to three-quarters of votes cast. The articles must set out that special majority. Bushell v. Faith shows how weighted voting can protect a director. This is a crucial difference between the two statutes.
Guest
By-law amendments also differ. Under the CBCA, directors have the power to make by-laws under section 103. That power is subject to the articles, by-laws, or a unanimous shareholder agreement. Directors can initiate changes. But shareholders must approve changes under section 103(2). Under the BCBCA, directors can alter articles by following section 259. Again, directors initiate, and shareholders must approve. This is a yield to shareholders. It ensures fundamental changes require shareholder consent. It also prevents directors from entrenching themselves without accountability. Shareholder proposals are another avenue. Qualifying shareholders can propose by-laws under CBCA section 137. Under the BCBCA, sections 187 to 189 allow proposals for changes at annual general meetings. These tools empower shareholders.
Host
Let us discuss the case of Kelly v. Electrical Construction Co. from 1907. It is an early case on shareholder proposals. The court considered whether shareholders could propose by-laws. It balanced shareholder rights against board authority. The decision helped shape the law on shareholder proposals. Today, the CBCA and BCBCA have detailed provisions. They set thresholds and procedures. But the underlying tension remains. How much power should shareholders have? How much should directors retain? Courts often look at the statute and the constating documents. They also consider the purpose of the proposal. This case reminds us that these debates are not new. They have deep roots.
Guest
Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame is foundational. It established divided control. Shareholders in a general meeting have ultimate control over fundamental matters. These include amending articles and removing or electing directors. But directors control all matters not specifically reserved to the general meeting. Shareholders cannot simply instruct directors on how to manage the business. The board has independent authority. This principle is still influential. It helps courts interpret ambiguous governance rules. It also explains why shareholder resolutions that interfere with management may be invalid. The division of power is not just a theory. It has practical consequences. It determines who can make decisions and who can be held accountable.
Host
Proxy voting and voter apathy are practical limits. In theory, shareholders control the general meeting. In practice, many do not attend. Imagine ten thousand shareholders. Only one hundred attend. Nine thousand nine hundred vote by management proxy. Management can effectively control the meeting. This can allow directors to usurp shareholder powers. They can influence the proxy voting process. This is a real-world limit on shareholder democracy. It shows that formal rights do not always translate into actual control. Courts and regulators have tried to address this through proxy rules and disclosure requirements. But the gap remains. This is why some scholars remain skeptical of shareholder power.
Guest
Delegation under the CBCA is limited. Section 115 says directors must supervise the affairs of the corporation. Before 2001, they had to manage. Now they supervise. They can delegate to a managing director or committee. But delegation is subject to the articles and by-laws. It is limited to powers in the ordinary course of business. Directors cannot delegate key powers. These include issuing securities, declaring dividends, adopting by-laws, and approving a take-over bid circular. These restrictions protect shareholders. They ensure accountability. Delegation is useful but cannot be total. The board must retain ultimate responsibility. This is a core principle of corporate governance. It prevents abdication of duty.
Host
Under the BCBCA, delegation is broader. Section 136(1) says directors must manage or supervise the management of the business and affairs. Section 137(1) allows the articles to transfer, in whole or in part, management or supervision to one or more other persons. Those persons can be shareholders or non-shareholders. The articles must clearly indicate, by express reference to section 137, the intention to transfer powers. This can be included at incorporation or later by special resolution. The transferee will have all rights, powers, duties, and liabilities of directors to the extent of the transfer. This is a significant shift. It allows flexibility but also risk. It must be done carefully.
Guest
Common law restrictions on delegation are crucial. The time rule says you cannot contract away substantially all powers for a long period. Sherman & Ellis v. Indiana Mutual Casualty shows that twenty years is too long. The control rule says you cannot delegate control of the company. Kennerson v. Burbank Amusement shows that periodic reports are not enough. The appointment rule says you can contract to keep someone in office if directors retain management control. Realty Acceptance Corp. v. Montgomery allows reasonable contracts. Hayes v. Canada-Atlantic & Plant SS says “full powers” must be limited to ordinary business. These cases protect the board’s core role. They prevent abdication. They are essential for understanding delegation limits.
Host
Audit committees are a statutory requirement for public companies. Under the BCBCA section 224 and CBCA section 171, the audit committee must have at least three directors. A majority must be outside directors. Outside directors are not officers or employees. The audit committee must review financial statements before approval. It must notify each director of any errors found. It must prepare and issue revised financial statements or otherwise inform shareholders. Knowingly failing to comply is an offence. The fine can be up to five thousand dollars or six months imprisonment. This shows that governance has legal teeth. But enforcement and independence remain challenges. Culture matters as much as rules.
Guest
Let us summarize the legal model of the corporation. It is a mix of statutory rules, common law principles, and contractual arrangements. The CBCA and BCBCA provide default rules. Parties can modify many through articles, by-laws, and unanimous shareholder agreements. Shareholders have voting rights, removal powers, and proposal rights. Directors manage or supervise the corporation. Delegation is possible but limited. Common law restricts delegation to protect the board’s core role. Audit committees provide oversight. Courts interpret ambiguous rules by looking at the division of power. The contractarian and Berle-Means views offer competing perspectives. Understanding these rules is essential for lawyers and business leaders. It helps navigate complex governance issues.
Host
Let us discuss the Berle-Means view more. They argued that shareholders have little direct control. Managers and directors control operations. This separation of ownership and control is a classic problem. It can lead to agency costs. Managers may pursue their own interests. Shareholders may not have enough power to monitor them. Contractarians respond that markets and contracts can discipline managers. But mandatory rules and fiduciary duties also help. The CBCA and BCBCA include fiduciary duties for directors. They must act honestly and in good faith. They must act in the best interests of the corporation. This is a legal constraint on managerial power. It complements shareholder rights.
Guest
Third parties are impacted by internal codes of conduct in subtle ways. If a corporation’s by-laws restrict an officer’s authority, a third party may not be bound unless they knew or ought to have known. But the internal rules can affect whether a contract is valid. They can also affect liability. For example, if a director exceeds their authority, the corporation may still be bound if the third party relied on apparent authority. The corporation may then sue the director for breach of duty. So internal governance has external consequences. It is not purely internal. This is why constating documents are public. They give notice to the world. They help third parties assess risk.
Host
Let us compare the CBCA and BCBCA on removal of directors. Under the CBCA, removal is by ordinary resolution at a special meeting under section 109. The articles cannot require more votes than section 109. Each share gives one vote under section 140(1). Under the BCBCA, removal is by special resolution under section 128(3). The articles can provide a lower majority. Each shareholder has one vote per share under section 173. A special resolution requires two-thirds to three-quarters of votes cast. The articles must set out that special majority. Bushell v. Faith shows how weighted voting can protect a director. This is a major difference. It affects shareholder power significantly.
Guest
By-law amendments and shareholder proposals are important. Under the CBCA, directors make by-laws under section 103. Shareholders must approve under section 103(2). Under the BCBCA, directors alter articles under section 259. Shareholders must approve. This is a yield to shareholders. Qualifying shareholders can propose by-laws under CBCA section 137. Under the BCBCA, sections 187 to 189 allow proposals for changes at annual general meetings. Kelly v. Electrical Construction Co. is an early case on shareholder proposals. It balanced shareholder rights against board authority. These mechanisms give shareholders a voice. But they also have thresholds and procedures. They are not unlimited. They reflect the ongoing tension between shareholder democracy and board authority.
Host
Let us discuss the division of power in the company. Control is divided between directors and shareholders. The general meeting gives ultimate control to shareholders for fundamental matters. These include amending articles and removing or electing directors. Directors control all matters not specifically reserved to the general meeting. If voter apathy is high, management may be able to usurp shareholder powers at the general meeting by controlling proxy voting. This is a practical concern. It shows that formal rules can be undermined by reality. Courts and regulators try to protect shareholder rights. But they cannot force shareholders to participate. This is a persistent challenge in corporate governance.
Guest
Delegation under the CBCA and BCBCA differs significantly. Under CBCA section 115, directors must supervise. They can delegate to a managing director or committee. But they cannot delegate key powers like issuing securities, declaring dividends, adopting by-laws, or approving a take-over bid circular. Under BCBCA section 137, articles can transfer management or supervision to other persons. This requires express reference to section 137. The transferee assumes director duties and liabilities. Common law restricts delegation through time, control, and appointment rules. Hayes, Sherman & Ellis, Kennerson, and Realty Acceptance define these limits. These rules prevent boards from abdicating their responsibilities. They ensure accountability. They are essential for corporate governance.
Host
Audit committees are a key oversight mechanism. Public companies must have one. It must have at least three directors. A majority must be outside directors. The committee reviews financial statements before approval. It must notify directors of errors. It must prepare revised statements or inform shareholders. Knowingly failing to comply is an offence. The fine can be up to five thousand dollars or six months imprisonment. This is a legal requirement. But some argue it is not enough. They say penalties are too low. Others say reputational damage is the real deterrent. What matters is independence and expertise. Without those, the committee may not be effective. Governance is about people as much as rules.
Guest
Let us wrap up the main points. The legal model of the corporation is a complex mix. Berle and Means emphasize managerial control. Contractarians emphasize private ordering and default rules. The CBCA and BCBCA provide different constating documents. Shareholders have voting, removal, and proposal rights. Directors manage or supervise. Delegation is allowed but limited by statute and common law. Audit committees provide oversight. Courts interpret ambiguous rules by looking at the division of power. Third parties are affected by internal codes through notice and apparent authority. Understanding these rules is essential. They shape how corporations are governed and how power is exercised. This is the foundation of business organizations law.
Host
Thank you for this detailed discussion. We have covered the legal model of the corporation, from Berle and Means to contractarianism, from CBCA and BCBCA constating documents to shareholder powers, removal of directors, by-law amendments, unanimous shareholder agreements, shareholder proposals, delegation, common law restrictions, and audit committees. We have seen how power is divided between shareholders and directors. We have explored how courts interpret ambiguous rules. We have considered practical issues like proxy apathy and third-party impact. This is a rich and evolving area of law. I hope our listeners now have a clearer understanding. Thank you all. Goodbye. Indeed.