What is Corporate Commercial Law?
The core concepts of corporate commercial law are those that pertain to the governance and regulation of business corporations, large and small alike. In Canada, the Business Corporations Act is the primary statute under which most businesses are formed. Under the Business Corporations Act, there exists an entity called a corporation. The corporation has a distinct existence independent from that of its shareholders. This means that shareholders interact with the corporation as if it were a third party (i.e. doing business with, or suing and being sued by, the corporation).
One of the major advantages of doing business through a corporation is limited liability. Essentially, this means that a corporation isolates shareholders from the liability of the corporation. Shareholders are therefore protected from creditors of the corporation in the event that the corporation accrues debt, for example. A corporation is thus a shield for shareholders against liability.
The limited liability of shareholders is not absolute. Courts of equity have carved out many exceptions to the general rule. For instance, one can pierce the corporate veil in cases of fraud. The corporate veil may be pierced in order to hold shareholders personally liable for the debts and liabilities of the corporation . Some other examples where courts will pierce the corporate veil include where the corporation is a mere puppet or dummy for shareholders of the corporation. Issues have also arisen where the corporation was used as a corporate vehicle for sham transactions. The corporate vehicle is a sham from the outset, and essentially created for the purpose of shielding shareholders from liability. On the other hand, while shareholders may be held liable for the debts of the corporation in limited circumstances, courts will not pierce the corporate veil for mere unpaid tax debts. This means that shareholders will not be forced to pay the taxes of the corporation personally.
The Business Corporations Act also provides many features to protect shareholders. One such feature is the oppression remedy. The oppression remedy is a statutory right granted to each shareholder of a corporation under the Business Corporations Act. It protects the minority shareholder from any oppression or unfair prejudice by the majority. The oppression remedy allows the court to make any order it sees fit to remedy the oppression. The oppression remedy has thus become a core concept in corporate commercial law. It protects minority shareholders from being oppressed by the majority and rewards them with comprehensive remedies.
Fundamentals of Corporate Commercial Law
At the core of corporate commercial law are several fundamental principles that serve as guiding tenets for both creation and enforcement of agreements. Understanding these tenets is essential for anyone embarking on a new venture: both the small company executive or the weekend warrior opening a pop-up site. They provide a framework of predictable outcomes for parties to rely upon in structuring deals, giving them security and predictability as they pursue their commercial objectives.
Mutual Assent: In order for an agreement to be enforceable, there must be a meeting of minds. For a proposed accord to be binding, both parties must agree to the general business terms. In essence, there must be an offer and an acceptance. One party must make an offer that the other accepts for there to be contractual liability. If the offer expressly stipulates a manner of acceptance, the second party is bound by those terms.
Consideration: The next principle is the requirement of consideration. Consideration is the essence of any contract. It is the quid pro quo for entering into the agreement, the basis upon which the parties have relied to commit to the deal. The consideration to be delivered under the terms and conditions should be specific and the agreed upon quid pro quo. Oftentimes, the parties can concretely state what they will receive in exchange for their performance.
Competence and Capacity: Parties engaging in business transactions are expected to have the legal capacity to contract and to be mentally competent. For example, a minor who enters into a contract but lacks legal capacity (e.g., a minor under the age of 18) may avoid the obligations resulting from the agreement. Similarly, persons who lack mental competence may also escape obligations resulting from contractual commitments. For parties to be held to the terms of the agreement, they must have the capacity to know their business dealings and be compos mentis.
Legality: For an agreement to be binding, the underlying purpose of the contract must be legal in nature. A contract to commit a crime is void. For example, a contract to smuggle people into the country is unenforceable. The underlying public policy behind corporate commercial law prohibits parties from entering into and enforcing contracts that are illegal. This is consistent with the public policy that disallows parties from committing crimes or torts for the furtherance of an unlawful or legal purpose.
In writing or not: As a general matter, contracts do not have to be in writing. Verbal agreements can create binding obligations for the parties. However, as it relates to certain types of contracts, the Statute of Frauds requires that they be in writing. For instance, contracts pertaining to the sale of real property, executory agreements, or those that cannot be performed within a year should be committed to writing. Failure to comply with the Statute of Frauds may render the agreement unenforceable.
What is the Difference between Corporate Law and Commercial Law
The terms "corporate law" and "commercial law" have different meanings in the legal world. In practice, the terminology may frequently be used interchangeably to provide a general understanding of what kind of individual and/or business needs the help of a corporate/commercial law firm, but for purposes of this Blog, an explanation of the specific types of legal work related to "corporate law" as opposed to "commercial law" should be made, so those readers without a legal education may have a better understanding of what kind of legal work is performed by a corporate/commercial law firm.
"Corporate law", as the term is used in this Blog, is the area of law that deals primarily with domestic and non-U.S. businesses (public, private, and in some cases non-profit). Examples of areas of law that fall under the umbrella of corporate law include: choice of entity; formation of new entities (including limited liability companies, corporations, and non-profit entities); good-standing issues arising from prior formation; maintenance of good standing for existing entities; among other ancillary issues. "Commercial law", as the term is used in this Blog, is the area that deals primarily with financing (debt or equity), business activities, and the contracts among the parties performing those activities, and the products that are sold or transferred as part of those activities. Areas of commercial law include: workouts; regulatory compliance; residential and commercial real estate; sales of products; sales of business entities; real estate development; bankruptcy and insolvency; collections; and litigation involving any of the above.
A referenced above, there is a frequent intermingling of the terms "corporate law" and "commercial law." For example, if an investor or a business wanted to borrow money from a third party, depending on the circumstances, that could result in commercial law matters becoming significant. One would need a detailed loan agreement that spells out the duties of the borrower to the lender. The loan itself may be secured by any real estate owned by the borrower; or, it could be secured by more intangible items such as equipment, memberships in a limited liability company, intellectual property (e.g., a secret formula that gives the borrower a competitive advantage over its competition), good will, a lease contract for its business premises, etc. The lender would want detailed security agreements and possibly guarantees to ensure that the borrower is protected in the event that the borrower defaults. These financing agreements can be documented in several different ways and must be tailored to meet the specific facts and circumstances of the deal.
Corporate law matters may also become relevant to a transaction. For example, if the lender has concerns about the credit worthiness of the borrower, it may seek additional protection by requesting ownership interests in the borrower’s entity; or, ownership interests in the borrower’s parent, sister, or brother entities. Again, these agreements need to be carefully drafted to identify the specific obligations of the parties, including the permanent securities interest arrangements. And, if entities of three or more levels are involved, the proper approvals need to be obtained from all of the entities. For example, if a corporation wants to lend money to one of its members, the corporation would need to obtain board approval for the loan, and the member would need to get the approval of its managers/contributors. These approvals would need to be formally documented.
Structure and Governance
Corporate commercial law encompasses various legal areas that impact the day-to-day operations of businesses while providing a framework that is both legal and ethical for pursuing business plans. When thinking about a corporate structure, companies have several choices ranging from sole proprietorships to corporations. A sole proprietorship is a unique entity in that it is not a separate legal entity as far as taxes are concerned. Sole proprietors report all profits and losses of the business on their individual tax returns and are responsible for all of the creditors’ liabilities, litigation/judgements, and obligations of the business. While a sole proprietorship is very easy to form, it is the default form of business organization as discussed below.
A corporation is a separate legal entity that acts like a natural person. In a corporation, shareholders are owners of the organization, officers are management, and employees carry out the labor necessary to succeed in business. The biggest benefit of a corporation is limited liability. This means that the shareholders’ financial exposures for the debt and liabilities of the corporation are limited to their investment in the corporation shares. In other words, the credit of the corporation is separate and distinct from the credit of the shareholders. On the other hand, a corporation faces double taxation; once on the profit of the organization, and again when those profits are distributed to the shareholders as dividends.
Limited liability companies (LLCs) are a third business structure available to companies. LLCs provide the comfort of limited liability while allowing for single taxation (tax is levied only on the source of income). Each member of the company pays taxes on a pro rata basis (according to equity interest) on gains or losses to the LLCs. This mitigates the double taxation problems of corporations.
In any case, no matter how a company is structured, the responsibility for corporate governance rests almost entirely on the board of directors. Corporate directors have the responsibility to act in the best interests of the company, its shareholders, and its employees. Corporate directors owe fiduciary duties to their companies to act in the best interests of the company and not their interests. This can often put directors in a difficult position when the company is seeking out high risk investments which are generally considered more lucrative.
Common Business Operations and Agreements
Common business transactions and contracts that fall under the purview of corporate commercial law are as myriad and diverse as the businesses themselves. This area of law encompasses agreements that govern interactions not only between entities but also between private parties in commercial dealings. Such transactions include mergers, acquisitions, purchases and sales of all or a portion of privately owned businesses, and joint venture agreements . Corporate commercial transactions may be strategic alliances between corporations designed to accomplish a common purpose, which may be for any number of reasons, such as to share financial costs or resources, or they may be from a more competitive standpoint. Such agreements can involve several aspects of the businesses, including research and development, technical development, and sharing employees, resources, patents, trademarks, or trade secrets. In addition to creating the agreement itself, corporate commercial lawyers must also navigate the complexities of freelance and independent contractor agreements.
Legal Compliance and Risk Management
Compliance and legal risk management are critical components of corporate commercial law. In a landscape where regulatory requirements and standards evolve constantly, it is essential for organizations to have compliance programs in place that help them navigate this complexity and mitigate navigational errors. A failure to comply with the law may result in significant liabilities for a company that could have otherwise been avoided.
While from a business perspective the costs associated with compliance may seem like a drain on resources, the real cost of compliance can be calculated on behaviours and avoidable risk that fail to align with requirements set out in statutes, regulations and by-laws. For example, without a formalized policy regarding the retention, collection and dissemination of documents, a company may find itself embroiled in litigation, pay out substantial costs in the event of an adverse decision or damaged reputation.
A comprehensive approach to risk management will have unique features tailored to the needs of each organization, however, there are some common elements that might form the foundation for a successful compliance program. These elements include:
Technological advances, globalization of markets and political re-alignment creates a dynamic environment. Organizations that make a habit of committing resources to compliance develop a culture of compliance that permeates their organization. By promoting compliance it is possible to minimize risk as part of the day to day routines of people within an organization.
Recent Developments and Contemporary Issues
In an era marked by rapid globalization, corporate commercial law is evolving to address complex cross-border transactions. Companies now have to navigate multifaceted international regulations, which can add significant risk if not properly managed. For example, multinational companies must maintain compliance with a range of tax and anti-corruption laws, which can differ significantly from one jurisdiction to the next. In addition, the push for greater corporate social responsibility (CSR) has led to the emergence of committees within corporations that constantly assess and report on compliance with not just legal requirements, but also ethical standards.
Additionally, e-commerce continues to disrupt traditional corporate structures. For instance, while technology firms often reside in one location, they can have a large global footprint. The plethora of anti-trust laws dealing with monopolistic competition can be challenging in these instances. Furthermore, the use of third-party marketplaces can create questions of liability, particularly in cases where third-party vendors mishandle customer information or where their goods fail to meet safety standards.
As digital currencies have gained traction over the past few years, some lawmakers have attempted to regulate the nascent technology. In Canada, its sheer volume has prompted Bill C-74, which seeks to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to cover cryptocurrency as well. These amendments pose new questions for businesses about the propriety of token sales and the classification of cryptocurrencies as securities.
Another challenge for corporations is the need for increased transparency. Data is now being made available to the public at an unprecedented scale. However, some proprietary information is still treated as confidential, and negotiations for mergers and acquisitions often require extensive periods of due diligence — often without access to critical proprietary data. As a result, corporations face mounting challenges in balancing the privacy of customers against their ability to conduct business.
Conclusion the Future of Corporate Commercial Law
Future Trends in Corporate Commercial Law
The evolution of corporate commercial law continues to capture the attention of legal practitioners, corporate executives, and legislatures alike, as the global economy becomes more transparent and interconnected. At the crossroads of innovation and regulation, this area of the law is particularly susceptible to the rapid changes that emerging markets and technologies bring.
With the rise of new technologies, there are new opportunities for corporate growth as well as new challenges. Artificial intelligence and blockchain technology, for instance, have disrupted the traditional corporate structure and continue to impact corporate governance in profound ways. It is therefore essential that businesses stay updated on the latest regulations, as well as best practices. As we stand at the forefront of a technological era, the ability to adapt will be the key to corporate longevity.
Additionally, with increased cross-border transactions, corporate commercial law is becoming an increasingly cross-jurisdictional field. Businesses must, therefore, ensure that they are complying with corporate law in all jurisdictions in which they operate. This is particularly important in an increasingly protectionist global landscape .
In addition to technology, cross-border considerations and a growing awareness of the need for sustainability will dictate how corporations interact with one another, their shareholders, and the larger community. For instance, non-financial metrics such as a company’s carbon footprint are quickly becoming a critical component of corporate decision-making.
Prompted by the aforementioned factors, increased competition and new industry standards will likely spur investor activism in corporate governance, particularly from shareholders whose diversity, social impact, and sustainability weight much higher on the scale now than they did years ago. As a result, it is in the best interests of corporations to adopt a more holistic view of the corporate landscape, examining the non-financial factors that affect corporate value in the long-term.
With the integration of various, and often competing, philosophies and cultures, legal counsel will continue to play an important role in addressing these complex issues. The future of corporate commercial law will depend on the ability of legal practitioners to create and navigate a complex matrix of legislative interpretations across multiple jurisdictions, while maintaining a forward-looking approach to corporate growth.
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