U.S. Close Corporation Legislation:
A Model Canada Should Not Follow
Brian R. Cheffins*
Canadian corporate legislation has been influ-
enced considerably by American models. The
author considers whether Canada should fol-
low a number of U.S. states by adopting legis-
lation for close corporations in the form of a
separate chapter in the general corporate legis-
lation. In particular, the author focuses on the
effectiveness of this approach in dealing with
the special needs of close corporation partici-
pants and to reduce their transaction costs. The
author concludes that the adoption of a sepa-
rate close corporation chapter, even an
improved version of U.S. models, is unneces-
sary in Canada because similar cost savings
can be achieved under present, or amended,
general corporate legislation.
La l6gislation canadienne en droit des compa-
gnies a dt6 fortement influence par les
sources am~ricaines. L’auteur s’interroge it
savoir si, A l’instar de nombreux 6tats am~ri-
cains, le Canada devrait adopter une loi sp6-
ciale sur ]a socidt6 ferme qui ferait l’objet
d’un chapitre distinct au sein de la 16gislation
g~nrrale sur le droit des compagnies. Plus pr6-
cisrment, l’auteur 6value si un tel chapitre est
vraiment apte A r~pondre aux besoins spdci-
fiques des personnes impliqu~es dans une
socirt6 fermre, et aussi 4 rrduire leurs cofrts de
transactions. L’auteur conclut que l’adoption
de ce chapitre distinct, meme s’il reprsentait
une amelioration par rapport aux modules
amdricains, n’est pas n~cessaire puisque les
cofts que l’on 6pargnerait par l’entremise du
chapitre distinct le sont 6galement sous la
l6gislation canadienne, dans sa prdsente forme
ou avec modification.
*Faculty of Law, University of British Columbia. The author would like to thank Frank Buckley
for comments on an earlier draft of this paper.
McGill Law Journal 1989
Revue de droit de McGill
1989]
CLOSE CORPORATIONS LEGISLATION
Synopsis
I.
Introduction
Background
A. Nature of Close Corporations
B. Historical Developments
C. Present Canadian Legislation
II. Close Corporation Legislation in the U.S.
I.
Evaluation of Close Corporation Legislation
A. The Delaware Chapter and the M.B.C.A. Supplement
B.
C. Presumptive or Mandatory Close Corporation Legislation
Improved Elective Close Corporation Legislation
IV. Conclusion
Introduction
The American Bar Association’s Model Business Corporations Act
(M.B.C.A.) and other U.S. corporate legislation considerably influenced the
thinking of Canadian corporate law reformers in the 1960s and 1970s., The
Canada Business Corporations Act (C.B.C.A.), which was enacted in 1975, was
based to a significant extent on U.S. sources. In turn, legislation modelled after
the C.B.C.A. was passed in six provinces.’ Since this flurry of legislative activity
‘Ontario, Legislative Assembly, Interim Report of the Select Committee on Company Law
(Toronto: Queen’s Printer, 1967) (Chair: A.. Lawrence) at vi-vii .[hereinafter the Lawrence
Report]; R. Dickerson, J.C. Howard & L. Getz, Proposals for a New Business Corporations Act
for Canada, vols 1, 2 (Ottawa: Supply & Services Canada, 1971) at iii-iv [hereinafter the
Dickerson Report]; and J. Howard, “The Proposals for a New Business Corporations Act for
Canada” in Special Lectures of the Law Society of Upper Canada, Corporate and Securities Law
(Toronto: Richard De Boo, 1972) 17 at 27-28.
2Business Corporations Act, R.S.O. 1970, c. 53; Canada Business Corporations Act, S.C.
1974-75-76, c. 33, now R.S.C. 1985, c. C-44 [hereinafter C.B.C.A.]; The Corporations Act, S.M.
1976, c. 40; The Business Corporations Act, R.S.S. 1978, c. B-10; Business Corporations Act,
S.N.B. 1981, c. B-9.1; Business Corporations Act, S.A. 1981, c. B-15 [hereinafter A.B.C.A.];
Business Corporations Act, 1982, S.O. 1982, c. 4 [hereinafter O.B.C.A., 1982]; and Corporations
Act, S.N. 1986, c. 12 [hereinafter N.C.A.]. The preceding statutes are hereinafter collectively
referred to as the C.B.C.A. statutes. Quebec also borrowed substantially from the C.B.C.A. when
its corporation law was reformed in 1981. See Companies Act, S.Q. 1980, c. 28. British Columbia
reformed its company legislation in the 1970s, but borrowed more heavily from the United
Kingdom. See Companies Act, S.B.C. 1973, c. 18, now R.S.B.C. 1979, c. 59 [hereinafter B.C.C.A.]
and M.A. Waldron, “The Process of Law Reform: The New B.C. Companies Act” (1975) 10
U.B.C. L. Rev. 179 at 192-94. In Nova Scotia and Prince Edward Island few significant changes
McGILL LAW JOURNAL
[Vol. 35
ended in the early 1980s, reform of corporate legislation has become a much
less debated topic in Canada. In the United States, however, reform of general
incorporation legislation remains a live issue. One area that has received a great
deal of attention has been special legislation for closely held corporations. A
significant number of states have passed such legislation in recent years, and in
the mid-1980s the American Bar Association adopted a Close Corporation
Supplement to the M.B.C.A. 3 In light of the U.S. influence on present Canadian
legislation, these developments suggest that serious consideration should be
given to the introduction of similar close corporation legislation in Canada. The
need for consideration of this issue is reinforced by the fact that Canadian com-
mentators who have examined the topic have been supportive of close corpora-
tion legislation.4 It will be argued in this article, however, that the adoption of
special close corporation legislation in Canada would be unwise.
have occurred. See generally F.H. Buckley & M.Q. Connelly, Corporations: Principles and
Policies, 2d ed. (Toronto: Edmond Montgomery, 1988) at 151-52.
3 A draft of the M.B.C.A. Supplement was prepared, with commentary, by the Committee on
Corporate Laws, “Proposed Statutory Close Corporation Supplement to the Model Business
Corporations Act” (1981) 37 Bus. Law. 269. The actual M.B.C.A. Supplement is set out as the
Model Statutory Close Corporation Supplement in Model Business Corporations Act Annotated,
vol. 3, 3d ed. (New York: Law and Business, 1985) [hereinafter Model Stat. Close Corp. Supp.].
In terms of corporate law reform generally, not only has the third edition of the M.B.C.A.
Supplement been produced recently, but the American Law Institute is in the process of producing
a series of drafts under the working title Principles of Corporate Governance.
4As a general rule, Canadian commentators have not considered close corporations in nearly as
much detail as their American counterparts. See F. Iacobucci & D.L. Johnston, “The Private or
Closely-held Corporation” in J.S. Ziegel, ed., Studies in Canadian Company Law, vol. 2 (Toronto:
Butterworths, 1973) 68 at 71. Further, there has not been a comprehensive Canadian journal article
on the topic since lacobucci and Johnston’s, and some leading texts, such as B. Welling, Corporate
Law in Canada: The Governing Principles (Toronto: Butterworths, 1984) give almost no special
attention to close corporations.
Two Canadian authorities who have favourably commented on U.S. close corporation legislation
as such are F. Iacobucci, M.L. Pilkington & J.R.S. Prichard, Canadian Business Corporations
(Agincourt, Ont.: Canada Law Book, 1977) at 75-83 and T. Hadden, R. Forbes & R.L. Simmonds,
Canadian Business Organizations Law (Toronto: Butterworths, 1984) at 186-91. Canadian com-
mentators who have commented favorably on close corporation legislation in a general sense
include Iacobucci & Johnston, ibid. at 128-37; P.S. Elder, “Statutory Remedies of Minority
Shareholders in Close Corporations” (1964-66) 2 U.B.C. L. Rev. 440 at 440-41, 466; and B.
Slutsky, “Company Law – Minority Rights – Oppression Remedy -Diligenti v. RIVMD
Operations Kelowna Ltd.” (1977) 11 U.B.C. L. Rev. 326.
The author has argued in another paper, “The Closely Held Corporation in Canada”, that the
present legislative approach to close corporations is adequate. The paper, which is to be published
in German by Verlag Otto Schmidt KG KoIn, was prepared for the Symposium on Dualism in
Corporation Law held in Austria in April 1989. The sources used for the paper were similar to
those used for the present article but the contents differ significantly.
19891
CLOSE CORPORATIONS LEGISLATION
I. Background
A. Nature of Close Corporations
Establishing a satisfactory precise definition for closely held corporations
is a difficult process because corporations vary greatly. Still, a number of prev-
alent characteristics of close corporations can be identified. Close corporations
will generally have a small number of shareholders. There will often be a dis-
tinct overlap between ownership and management, as many, if not all, of the
shareholders will be actively involved in the operation of the business. The busi-
ness will likely be the primary source of income for those involved. Generally,
there is not a public market for the shares of close corporations, in part because
transfer restrictions will frequently be imposed on the shares. Even absent trans-
fer restrictions, however, there will be few persons who will be interested in
purchasing shares in a close corporation, especially if a minority interest is
involved. The lack of a liquid market for the shares of close corporations means
that the stock market does not act to monitor management. Consequently, the
possibility of a take-over bid does not provide incentives to managers of a close
corporation to operate the firm efficiently. Finally, close corporations will often
be smaller business operations than their publicly traded counterparts, though
there are notable exceptions. One result of this is that close corporations are
much less likely to have independent directors, investment bankers and analysts
monitoring the conduct of the managers.’
Despite these differences, the distinctive nature of close corporations
should not be overstated.6 The absence of a liquid market for shares and the less
frequent use of other external monitoring devices does not mean that managers
of close corporations operate free of constraints. The frequent overlap between
directors and shareholders means that management in close corporations is not
separated from risk bearing to nearly the same extent as in a public corporation.
Consequently, direct monitoring of managers can occur much more easily.
Further, the incentive to monitor directly will generally be greater than in a pub-
lic corporation. This is because investors in close corporations tend to treat the
5See Hadden, Forbes & Simmonds, ibid. at 129-30, 190-91; R. Kingston et al., eds, Canada
Corporation Manual (Don Mills, Ont: Richard De Boo, 1986) at 13-11; Empirical Research
Project, “Statutory Needs of Close Corporations – An Empirical Study: Special Close
Corporation Legislation or Flexible General Corporation Law” (1985) 10 J. Corp. L. 849 at 852-54,
877-79; L.D. Soderquist, “Reconciling Shareholders’ Rights and Corporate Responsibility: Close
and Small Public Corporations” (1980) 33 Vand. L. Rev. 1387 at 1391-1407; H. Manne, “Our Two
Corporation Systems: Law and Economics” (1967) 53 Va. L. Rev. 259 at 278-81; and F.
Easterbrook & D. Fischel, “Close Corporations and Agency Costs” (1986) 38 Stan. L. Rev. 271
at 273-77.
6The following is based largely on Easterbrook & Fischel, ibid. at 274-75, 277-79, 283-86.
REVUE DE DROIT DE McGILL
[Vol. 35
business as their primary source of income. The result is that investors do not
have the diversified investment portfolio of investors in public companies, so
they have a particularly strong incentive to see that the business is operated
profitably.
Another implication of the absence of a liquid market should not be over-
emphasized. It has frequently been said that the lack of a market for shares in
close corporations exposes minority shareholders to unique risks of exploitation
as the minority has no exit option if the majority is engaging in opportunistic
behaviour. This ignores the fact, however, that these corporations compete with
other investment opportunities to raise capital. If minority shareholders in close
corporations were systematically exploited, persons would not invest in close
corporations. Thus, an incentive does exist for those controlling close corpora-
tions to accommodate, at least ex ante, the needs and concerns of minority
shareholders. The extensive use of close corporations suggests that this business
form does indeed constitute an attractive investment, so it may well be that
minority shareholders are not in as disadvantageous a position as might appear
to be the case.7
A factor which reduces the differences between close corporations and
other corporations is that corporate law, both statutory and judicial, can be seen
as performing the same basic function, regardless of the type of corporation.
This is establishing a set of standard terms that lower the cost of contracting. 8
The contract process for investors will differ somewhat between close corpora-
tions and public corporations because the scope for bargaining in close corpo-
rations is greater, given the greater proximity between those involved in the cor-
71t has been argued by F.H. O’Neal, “Oppression of Minority Shareholders: Protecting Minority
Rights” (1987) 35 Clev. St. L. Rev. 121 at 121 and F.H. O’Neal & R.B. Thompson, O’Neal’s
Oppression of Minority Shareholders, 2d ed. (Wilmette, Ill: Callaghan, 1985) para. 1.04 that
oppression of minority shareholders reduces investment in close corporations, but no empirical evi-
dence is advanced to support this assertion.
8J.A.C. Hetherington, “Redefining the Task of Corporation Law” (1985) 19 U.S.F.L. Rev. 229
at 256-59; H.N. Butler, “The Contractual Theory of the Corporation” (1989) 11 Geo. Mas. U.L.
Rev. 99 at 119-23; and L.A. Moody, “Statutory Solutions to Conflicts of Interest in Close
Corporations” (1987) 35 Clev. St. L. Rev. 95 at 98. The bargaining approach to corporate law has
generated a significant amount of literature in the U.S., especially in relation to corporations with
videly traded shares. For an overview and mildly sceptical appraisal of the bargaining approach,
see P. Cox, “Reflections on Ex Ante Compensation and Diversification of Risk as Fairness
Justifications for Limiting Fiduciary Obligations of Corporate Officers, Directors, and Controlling
Shareholders” (1987) 60 Temp. L.Q. 47.
Analyzing corporations from the perspective of contractual relations is not as prevalent in
Commonwealth countries as it is in the U.S., but this appears to be changing. See, for example,
Buckley & Connelly, supra, note 2; D.F. Partlett & G. Burton, “The Share Repurchase Albatross
and Corporation Law Theory” (1988) 62 Aust. L.J. 139; D.D. Prentice, “The Theory of the Firm:
Minority Shareholder Oppression: Sections 459-61 of the Companies Act 1985″ (1988) 8 Oxf. J.
of L. St. 55; and New Zealand Law Commission, Preliminary Paper No. 5 – Company Law
(Wellington: Law Commission, 1988) at 9-10.
1989]
CLOSE CORPORATIONS LEGISLATION
poration.9 Nevertheless, as will be seen, this difference, and other differences
between close corporations and other corporations, are not sufficient to justify
establishing a distinct set of elective, presumptive or mandatory terms for close
corporations, assuming that participants are given the freedom to arrange their
affairs in the manner which best suits them.
B. Historical Developments
Given the recent development of close corporation legislation in the United
States, it is ironic that historically Canadian corporate legislation has been more
responsive to the existence of smaller corporations without publicly traded
shares. In the 19th century, no distinctions were drawn in Canadian company
legislation between such corporations and other corporations. Beginning in
1910, however, Canadian jurisdictions began to introduce the private company
concept which had been adopted in England in 1907. By the 1940s all but three
provinces had adopted the private company concept. The definition of private
company was basically uniform. Companies which stipulated in the documents
of incorporation that the number of shareholders was limited to fifty, that there
were transfer restrictions on the company’s shares and that the shares were not
to be distributed to the public were deemed to be private companies. It was pos-
sible, however, for the documents of incorporation to be varied to convert a pri-
vate company into a public company and vice versa. The benefits granted to pri-
vate companies varied from jurisdiction to jurisdiction, but most related to relief
from some filing and financial disclosure requirements. There were no special
provisions relating to management or remedies.’0
In contrast, no U.S. jurisdiction had any provisions specifically dealing
with closely held corporations until 1955.” This was the case even though com-
mentators had begun arguing for legislative reform as early as 1929. It was
pointed out that the existing general incorporation laws and judicial doctrines
had been developed with larger, publicly held corporations in mind and without
9See, for example, V. Brudney & R.C. Clark, “A New Look at Corporate Opportunities” (1981)
94 Harv. L. Rev. 998 at 1006-10.
‘0The first jurisdiction to introduce the private company concept was British Columbia –
see
Companies Act, 1910 S.B.C. 1910, c. 7, s. 130. On the emergence of private companies in Canada,
see generally lacobucci & Johnston, supra, note 4 at 77-78; W.K. Fraser, Handbook on Canadian
Company Law, 4th ed. (Toronto: Carswell, 1945) at 25-41, 51-56; and F.W. Wegenast, The Law
of Canadian Companies (Toronto: Burroughs, 1931) at 189-90, 707-08.
“On the history of closely held corporation legislation in the United States, see Empirical
Research Project, supra, note 5 at 867-74 and F.H. O’Neal, “Close Corporations: Existing
Legislation and Recommended Reform” (1978) 33 Bus. Law. 873 at 873-75.
Prior to 1955, there were some provisions in certain jurisdictions which were intended to assist
closely held corporations, but which were applicable to all corporations. See, for example, C.O.
Israels, “The Close Corporation and the Law” (1948) 33 Cornell L.Q. 488 and Manne, supra, note
5 at 282-84.
McGILL LAW JOURNAL
[Vol. 35
regard for the fact that corporations differ significantly. Accordingly, existing
general incorporation legislation was not entirely appropriate for closely held
corporations, with their small number of shareholders, informal operations, and
overlap between shareholders and management. For example, costs were likely
imposed on close corporation participants by virtue of their having to comply
with statutory formalities intended to protect passive shareholders. In addition,
close corporation participants who wished to vary the corporate governance
model established by corporate law found it difficult to do so since U.S. corpo-
rate legislation did not sanction departures from the principles of majority rule
and did not authorize variations on the grant of exclusive managerial control to
the board of directors. As well, the judiciary was hostile to shareholders’ agree-
ments. The upshot of all this was that strong support emerged for the introduc-
tion of legislative provisions which would reduce statutory formalities for close
corporations and which would give such corporations more freedom with
respect to internal operations and other planning concerns.’ 2
One response to the calls for legislative reform was the enactment of pro-
visions applicable only to close corporations. North Carolina enacted the first
such provision. The objective of the North Carolina provision was to overcome
judicial resistance to shareholders’ agreements by sanctioning the use of unan-
imous shareholders’ agreements which infringed on the powers of directors of
corporations without publicly traded shares. In 1961, New York enacted a sim-
ilar provision. Two years later, Florida took a different approach. It established
a special chapter in its corporation legislation which close corporations could
elect to have apply to the corporation. In the 1960s, three other states, including
Delaware, followed suit. The objective of these special chapters was to allow
electing corporations to operate informally and to increase the scope of planning
devices available to participants. 3
Another trend which arose in part as a response to the problems of closely
held corporations and which initially had much greater acceptance than special
legislation was the movement towards flexible general incorporation laws.
Traditionally, U.S. general incorporation legislation was rigid and restrictive in
comparison with, for example, the permissive, enabling approach of the English
Companies Act. In the 1960s and early 1970s, however, the prevalence of
‘2See, for example, J.L. Weiner, “Legislative Recognition of the Close Corporation” (1929) 27
Mich. L. Rev. 273; W.B. Rutledge, “Significant Trends in Modem Incorporation Statutes” (1937)
22 Wash. U.L.Q. 305; N. Winer, “Proposing a New York “Close Corporation Law.”” (1943) 28
Comell L.Q. 313; Israels, ibid.; “Proceedings at the Annual Meeting of the Section of Corporation,
Banking and Business Law” (1954) 10 Bus. Law. 9; E.R. Latty, “The Close Corporation and the
New North Carolina Business Corporation Act”, (1956) 34 N.C.L. Rev. 432; and F.H. O’Neal,
“Forward” in “A Plea for Separate Statutory Treatment of the Close Corporation” (1958) 33
N.Y.U. L. Rev. 700.
13See supra, note 11; Latty, ibid.; and R.S. Stevens, “Close Corporations and the New York
Business Corporation Law of 1961” (1962) 11 Buffalo L. Rev. 481 at 486-91.
19891
CLOSE CORPORATIONS LEGISLATION
restrictive corporate law statutes was displaced by a dual process. First, the pro-
visions of the M.B.CA., which has been promulgated by the American Bar
Association’s Committee on Corporate Laws since 1950, became increasingly
flexible. Second, the M-B.C.A. became the dominant state corporation law as the
number of states adopting the legislation rose from sixteen in 1966 to thirty-four
in 1977. Further, the M.B.CA. had a substantial influence on almost all of the
remaining states.
By virtue of these trends, provisions permitting incorporation by one per-
son instead of the traditional three became commonplace, as did provisions spe-
cifically authorizing the use of transfer restrictions on shares. In addition, pro-
visions authorizing the use of voting trusts and the creation of supermajority and
high quorum requirements became much more prevalent. Many general corpo-
rations statutes also sanctioned the taking of certain shareholder and director
actions without a meeting and established broader grounds for involuntary dis-
solution. It was widely recognized that these provisions, though available to all
corporations, would be primarily useful for closely held corporations. Indeed, in
1969 the authors of the M.B.C.A. rejected the idea of adopting special provi-
sions aimed specifically at closely held corporations on the basis that general
incorporation legislation, including the above reforms, was sufficiently flexible
to meet the needs of closely held corporations.’4
C. Present Canadian Legislation
At the same time that U.S. corporate law was becoming more responsive
to closely held corporations, Canadian corporation legislation, was, on first
glance, becoming less responsive. In the 1960s and 1970s those appointed to
examine the reform of corporate legislation recommended that the existing dis-
tinction between public and private companies be abandoned. Following these
recommendations, the public/private company concept was dropped from fed-
eral corporation legislation with the enactment of the C.B.C.A. and was simi-
larly dropped in provinces which modelled their legislation after the C.B.C.A.5
14See Empirical Research Project, supra, note 5 at 860-64; R.A. Kessler, “Hooray (?) for the
the 1969 Revision and the Close Corporation” (1970) 38 Fordham L. Rev. 743; and
Model Act –
D. Branson, “Countertrends in Corporation Law: Model Business Corporation Act Revision,
British Company Law Reform and Principles of Corporate Governance and Structure” (1983) 68
Minn. L. Rev. 53.
15British Columbia also dropped the public/private distinction, but in effect replaced this with
a similar arrangement, this being a reporting/non-reporting company dichotomy. A reporting com-
pany is defined in the B.C.C.A., supra, note 2, s. 1. On the dropping of the public/private distinc-
tion, see Lawrence Report, supra, note I at 14-17; Dickerson Report, supra, note 1 at 13; Howard,
supra, note 1 at 32-33; New Brunswick, Company Law Project Law Reform Division, Report on
Company Law by R. Bird (Fredericton: Department of Justice, 1974) at 36-37; Institute of Law
Research and Reform, Proposals for a New Business Corporations Law for Alberta (Edmonton:
Institute of Law Research and Reform, University of Alberta, 1980) at 15-16 [hereinafter Alberta
REVUE DE DROIT DE McGILL
[Vol. 35
Despite the abandonment of the private company concept, the C.B.C.A.
statutes were drafted with the intention of accommodating closely held corpo-
rations. This was done through a combination of two approaches. The first was
consistent with the then dominant trend in the United States, this being the
development of flexible rules applicable to all corporations. This approach was
used in relation to internal regulations and formalities, planning and remedies.
For example, directors and shareholders were specifically authorized to pass
resolutions without meetings if all concerned consented in writing. In addition,
statutory affirmation was given to unanimous shareholders’ agreements, and
appraisal rights and the oppression remedy were introduced. 6 It was recognized
that these and similar provisions, which were frequently borrowed from
American corporate law, might well be of more use to closely held corporations
than other corporations. 7 Nevertheless, such provisions were made applicable
to all corporations.
The second approach used by the drafters of the C.B.C.A. statutes was
making certain provisions applicable only to selected corporations. It does not
appear, however, that U.S. special close corporations provisions had much influ-
ence on this process. Canadian corporate reformers gave little consideration to
the idea of a special statute for close corporations and those who considered the
idea rejected it.'” Further, the areas where distinctions were drawn under the
C.B.CA. statutes differed from the areas where distinctions were drawn in the
U.S. Generally, U.S. close corporation legislation was, and continues to be,
aimed at internal formalities, planning devices and remedies. As mentioned,
under the C.B.CA. statutes provisions dealing with these areas were almost
invariably made available to all corporations. 9 A primary example is sharehol-
Report]; and J.S. Ziegel, “The New Look in Canadian Corporation Laws” in Ziegel, ed., supra,
note 4, 1 at 11-13.
16C.B.C.A., supra, note 2, ss. 117, 142, 146, 190, 241. There are equivalent provisions in juris-
dictions modelled after the C.B.C.A.. See, for example, O.B.C.A. 1982, supra, note 2, ss. 104, 108,
129, 184, 247, and see generally H. Sutherland, D.B. Horsley & J.M. Edmiston, eds, Fraser’s
Handbook on Canadian Company Law, 7th ed. (Toronto: Carswell, 1985) at 139-64, 224-28,
234-45, 289-303 [hereinafter Fraser’s Handbook].
17 See Lawrence Report, supra, note 1 at 83-84; Dickerson Report, supra, note 1 at 10-11, 78,
115-16, 123-24, 162-63; Alberta Report, supra, note 15 at 24-25, 126-27, 136-42; Howard, supra,
note 1 at 33-34, 47-50; and R. Dickerson, The Canada Business Corporations Act: Implications
for Management and the Accountant (Hamilton, Ont: Society of Management Accountants of
Canada, 1978) at 16,51, 56-58. The oppression remedy was borrowed from English law, with mod-
ifications suggested by the Jenkins Committee in Report of the Company Law Committee (London:
H.M.S.O., 1962).
‘”See Howard, ibid. at 33-34; Alberta Report, ibid. at 15-16; and Dickerson, ibid. at 55.
1TWwo exceptions might be that only non-distributing corporations can have one board member
(distributing corporations must have at least three) and can impose transfer restrictions. See
C.B.C.A., supra, note 2, ss. 49(9), 112. The position is the same in the jurisdictions with statutes
modelled after the C.B.C.A.. See, for example, O.B.C.A., 1982, supra, note 2, ss.42, 115.
1989]
CLOSE CORPORATIONS LEGISLATION
ders’ agreements. In contrast, it is extremely rare for U.S. statutory provisions
authorizing shareholders’ agreements to be available to all corporations. 20
The primary areas where distinctions were drawn and continue to exist
under the C.B.CA. statutes relate to the preparation and filing of financial infor-
mation and to the providing of information to shareholders before shareholders’
meetings. The purpose of these provisions, in large part, is to facilitate the mon-
itoring of management. However, because these statutory formalities likely
would not be observed in many close corporations and because, as has been
described, more direct methods of monitoring management exist, the exceptions
established under the C.B.C.A. statutes appear to be justified.2′ In terms of fman-
cial information, under these statutes, corporations which do not distribute
shares to the public are relieved from the requirement of having to file annual
financial statements with the administrative official supervising the Act, are not
subject to the mandatory direction to appoint an audit committee and are permit-
ted to waive, by unanimous shareholder approval, the statutory obligation to
appoint an auditor.22 Obligations relating to financial information have tradition-
ally been, and continue to be, mandatory for all corporations under U.S. general
corporation legislation. These requirements have not, however, imposed signif-
icant costs for U.S. close corporations because U.S. corporate law has been
2An example is Minnesota. See generally Empirical Research Project, supra, note 5 at 868-70,
907-09; D.S. Karjala, “A Second Look at Special Close Corporation Legislation” (1980) 58 Tex.
L. Rev. 1207 at 1253-57; and L.J. Miller, “Illinois Close Corporations: Analysis of the New Act”
(1978) 27 De Paul L. Rev. 587 at 601-03. Almost inevitably, American statutes limit the availa-
bility of shareholders’ agreement provisions to corporations without publicly traded shares, with
less than a certain number of shareholders, or with transfer restrictions.
Professor Karjala has also written papers on U.S. and Japanese close corporation law for the
Symposium on Dualism in Corporation Law referred to in note 4. The author has relied on these
papers in preparing this article. Page references to these papers are not given in the notes for this
article because the papers were in draft form when this article was written. As with the author’s
paper for the Symposium, Professor Karjala’s papers will be published as part of the proceedings,
though only in abbreviated form. In addition, Professor Karjala’s paper on U.S. law will be pub-
lished in (1989) 21:3 Ariz. St. L.J and his paper on Japanese law will be published in (1989) 7:2
B.U. Int’l L.J.
21On the likelihood of close corporations not complying with the formalities, see Alberta Report,
supra, note 15 at 112-13 and F.H. O’Neal & R.B. Thompson, O’Neal’s Close Corporations, 3d ed.,
(Wilmette, Ill.: Callaghan, 1986) para. 8.02. On the monitoring function of the statutory require-
ments, see lacobucci, Pilkington & Prichard, supra, note 4 at 368-70, 390-91 and R.L. Watts &
J.L. Zimmerman, “Agency Problems, Auditing, and the Theory of the Finn: Some Evidence”
(1983) 26 J.L. & Econ. 613.
22See, for example, C.B.C.A., supra, note 2, ss. 160, 163, 171(1) and see generally Hadden,
Forbes & Simmonds, supra, note 4 at 166-68 and Fraser’s Handbook, supra, note 16 at 360-92.
In the C.B.C.A. and most of the statutes modelled after it, the exemptions do not apply to corpo-
rations with over $10 million in assets or annual revenues of over $5 million. This is not the case
in Alberta and Newfoundland. See A.B.C.A., supra, note 2, ss. 154, 157; Alberta Report, supra,
note 15 at 103-04; and N.C.A., supra, note 2, ss. 259, 262.
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comparatively lax in this area.’
In terms of providing information to the shareholders before meetings, the
C.B.CA. statutes require a corporation to solicit proxies when a shareholders’
meeting is called by the directors. The effect is that management is obliged to
provide prescribed information to shareholders about the matters to be consid-
ered at the meeting.24 This obligation, however, is not imposed on corporations
with fifteen or fewer shareholders. In the United States, there has never been
any need to develop distinctive treatment in respect of proxy solicitation for
close corporations under general corporate legislation. This is because, unlike
in Canada where the matter is governed both by corporate and securities laws,
the regulation of proxy solicitation has been left to securities legislation.’
Consequently, close corporations have never been subject to regulations con-
cerning proxies since securities legislation is inapplicable to such corporations.
II. Close Corporation Legislation in the United States
In the years since the enactment of the C.B.C.A., academic opinion in the
United States has moved steadily in favor of special close corporation legisla-
tion as opposed to flexible general legislation as the proper approach to the
problems of closely held corporations. For example, corporate formalities, such
as retaining distinctions between shareholders and directors and requiring the
use of articles and by-laws to govern the affairs of the corporations, are seen as
being inappropriate because participants most often act informally.
Consequently, it is argued that general incorporation legislation, despite the con-
cessions which have been made, does not go far enough in terms of allowing
informality in close corporations.
In terms of planning, it is suggested that
even though managerial power can be reallocated to a significant extent and
23See generally Branson, supra, note 14 at 79-80; R.L. Knauss, “Corporate Governance – A
Moving Target” (1981) 79 Mich. L. Rev. 478 at 486-87; Fletcher Cyclopedia of the Law of Private
Corporations, vol. 5A (Wilmette, Ill.: Callaghan, 1987) paras. 2186, 2267-72 [hereinafter Fletcher
Cyclopedia]; and H. Goiter, ed., Fletcher Cyclopedia of the Law of Private Corporations:
Corporate Practise Deskbook, vol. 19 (Wilmette, IlI.: Callaghan, 1988) paras. 4.02-4.05.
24See, for example, C.B.CA., supra, note 2, s. 149 and O.B.CA. 1982, supra, note 2, s. 111. For
corporations with fifteen or fewer shareholders, the C.B.C.A. requires management to provide the
stipulated information if proxies are actually solicited, but this pattern has not necessarily been fol-
lowed in other C.B.C.A.-type jurisdictions. Indeed, proxies are one of the few areas where the stat-
utes modelled after the C.B.C.A. have not completely followed it. See generally Fraser’s
Handbook, supra, note 16 at 276-89.
‘See Fletcher Cyclopedia, supra, note 23, paras. 2008-2009.1.
26Empirical Research Project, supra, note 5 at 910-17; R.A. Kessler, “The ABA Close
Corporation Statute” (1985) 36 Mercer L. Rev. 661 at 663-64, 675-76, 681; K.S. Chittur,
“Resolving Close Corporation Conflicts: A Fresh Approach” (1987) 10 Harv. J. L. & Pub. Pol’y
129 at 137-39, 172; and S.C. Bahls & M.C. Quist, “The ABA Model Statutory Close Corporation
Act: A New Opportunity for “Made in Montana” Corporations” (1988) 49 Mont. L. Rev. 66 at
79-81, 96-97.
1989]
CLOSE CORPORATIONS LEGISLATION
substantial protection can be provided for minority shareholders, general incor-
poration legislation remains inadequate for close corporations because making
such alterations is unduly complex and costly.” Finally, it is said that general
corporation legislation does not provide adequate remedies for minority share-
holders in close corporations in situations where the minority has not negotiated
for protection.” The appropriate response to all of these problems, it is now
argued by many commentators, is special close corporation legislation.29
Legislatures in U.S. states have become increasingly responsive to these
arguments. There is now some form of close corporation legislation in over
twenty states, including most of the leading commercial and industrial states.30
This legislation varies widely.3′ In two states, for example, special close corpo-
ration legislation is restricted to remedies. In Minnesota and North Dakota, a
provision in the general incorporation statute which authorizes a court to grant
a wide range of remedies for oppressive, fraudulent or unfairly prejudicial con-
duct is only applicable in most respects to corporations with fewer than thirty-
five shareholders.32
The legislation in other states consists of two basic types. Nine states have
followed the approach developed by North Carolina and have limited their spe-
cial treatment of close corporations to providing special protection in the gen-
eral incorporation statute for shareholders’ agreements entered into by close
corporation participants. Most often, the agreement must be unanimous and in
writing. The majority of these states allow the agreement to be in the articles,
27Kessler, ibid. at 669-70, 681-87; Bahls & Quist, ibid. at 71-72, 81-83, 96-102; K.B. Smith,
“Oklahoma Close Corporations: A Need to Recognize Shareholder Expectations” (1986) 11 Okla.
City U.L. Rev. 357 at 369-71, 375-77, 382-84; and F.B. Weinberg, “The Close Corporation under
Ohio Law” (1987) 35 Clev. St. L. Rev. 165 at 184-88.
280’Neal, supra, note 11 at 881-88; E.J. Bradley, ” Comparative Assessment of the California
Close Corporation Provisions and a Proposal for Protecting Individual Participants” (1976) 9 Loy.
L.A.L. Rev. 865 at 898-902; J.E. Olson, “A Statutory Elixir for the Oppression Malady” (1985)
36 Mercer L. Rev. 627 at 627-34; J.A.C. Hetherington & M.P. Dooley, “Illiquidity and
Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem” (1977)
63 Va. L. Rev. 1 at 1-6, 34-62; and G.C. Ivey, “Standards of Management Conduct in Close
Corporations: A Transactional Approach” (1981) 33 Stan. L. Rev. 1141 at 1153-60.
29 ee, for example, Miller, supra, note 20 at 588-603, 622-24; Bahls & Quist, supra, note 26
at 70-73, 80-85; Kessler, supra, note 26 at 666, 698-99; Chittur, supra, note 26 at 144-51; Smith,
supra, note 27 at 360, 390-92; R. Blunk, “Analyzing Texas Articles of Incorporation: Is the
Statutory Close Corporation Format Viable” (1980) 34 Sw. L.J. 941 at 956-60; and H.J.
Haynsworth, “The Need for a Unified Small Business Legal Structure” (1978) 33 Bus. Law. 849
at 857-61.
300’Neal & Thompson, supra, note 21, para. 1.15; Weinberg, supra, note 27 at 170; and Bahls
& Quist, ibid. at 73. Further, a survey of state legislators found that about 70 per cent of legislators
supported some form of special treatment for close corporations –
see Empirical Research Project,
supra, note 5 at 1020.
3 1A concise overview is provided by O’Neal & Thompson, ibid., para. 1.16.
32See Olson, supra, note 28.
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by-laws or a side agreement, though some require that the agreement be set out
in the articles. Some provisions affirmatively state that qualifying shareholders’
agreements are valid. Most, however, are worded negatively because they were
drafted to overcome case law hostile to shareholders’ agreements.33
The second basic approach which has been used is that initially adopted by
Florida and Delaware. Under this approach, participants in a business can elect
to have a close corporation chapter apply to the corporation. These provisions
are most often organized in a separate chapter of the general corporation stat-
ute.’ The remainder of the paper will focus primarily on this approach to close
corporation legislation. The North Carolina approach, as such, will not be con-
sidered in any detail in this paper because the C.B.C.A. statutes contain similar
provisions. In fact, the Canadian provisions are broader since they apply to all
corporations rather than just close corporations. The C.B.C.A. statutes, however,
contain nothing along the lines of a close corporation chapter, and the introduc-
tion of such a chapter could bring some significant changes in the governance
of close corporations.
Ten states utilize the close corporation chapter approach, and the M.B.C.A.
Supplement has been drafted along these lines.” The provisions vary quite sig-
nificantly; however, in order to provide an overview, the Delaware and
M.B.CA. provisions will be considered. The Delaware chapter has thus far been
the more influential, as four states have adopted a similar approach.36 In con-
trast, only two states have adopted the M.B.C.A. Supplement, but given the past
influence of M.B.CA. proposals, it is reasonable to suggest that most future
close corporations chapters will be modelled after the M.B.C.A. Supplement.37
33The states following the North Carolina approach are South Carolina, Florida, Georgia, Maine,
Ohio, Michigan, New Jersey, New York and Rhode Island. See Empirical Research Project, supra,
note 5 at 868-70, 898-900, 908-09, 918; Karjala, supra, note 20 at 1251-53; and Miller, supra, note
20 at 602-03.
34C.B.C.A., supra, note 2, s. 146 was modelled after the shareholders’ agreement provisions in
North Carolina and New York, although the drafters intentionally dropped the qualification
requirements in these provisions, save that of unanimity. See Howard, supra, note 1 at 34.
35The states are California, Delaware, Maryland, Texas, Arizona, Illinois, Alabama, Kansas,
Pennsylvania and Wisconsin. See generally Empirical Research Project, supra, note 5 at 870-74.
In California, provisions available to close corporations appear in various locations in the gen-
eral statute rather than in a single chapter. Most relate to shareholders’ agreements, so California
arguably should be grouped with the North Carolina states. On the California provisions, see
Bradley, supra, note 28 and D. Berger, “Statutory Close or Closely Held Corporation?” (1980) 11
Pac. L.J. 699 at 699-708.
Florida dropped its special close corporation chapter in 1975. On the problems with this partic-
ular legislation, see D.L. Dickson, “The Florida Close Corporation Act: An Experiment that
Failed” (1967) 21 U. Miami L. Rev. 842.
36The states are Pennsylvania, Kansas, Illinois and Alabama. The approaches used in Maryland,
37The two states are Wisconsin and Montana. See Bahls & Quist, supra, note 26 at 72-73. On
the promising long term future of the M.B.CA. Supplement, see Kessler, supra, note 26 at 661-62.
Texas and Arizona differ appreciably. See Empirical Research Project, ibid. at 871-73.
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CLOSE CORPORATIONS LEGISLATION
The Delaware and M.B.C.A. provisions, like all U.S. close corporations
chapters, are not mandatory.3″ Instead, close corporations, and only close corpo-
rations, can elect to have the provisions apply. When such an election takes
place, inconsistent provisions in the general incorporation legislation are dis-
placed, but otherwise the general legislation continues to apply. Legislative def-
initions of close corporations have traditionally been based on some combina-
tion of three criteria, these being the number of shareholders, the absence of
public trading of the corporations’ shares and the presence of transfer restric-
tions. 9 Delaware incoporates all three criteria, as only a corporation which has
thirty or fewer shareholders, which has some form of transfer restrictions on its
shares and which has disavowed any public offering of its shares may elect.4″
The M.B.C.A. Supplement is much less restrictive, permitting any corporation
with fewer than fifty shareholders to adopt the close corporation provisions.4′
Qualifying Delaware corporations elect to have the close corporation chap-
ter apply by stating in the articles that the corporation is a close corporation.
This can be done on incorporation or subsequently by a resolution approved by
two-thirds of holders of each class of shares. Electing corporations will have
their close corporation status terminated involuntarily if an event occurs which
breaches the qualifying conditions for such status, though close corporation sta-
tus can be preserved if the breach is corrected within thirty days. Close corpo-
ration status can also be voluntarily terminated by a vote of a two-thirds major-
ity within each class of shares.42
Under the M.B.CA. Supplement, any newly formed corporation can elect
to be a close corporation. An existing corporation with fewer than fifty share-
holders can also so elect if a two-thirds majority in each class of shares
approves. Both the articles and the share certificates of the corporation must
identify the corporation as being a close corporation. The voluntary termination
provisions are the same as those under the Delaware provisions. There are, how-
38Empirical Research Project, supra, note 5 at 1022 and Committee on Corporate Laws, supra,
note 3 at 272, 275-77.
39Empirical Research Project, ibid. at 878-79.
4’Del. Code Ann. tit. 8, s. 342(2) (1986) [hereinafter Del. Code Ann.]; Empirical Research
Project, ibid. at 880, 882, 884; and G.J. Siedel, “Close Corporation Law: Michigan, Delaware and
the Model Act” (1986) 11 Del. J. Corp. L. 383 at 403, 408.
4’Model Stat. Close Corp. Supp., supra, note 3, s. 3; Empirical Research Project, ibid. at 875,
880-81; Kessler, supra, note 26 at 667; Committee on Corporate Laws, supra, note 3 at 277-78;
and Siedel, ibid. at 407-08. In Montana, the limit was dropped to twenty-five-in order to prevent
corporations which are not closely held from using the provisions; see Bahls & Quist, supra, note
26 at 73.
42Del. Code Ann., supra, note 40, ss. 342-46, 348; Empirical Research Project, ibid. at 871,
888-92; and Siedel, ibid. at 403-05.
McGILL LAW JOURNAL
[Vol. 35
ever, no involuntary termination provisions, as an electing corporation does not
automatically lose its status if the number of shareholders exceeds fifty.43
Both the Delaware chapter and the M.B.C.A. Supplement contain provi-
sions permitting electing corporations to operate less formally. The Delaware
statute provides that if the participants have agreed that the shareholders are to
manage the corporation, a shareholders’ meeting does not need to be called to
elect directors.’ The M.B.C.A. Supplement allows electing corporations to
waive the obligation of holding an annual general meeting unless a shareholder
applies for one.45 It also relieves an electing corporation from any obligation to
promulgate by-laws.”Further, both chapters specifically affirm that sharehol-
ders’ agreements will not be rendered invalid by the corporation carrying on its
affairs in a manner resembling a partnership. These provisions exist, in part, to
help protect electing corporations from having the veil of incorporation lifted.
The concerns in this regard flow from the fact that operating without regard for
corporate formalities is a factor U.S. courts take into consideration in lifting the
corporate veil. The M.B.C.A. Supplement reinforces this protection by contain-
ing a provision specifically stating that failure to observe corporate formalities
should not be grounds for imposing personal liability on participants in the cor-
poration.4 7
In terms of planning, the Delaware chapter authorizes an electing corpora-
tion to abolish the board of directors and shift managerial authority to the share-
holders if the shareholders unanimously approve placing a statement to this
effect in the articles.” In addition, the chapter authorizes electing corporations
to include a provision in the articles giving shareholders the right to compel dis-
solution at will or upon the occurrence of special circumstances.49 Otherwise, it
is assumed that participants in an electing corporation will rely on provisions in
a shareholders’ agreement or in the articles and by-laws to meet their planning
objectives. To assist in the use of these devices, the Delaware close corporation
chapter facilitates enforcement of transfer restrictions on shares and protects
43Model Stat. Close Corp. Supp., supra, note 3, ss. 3, 10, 31; Empirical Research Project, ibid.
at 888-92; Kessler, supra, note 26 at 667-69, 682; Committee on Corporate Laws, supra, note 3
at 277-78, 283-88; and Siedel, ibid. at 407-09, 411-12.
44Del. Code Ann., supra, note 40, s. 351(1) and Empirical Research Project, ibid. at 914.
45Model Stat. Close Corp. Supp., supra, note 3, s. 23; Committee on Corporate Laws, supra,
note 3 at 293; and Siedel, supra, note 40 at 421-23.
46Model Stat. Close Corp. Supp., ibid., s. 22. Such a provision is unnecessary under the
Delaware provisions since there is no requirement under the general Delaware corporation law to
enact by-laws. See Siedel, ibid. at 420-21.
47See generally Del. Code Ann., supra, note 40, s. 354; Model Stat. Close Corp. Supp., ibid., ss.
20, 25; Empirical Research Project, supra, note 5 at 916-23; Committee on Corporate Laws, supra,
note 3 at 290-91, 306-07; and Siedel, ibid. at 428-29.
48Del. Code Ann., ibid., s. 351; Smith, supra, note 27 at 370- 71; and O’Neal, supra, note 11
at 876.
49Del. Code Ann., ibid., s. 355; Smith, ibid. at 389; and Siedel, supra, note 40 at 426.
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CLOSE CORPORATIONS LEGISLATION
written shareholders’ agreements, entered into by shareholders holding a major-
ity of shares, from attack on the basis that the powers of the directors are being
infringed.5″
The M.B.C.A. Supplement contains provisions relating to abolition of the
board, enforcement of transfer restrictions and validation of shareholders’
agreements which are similar to those in the Delaware chapter, though only
unanimous shareholders’ agreements are given special statutory protection.5
Overall, however, the M.B.C.A. Supplement is more ambitious than the
Delaware chapter in terms of planning, and thus constitutes a greater attempt to
reduce the transaction costs associated with structuring the internal rules of
close corporations. The M.B.CA. Supplement attempts to codify some basic
provisions that experienced practitioners often draft for close corporation share-
holder clients,52 though none of these provisions are mandatory. For example,
under the M.B.CA. Supplement, as with the Delaware close corporation chapter,
electing corporations may give any shareholder the right to dissolve the corpo-
ration at will or on the occurrence of specified events by including a statement
to this effect in the articles.53 Unlike the Delaware chapter, however, the
M.B.C.A. Supplement authorizes an electing corporation to adopt a comprehen-
sive procedure dealing with the purchase of shares from the estate of a deceased
shareholder by the corporation.’ Further, the M.B.C.A. Supplement establishes
presumptive transfer restrictions, the primary effect of which is to give the par-
ticipants in the corporation the right to match the offer made by a potential
transferee in most circumstances. This right of first refusal, and other transfer
restriction provisions in the M.B.C.A. Supplement, can be varied or excluded by
the articles.5
The M.B.C.A. Supplement is also more ambitious than the Delaware chap-
ter in terms of remedies. The remedies provisions in the M.B.C.A. Supplement
find their origins in statutory provisions and case law authorizing shareholders
500n the validation of shareholders’ agreements, see Del. Code Ann., ibid., s. 350; Smith, ibid.
at 371; and O’Neal, supra, note 11 at 876. It is specifically provided that liabilities imposed on
directors shall be shifted to the extent that managerial power is reallocated. On the transfer restric-
tion provisions, see Del. Code Ann., ibid., ss. 347, 348(b); O’Neal & Thompson, supra, note 21,
para. 1.16; and Smith, ibid. at 382-84. It should be remembered that a close corporation must have
transfer restrictions in order to be eligible to elect close corporation status. See Siedel, ibid. at
410-11.
51Model Stat. Close Corp. Supp., supra, note 3, ss. 13, 20, 21. The Delaware and M.B.C.A.
Supplement provisions are contrasted by Siedel, ibid. at 411-12, 415, 417-18.
52Committee on Corporate Laws, supra, note 3 at 275.
53Model Stat. Close Corp. Supp., supra, note 3, s. 33; Kessler, supra, note 26 at 690-91; and
Committee on Corporate Laws, ibid. at 299-300.
54Model Stat. Close Corp. Supp., ibid., ss. 14-17; Kessler, ibid. at 685-88; and Committee on
Corporate Laws, ibid. at 293-99.
Corporate Laws, ibid. at 279-83.
55Model Stat. Close Corp. Supp., ibid., ss. 11-12; Kessler, ibid. at 682-85; and Committee on
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[Vol. 35
to apply for dissolution of the corporation on the basis of a deadlock or miscon-
duct by those in control of the corporation. In U.S. corporate law, however,
involuntary dissolution has traditionally been treated as an exceptional remedy
only available in special circumstances.56
The Delaware close corporation chapter is a rather stark example of the
cautious approach to dissolution. Unlike most general corporation legislation in
the United States, the general Delaware statute does not provide statutory
authorization for involuntary dissolution upon an application by a minority
shareholder. 7 However, if a corporation is deadlocked, a court is authorized to
appoint a custodian. The close corporation chapter moderately expands the sit-
uations where a custodian can be appointed, and further allows a court to
appoint a provisional director if this would be the more appropriate solution.58
In sharp contrast to the cautious approach of the Delaware legislation, the
remedies provisions in the M.B.CA. Supplement are the result of a concerted
attempt to expand the jurisdiction of the courts in intra-corporate disputes. By
the time the M.B.CA. Supplement was first proposed, a small number of U.S.
states had departed from the traditionally restrictive approach to involuntary
dissolution and had borrowed from the English Companies Act,1948 in enacting
a provision allowing a court to grant dissolution or certain alternative remedies
on the grounds that the applicant had suffered from oppressive conduct. 9 In pre-
paring the M.B.C.A. Supplement, the drafters relied on these provisions, but also
sought to expand the conduct which could give rise to relief and further sought
to break down the connections between involuntary dissolution and other rem-
edies. Thus, the M.B.CA. Supplement authorizes a court, upon an application by
a shareholder in an electing close corporation, to grant a remedy on the basis
of deadlock or fraudulent, illegal, oppressive or unfairly prejudicial conduct by
the directors or those in control of the corporation. The court is authorized to
grant a number of remedies, including appointing a custodian or provisional
director, removing directors or officers and ordering a buy-out of the applicant’s
56C.B. Capel, “Corporation Law – Meiselman v. Meiselman: “Reasonable Expectations”
Determine Minority Shareholders’ Rights” (1984) 62 N.C.L. Rev. 999 at 1005-08 and R.W.
Hillman, “The Dissatisfied Participant in the Solvent Business Venture: A Consideration of the
Relative Permanence of Partnerships and Close Corporations” (1982) 67 Minn. L. Rev. I at 38-41,
45-49.
570’Neal & Thompson, supra, note 21, para. 9.28 n. 14.
58Del. Code Ann., supra, note 40, ss. 226, 352 and Empirical Research Project, supra, note 5
59See, the Companies Act, 1948 (U.K.), 1948, c.38, s. 210. The states specifically identified by
the Committee on Corporate Laws were Michigan, Minnesota, New Jersey and South Carolina, see
supra, note 3 at 302. A significantly larger number of states followed the approach of the M.B.C.A.
and established oppression as grounds for dissolution but did not specifically authorize the granting
of alternative remedies. See Hillman, supra, note 56 at 39-41.
at 976-77.
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CLOSE CORPORATIONS LEGISLATION
shares. Dissolution can also be ordered, but this is to be treated as a last resort.
The result is one of the most broadly drafted dissolution/oppression provisions
in the United States. At present, only Minnesota and North Dakota have provi-
sions which are more broadly cast.”
M. Evaluation of Close Corporation Legislation
A. The Delaware Chapter and the M.B.C.A. Supplement
The foregoing illustrates that the introduction of a close corporation chap-
ter along the lines of the Delaware chapter or the M.B.C.A. Supplement would
bring some significant changes to the C.B.C.A. statutes. In evaluating whether
such changes would be desirable it is important to remember that close corpo-
ration chapters should not be analyzed in terms of whether they allow close cor-
porations to be governed and operated in accordance with partnership law prin-
ciples. This point needs to be addressed because many commentators have
advocated special close corporation legislation on the basis that such legislation
allows close corporations to operate as partnerships.62 The reasons why the part-
nership analogy has been drawn are not difficult to trace. In some respects, close
corporations do resemble partnerships, as there is often a similar degree of over-
lap between management and risk-bearing. Also, ownership interests in both
types of business enterprise are often not liquid and the investment made by the
participants tends to be more firm specific than in publicly traded corporations.
This does not mean, however, that partnership law should be applied to
close corporations. This should only occur if partnership law accurately reflects
the bargain which close corporation participants would have reached if negoti-
ations had been costless. It is unlikely that this would be the case except in a
small percentage of firms. Depending upon one’s definition of a close corpora-
tion, many close corporations do not resemble the Partnerships Act’s presump-
tive partnership, which involves equal sharing of profits and liabilities, and par-
ticipation in management by each partner.63 Such a partnership presumably
would involve a small number of participants who each wanted to be involved
in management. The further a close corporation departs from this structure, the
Committee on Corporate Laws, ibid. at 300-306; and Hillman, ibid. at 41-43.
6Model Stat. Close Corp. Supp., supra, note 3, ss. 40-43; Kessler, supra, note 26 at 691-95;
6’See Olson, supra, note 8.
62See, for example, Hadden, Forbes & Simmonds, supra, note 4 at 186-91; Kessler, supra, note
26 at 663-67; Bahls & Quist, supra, note 26 at 68-69, 82-83; Smith, supra, note 27 at 360, 390-92;
Bradley, supra, note 28 at 866-67, 899; and Hgtynsworth, supra, note 29 at 857-61. Other commen-
tators have expressed enthusiasm for the partnership analogy without specifically endorsing the
adoption of a close corporation chapter. See, for example, Manne, supra, note 5 at 278-83 and
Hetherington & Dooley, supra, note 28 at 41-50.
63E.g. Partnerships Act, R.S.O. 1980, c. 370, s.2.
McGILL LAW JOURNAL
[Vol. 35
less reason there is to suspect that participants in that corporation would prefer
to be governed by the standard terms provided by partnership law. For example,
while a corporation with twenty shareholders would fall within many defini-
tions of close corporation, there is good reason to suspect that these parties
would not bargain for equal rights in terms of participation in management and
profits.’
Further, even in relation to corporations which structurally resemble the
Partnerships Act’s presumptive partnership, there is reason to be sceptical
whether participants in such corporations would choose to be governed by part-
nership law if such a choice was available at no cost. This is because the deci-
sion to incorporate rather than operate as a partnership cannot be lightly dis-
missed. In order to argue that close corporation participants would rather be
governed by partnership law, one must assume that participants in such corpo-
rations were either unaware of, or indifferent to, the distinctions between corpo-
rate law and partnership law.65 Such an assumption is questionable since it is
widely assumed that sophisticated commercial considerations, such as tax law
and estate planning, will influence the decision to incorporate. To suggest that
participants in close corporations are aware of these issues and are not cognizant
of the distinctions between corporate law and partnership law is rather dubi-
ous.
66
A more appropriate standard for evaluating close corporation chapters is
whether they will reduce transaction costs of participants.67 It has been stated
earlier that corporate law can be seen as establishing a set of standard terms
note 56 at 1003-04.
64See Hillman, supra, note 56 at 64-65 and M.R. Chesterman, “The “Just and Equitable”
Winding Up of Small Private Companies” (1973) 36 Mod. L. Rev. 129 at 131-36, who points out
that one of the problems with the partnership analogy is determining with which partnership a close
corporation is being compared.
65This is done, for example, by O’Neal & Thompson, supra, note 7, para. 2.10 and Capel, supra,
66Easterbrook & Fischel, supra, note 5 at 298-99. Admittedly, concern about limited liability,
greater flexibility in terms of borrowing and tax issues might outweigh internal governance con-
siderations and could cause participants to incorporate even though they would otherwise prefer
to be governed by partnership rules. If this was the case, however, one would expect that there
would be a good deal of enthusiasm among businesspersons for the introduction of partnership law
rules into corporate law. Such enthusiasm, however, is absent. This is indicated by the lack of use
of elective close corporation chapters in the U.S., which will be discussed infra and by a 1980 sur-
vey of English businesspersons which indicated that they had little interest in any new form of
incorporation based on partnership lines. On the latter, see F. Wooldridge, “A New Form of
Incorporation – Responding to the Gower Proposals” (1982) 3 Co. L. 58 at 58, 60-61.
On the factors involved in the decision to incorporate, see generally R.W. Bird, “Incorporation
and the Reasons Therefor” (1974) 23 U.N.B.L.J. 89; D. Cameron, “The Form and Organization
of the Business Entity” in Buckley & Connelly, supra, note 2 at 41-44; and H. Haynsworth,
Selecting the Form of a Small Business Entity (Philadelphia: American Law Institute – American
Bar Association, 1985).
67Easterbrook & Fischel, ibid. at 283-84, 299 and Buckley & Connelly, ibid. at 765.
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CLOSE CORPORATIONS LEGISLATION
which will reduce the cost of contracting and that this analysis is applicable to
close corporations as well as other corporations. Under this framework, the
introduction of special close corporation chapters will only be justified if they
reduce the costs associated with planning and operating close corporations.
The empirical evidence indicates that close corporation chapters do not
achieve this result. If they did, one would expect that election would frequently
take place because the cost savings would be passed on to the participants.
Close corporation chapters, however, are rarely utilized in the United States. In
the U.S., as in Canada, a large majority of corporations have most or all of the
traditional indicia of close corporations.68 Nevertheless, the pattern in states
with special close corporation chapters is that only a small percentage of corpo-
rations elect close corporation status.69
When confronted with this, supporters of U.S. close corporation legislation
have relied on factors external to the content of the legislation to explain the
phenomenon. For example, it is said that those incorporating without legal
advice will not use close corporation chapters because of a lack of awareness
of the provisions. Also, it is asserted that even when lawyers are used, there is
no guarantee that the election of close corporation status will be considered, as
many lawyers are ignorant of the provisions or are unjustifiably reluctant to use
the elective chapters.”
There is reason to be sceptical of these justifications for the lack of use of
close corporation chapters.7 Given that the decision to incorporate will be based
on commercial and legal considerations, it would be rather odd for investors in
close corporations and their lawyers to be ignorant of provisions in corporation
statutes which are organized into a separate chapter dealing with close corpora-
tions. Further, if cost savings indeed arose by virtue of election, there is every
68In the United States, see Haynsworth, supra, note 29 at 851-52 and in Canada, see Hadden,
Forbes & Simmonds, supra, note 4 at 47-51.
69The percentage of incorporating corporations which elect close corporation status in states
with special chapters varies from 5 to 20 percent. See O’Neal & Thompson, supra, note 21, para.
1.19; Blunk, supra, note 29 at 955-56; and M. Harris, “Assessing the Utility of Wisconsin’s Close
Corporation Statute: An Empirical Study” [1986] Wis. L. Rev. 811 at 827-28.
70Bahls & Quist, supra, note 26 at 82-83; Harris, ibid. at 829-30; and H. Haynsworth,
Organizing a Small Business Entity (Philadelphia: American Law Institute – American Bar
Association, 1986) at 229-30. Supporters of close corporation chapters are prepared to admit that
there may be minor defects with the terms of the close corporation chapter, but it is rarely sug-
gested that the lack of use arises because the basic premise is flawed. See, for example, Blunk, ibid.
at 956-60. Some commentators, however, have tied the lack of use of the chapters to basic prob-
lems with their operation. See Weinberg, supra, note 27 at 166 and Hetherington & Dooley, supra,
note 28 at 60-61.
71For example, in terms of non-lawyers being unaware of close corporation chapters, the evi-
dence from California indicates that non-lawyers use elective chapters more often than lawyers.
See O’Neal & Thompson, supra, note 21, para. 1.18.
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[Vol. 35
reason to suspect that any ignorance of, and resistance to, using close corpora-
tion chapters would be quickly displaced.
A more plausible explanation for the lack of special close corporation
chapters is that as compared with general corporation legislation, they do not
reduce transaction costs. To the extent that this is accurate, one would expect
that the same result would ensue in Canada, given that the C.B.C.A. statutes
were derived largely from U.S. precedents. Indeed, it is even less likely that
transaction cost savings would arise from election in Canada. This is because,
unlike most U.S. general corporate statutes, the C.B.CA. statutes already con-
tain a significant portion of the provisions in close corporation chapters which
potentially could reduce transaction costs. Further, other provisions in the close
corporation chapters which could reduce transaction costs could be satisfacto-
rily incorporated into the C.B.CA. statutes.
For example, with respect to corporate formalities, annual meetings are one
instance where Canadian corporate legislation offers essentially the same poten-
tial transaction cost savings as special close corporation chapters. As men-
tioned, the M.B.CA. Supplement allows an electing corporation not to hold
annual general meetings, which are invariably compulsory under U.S. general
corporation legislation. In those corporations where monitoring can occur satis-
factorily without an annual general meeting, election under the M.B.C.A.
Supplement would allow avoidance of the unnecessary costs of holding the mee-
ting. However, such cost savings are already available to businesses incorpo-
rated under the C.B.C.A. statutes since business carried out at annual general
meetings, as with all other general meetings, can be carried out by a resolution
in writing signed by all of the shareholders.72
Similarly, the provision in the M.B.CA. Supplement relieving an electing
corporation from any obligation to promulgate by-laws might reduce transaction
costs for electing corporations in jurisdictions where such an obligation is
imposed. This will be the case in corporations where the monitoring function
provided by the by-laws can be achieved with less cost through the use of other
devices. However, election would not be necessary to obtain such cost savings
in Canada because a corporation is not obliged to enact by-laws under the
C.B.CA. statutes.73
Corporate formality provisions in the Delaware and M.B.CA. legislation
which do not have direct equivalents in the C.B.CA. statutes and which, on first
glance, might be attractive to participants in Canadian close corporations would
be those which seek to protect electing corporations from having the corporate
72See, for example, C.B.C.A., supra, note 2, s. 142. On the waiver of annual general meetings
in the U.S., see supra, note 45 and Empirical Research Project, supra, note 5 at 914-15, 997-99.
73Note the permissive wording of C.B.C.A., supra, note 2, ss. 103(1), 104(1) and see D.
Goldenberg, Alberta Corporation Manual (Don Mills,Ont.: Richard DeBoo, 1985) at 5-11 – 5-12.
19891
CLOSE CORPORATIONS LEGISLATION
veil lifted on the basis that corporate business has been conducted informally or
along the lines of a partnership. There have been Canadian cases where the
court has relied on the failure to observe corporate formalities as at least a pir-
tial justification for lifting the corporate veil.74 However, the effectiveness, and
hence the attraction, of a legislative provision limiting the lifting of the corpo-
rate veil on the basis of corporate formalities may be minimal. A decision by
a court to lift the veil is almost inevitably based on a variety of factors and is
most often ultimately determined by the equities of the case. Consequently, a
failure to follow formalities is unlikely to be the sole factor in a decision to lift
the veil, and thus it is unlikely that a judge would refrain from lifting the veil
solely on the basis of an elective statutory provision.76 As a result, reasons other
than concern about limited liability would likely be needed for participants in
a corporation to elect close corporation status.
The costs involved with the resolution of planning issues would also not
cause Canadian corporations to elect under a close corporation chapter mod-
elled after the Delaware chapter or the M.B.C.A. Supplement, especially if some
amendments were made to the C.B.C.A. statutes. In relation to the Delaware
chapter, this is primarily because the C.B.C.A. statutes utilize a similar approach
to planning questions by providing specific statutory approval to the realloca-
tion of managerial control in corporations through shareholders’ agreements.
Some differences exist, however, between the shareholders’ agreement
provisions in the Delaware close corporation chapter and those in the C.B.C.A.
statutes. The Delaware provisions leave no doubt that shareholders, acting
unanimously, can shift managerial power from the board to the shareholders.
The ability to do this under the C.B.C.A. and most of the statutes modelled after
it is somewhat uncertain, though it is likely that an affirmative shift of manage-
rial power can be made.77 Other differences include the possibility of abolition
of the board of directors under the Delaware chapter78 and unanimity not being
74See, for example, Wolfe v. Moir (1969), 69 W.W.R. 70 (Alta. S.C.).
75See Constitution Insurance Co. of Canada v. Kosmopoulos, [1987] 1 S.C.R. 2 at 18, 34 D.L.R.
(4th) 208 at 213, Wilson J.
76See Karjala, supra, note 20 at 1216, 1263 and O’Neal & Thompson, supra, note 21, para. 1.17.
For a contrary view on the utility of such a provision, see Empirical Research Project, supra, note
5 at 921-23.
77Contrast R.J. Hay & L.A. Smith, “The Unanimous Shareholder Agreement: A New Device for
Shareholder Control” (1985) 10 Can. Bus. L.J. 440 at 450-51, who argue that managerial power
can be affirmatively shifted, with D.H. Sohmer, “Controlling the Power to Manage in Closely-Held
Corporations under the Canada Business Corporations Act” (1976) 22 McGill L.J. 673 at 675 who
argues that this cannot occur. On the unanimous shareholders’ agreement provisions in the
C.B.C.A. statutes, see generally Fraser’s Handbook, supra, note 16 at 224-28.
78That this cannot be done under the C.B.C.A. statutes is indicated by the fact that a corporation
will have to continue to comply with the provisions respecting number and residency requirements
for the board. See, for example, C.B.C.A., supra, note 2, ss. 102(2), 105(3).
McGILL LAW JOURNAL
[Vol. 35
necessary to insulate a shareholders’ agreement from judicial scrutiny on the
basis that managerial discretion is infringed.79
These differences might cause participants in some Canadian close corpo-
rations to prefer the rules established by the Delaware chapter. For example,
shareholder management could be established with more confidence. In addi-
tion, the reduced emphasis on unanimity could lessen the possibility of oppor-
tunistic behavior on the part of the minority. Further, the ability of shareholders
to abolish the board would reduce costs for close corporations which wished to
operate without directors.”0
However, these differences do not strengthen the case in favor of introduc-
ing the Delaware chapter to Canadian corporate legislation. First, one can be
sceptical whether the Delaware rules would be preferred by many close corpo-
ration participants. For instance, minority shareholders might be strongly sup-
portive of a unanimity requirement and U.S. close corporations have shown lit-
tle inclination to abolish the board when they have had this option.”‘ Further,
9″To reiterate, only a majority of shareholders need to be parties. See supra, notes 48 and 50.
Under the C.B.C.A. statutes, however, unanimity is required. In addition, while unanimous
approval is required to shift managerial power to the shareholders under the Delaware chapter, a
majority vote is all that is needed to return managerial power to the board. In contrast, under the
C.B.C.A. statutes, unanimous agreement would be required before the agreement could be altered
to shift managerial power back to the board. Nevertheless, it is of course open for the participants
in a unanimous shareholders’ agreement to stipulate whether majority rule or unanimity will deter-
mine business decisions made by the participants.
S0On the benefits of operating without a board of directors, see Kessler, supra, note 26 at 675-76.
81In relation to unanimity, there is going to be a trade-off between the dangers of opportunistic
conduct by the minority and the benefits to the minority arising from reduced agency costs. See
Buckley & Connelly, supra, note 2 at 741, 754 and O’Neal & Thompson, supra, note 21, paras.
4.02-03, 4.21-22. Academic commentators generally favor a unanimity requirement in the context
of displacing the board’s managerial power. See lacobucci, Pilkington & Prichard, supra, note 4
at 79-80; Welling, supra, note 4 at 318; Kessler, ibid. at 668-69, 678-79; Siedel, supra, note 40
at 419-20; Weinberg, supra, note 27 at 193; and J.A.C. Hetherington, “Defining the Scope of
Controlling Shareholders’ Fiduciary Responsibilities” (1987) 22 Wake Forest L. Rev. 9 at 29-30.
Some, however, are less enthusiastic. See Karjala, supra, note 20, at 1229-32 and R.M. Shapiro,
“The Statutory Close Corporation: A Critique and a Corporate Planning Alternative” (1976) 36
Md. L. Rev. 289 at 292-96. The survey by the Empirical Research Project indicates that more attor-
neys favor a unanimity requirement than a two-thirds or simple majority requirement. See supra,
note 5 at 988-90.
On the empirical evidence from the U.S., see Blunk, supra, note 29 at 955 and Harris, supra,
note 69 at 822 n. 72. One reason that Canadian close corporations might not be interested in oper-
ating without a board is that the costs to corporations which have already established shareholder
management should be minor. Under the C.B.C.A. statutes, directors’ duties and liabilities are shif-
ted to the shareholders to the extent that the powers of the board are assumed. See, for example,
C.B.C.A., supra, note 2, s. 146(5) and A.B.C.A., supra, note 2, s. 140(7), which is drafted more
clearly on the point. Further, close corporation participants might find that third parties would be
more comfortable if the corporation had directors. On abolition of the board in close corporations,
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CLOSE CORPORATIONS LEGISLATION
even if the aforementioned features of the Delaware shareholders’ agreement
provisions would be preferred by many close corporation participants, these fea-
tures could be introduced into the C.B.C.A. statutes without the need for a spe-
cial chapter. Indeed, this has been done to a certain extent under the A.B.C.A.,
which has shareholders’ agreement provisions which go as far as the Delaware
close corporation chapter in authorizing affirmative shifts of managerial power
to the shareholders.82 De-emphasizing the significance of unanimity could also
be done quite easily by statutory amendment of the shareholders’ agreement
provisions. Permitting elimination of the board would involve some more intri-
cate statutory changes, as provisions such as those requiring the board to meet
certain residency requirements would have to be either dropped or redrafted.”
It should be remembered, though, that adoption of a close corporation chapter
along the lines of the Delaware chapter would require similar alterations. This
is because, as mentioned, the provisions of the general corporation statute con-
tinue to apply to electing corporations. Consequently, statutory provisions deal-
ing with the board in the C.B.C.A. statutes would have to be altered to take into
account electing corporations which decided to abolish the board.
As mentioned, the M.B.C.A. Supplement, like the Delaware chapter,
authorizes the use of shareholders’ agreements which infringe on the managerial
authority of the board, authorizes the shift of managerial power from the board
and allows abolition of the board. Where the M.B.C.A. Supplement differs sig-
nificantly from the Delaware chapter in terms of planning is by the inclusion of
detailed terms dealing with transfer restrictions and the purchasing of shares
from the estate of deceased shareholders. On first consideration, these provi-
sions might be attractive to close corporation participants, as share transfers and
buy-outs upon death are frequently areas of concern in close corporations.
Indeed, if these terms accurately set out how participants in a close corporation
would deal with these issues, then election under the M.B.CA. Supplement
would lead to cost savings for the participants because time and effort would not
have to be expended in negotiating and drafting the relevant provisions.’ These
cost savings in turn probably would operate as an incentive to elect close cor-
poration status.
see generally Alberta Report, supra, note 15 at 25; Bahls & Quist, supra, note 26 at 97; and Hay
& Smith, supra, note 77 at 447.
82A.B.C.A., ibid., s. 140. The provisions are described by Goldenberg, supra, note 73 at 10-76
– 10-82. They were introduced in accordance with the recommendations of the Alberta Report,
supra, note 15 at 23-29.
83See supra, note 79. Abolishing some of these requirements might be justified in any event. See
8*his was in fact put forward as an argument for the M.B.C.A. Supplement. See Committee on
Buckley & Connelly, supra, note 2 at 372.
Corporate Laws, supra, note 3 at 273.
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[Vol. 35
It is unlikely, however, that the planning terms in the M.B.C.A. Supplement
would reduce transaction costs for Canadian close corporations.” Both the
transfer restriction and purchase on death provisions in the M.B.C.A.
Supplement are detailed, which is not surprising since well-drafted provisions
dealing with these issues will most often be intricate.86 A cost which arises from
the detailed nature of the provisions, however, is that the provisions require
careful consideration to determine their precise nature and effect. Further, dis-
placing the terms or making the terms applicable has to be done with some care
because the transfer restriction provisions are presumptive while the buy-out on
death terms are elective.” Most significantly, the level of detail increases the
likelihood that the provisions will not be suitable for most close corporations.
Close corporations differ significantly and even subtle distinctions between
close corporations can render a well-drafted transfer restriction or purchase on
death provision inappropriate for a particular close corporation. This is illus-
trated by F. Hodge O’Neal and Robert Thompson’s general comment on the
preparation of transfer restrictions:
“[Tihe drafter must thoroughly explore the ramifications of the particular business
situation, for the instrument he is drafting should be adapted to both the particular
business and the particular shareholders. The drafter should use forms and instru-
ments prepared for other businesses only as ‘idea guides’ or as checklists, and not
permit them to channel his thinking. Restrictive provisions may well vary with the
size of the enterprise, the nature and scope of its activities, the number of persons
holding shares, the extent to which the shareholders participate in the business, the
health of the shareholders, the financial conditions and family situations of the
shareholders, and the individual preferences of the interested persons.” 88
The result is that the transfer restriction and purchase on death provisions
in the M.B.CA. Supplement will most often not meet the needs of close corpo-
rations.8 9 For example, under the M.B.CA. Supplement, the right of first refusal
does not apply to transfers between shareholders or between family members.
The absence of controls over these transfers could lead to unanticipated shifts
in control of the corporation or to the unwanted participation of a spouse or
child in the business. If this did not accord with the intentions of the partici-
85Even strong proponents of the M.B.C.A. Supplement acknowledge that election of close cor-
poration status does not eliminate the need for careful planning. Bahls & Quist, supra, note 26 at
113.860’Neal & Thompson, supra, note 21, paras. 7.04, 7.21, 7.26.
87See supra, notes 54 and 55. The combination of elective and presumptive provisions, together
with the requirement of dealing with the relevant matters in the articles, is criticized by Kessler,
supra, note 26 at 669-75, 697-99.
88Supra, note 21, para. 7.04.
89See E.J. Bradley, “An Analysis of the Model Close Corporation Act and a Proposed
Legislative Strategy” (1985) 10 J. Corp. L. 817 at 822, 834. Even supporters of the M.B.C.A. for-
mat acknowledge that it is likely that the transfer restriction and purchase on death provisions will
have to be changed in most electing close corporations. Bahls & Quist, supra, note 26 at 85-96.
1989]
CLOSE CORPORATIONS LEGISLATION
pants, election of close corporation status under the M.B.C.A. Supplement would
not reduce transaction costs in relation to transfer restrictions because the par-
ticipants and their advisers would have to negotiate and draft new transfer
restriction provisions. A similar process would take place in any electing close
corporation whenever the transfer restriction or purchase on death provisions
did not match the needs of the participants. In the result, the detailed planning
provisions in the M.B.C.A. Supplement would probably not provide significant
cost savings for participants in close corporations incorporated under the
C.B.C.A. statutes.90
A final area in which election of close corporation status under a chapter
modelled after the Delaware legislation or the M.B.C.A. Supplement could
potentially reduce transaction costs would be remedies. As mentioned, close
corporations, like other business organizations, have to compete for investing
capital. As part of this process, close corporations must provide an attractive
investment opportunity, and giving minority shareholders more substantial rem-
edies could provide such an incentive.9 ‘ The Delaware chapter and the M.B.CA.
Supplement could facilitate this because, as mentioned, election provides greater
scope for judicial intervention to protect minority shareholders than does the
corresponding general corporation law.92
In Canada, however, the remedies provisions would do little to encourage
election. This is because the oppression remedy in the C.B.CA. statutes is much
broader than any similar provision in the Delaware chapter and is as broad as
the relevant provision in the M.B.C.A. Supplement.93 Thus, election of close cor-
poration status under a chapter modelled after the M.B.C.A. Supplement would
add little to the protection of minority shareholders.
In sum, corporations incorporated under the C.B.CA. statutes would likely
not utilize a close corporation chapter drafted along the lines of the Delaware
chapter or the M.B.C.A. Supplement. This, in large part, is because election
under either of these chapters would do little, if anything, to reduce the trans-
action costs associated with formulating the relationship between the partici-
9 Further, it is also possible that election might cause counsel and their clients to not consider
the issues involved when the terms of the M.B.C.A. Supplement do not meet the participants’ bar-
gain. On the possibility of election deflecting careful planning, see Shapiro, supra, note 81 at 291,
309 and Bradley, ibid. at 834.
91See Easterbrook & Fischel, supra, note 5 at 285. There has been very little empirical work
done on the issue of whether shareholders’ remedies affect the decision of shareholders to invest.
This is beginning to change –
see, for example, D.R. Fischel & M. Bradley, “The Role of Liability
Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis” (1986) 71
Cornell L. Rev. 261.
92See supra, notes 56 to 61. See also O’Neal & Thompson, supra, note 21, para. 1.16.
93See, for example, C.B.C.A., supra, note 2, s. 247. The author has written about the oppression
remedy in Canada and dissolution/oppression provisions in the United States in “The Oppression
Remedy in Corporate Law: The Canadian Experience” (1988) 10 U. Pa. J. Int’l Bus. L. 305.
McGILL LAW JOURNAL
[Vol. 35
pants. This strongly suggests that there is little reason to introduce a close cor-
poration chapter based on either of these models, especially if shareholders’
agreement provisions were introduced along the lines of those in the A.B.C.A.
This, however, does not end matters. Two further scenarios need to be consid-
ered before the case for close corporation chapters can be dismissed.
B.
Improved Elective Close Corporation Legislation
One possibility would be to improve the provisions of close corporation
chapters to make them more attractive to potentially electing corporations. The
most obvious way would be to increase the number of detailed planning provi-
sions available to electing corporations. For example, even in corporations
which have adopted the M.B.C.A. Supplement and where the terms of the
M.B.C.A. Supplement closely match the bargain which the participants would
have reached on the issues covered therein, detailed drafting of a shareholders’
agreement and/or the corporate constitution will still be needed to fully reflect
the participants’ bargain.94 This is because many issues which are important in
close corporations are not dealt with by election under the M.B.C.A.
Supplement, such as employment, allocation of income, preservation of propor-
tional shareholdings, buy-outs and dispute resolution.95 This suggests that if
these issues were dealt with in a close corporation chapter, the transaction costs
of electing corporations would be reduced and election would be more
attractive.
In fact, however, changes along these lines would do little to improve the
case in favor of close corporation legislation. As with transfer restriction and
purchase on death provisions, it is unlikely that statutory provisions dealing
with issues such as protection of income flow, buy-outs, employment and dis-
pute resolution can be drafted to accord with what participants in most close
corporations would have bargained for absent transaction costs. This, again, is
because such issues cannot easily be reduced to satisfactory universal standard
terms. Provisions dealing with these issues which accurately reflect the partici-
pants’ bargain will carefully balance flexibility with protection of the minority’s
interest and will have to be able to stand the test of time. Consequently, well
drafted terms dealing with these issues will most often be detailed and com-
940n the complexities involved with drafting in relation to close corporations despite the pres-
ence of close corporation legislation see supra, note 85; Karjala, supra, note 20 at 1241-42,
1249-52; and Berger, supra, note 35 at 726-27. See also O’Neal & Thompson, supra, note 21,
paras. 3.03, 4.22, 5.38, 7.04, 7.21, 9.03 and Haynsworth, supra, note 70 at 354-55, 374-78.
9S0n areas of importance in close corporations, see Empirical Research Project, supra, note 5
at 862, 905; Easterbrook & Fischel, supra, note 5 at 277-79; and Haynsworth, ibid. at 227-29.
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CLOSE CORPORATIONS LEGISLATION
plex.96 This would have to be the case as much with a statutory provision as with
one drafted by a lawyer. The detail, however, which would be necessary to
achieve the appropriate balance in a statutory provision would cause the provi-
sion to be inconsistent with the intentions of participants in most close corpo-
rations. The result, again, would be that participants and legal advisers in most
close corporations would have to draft new provisions suited to the individual
close corporation, and the potential cost savings arising from election would
largely be lost.
Other, more minor potential improvements to close corporation chapters
can be envisioned. For example, as has been seen under both the Delaware
chapter and the M.B.C.A. Supplement, adoption or displacement of many of the
provisions will not be effective unless the matter is dealt with in the articles of
incorporation.97 This will be the case even if the shareholders have otherwise
agreed by unanimous written agreement. In such situations, the requirement of
inclusion in the articles will be a trap for the unwary. Consequently, making the
shareholders’ agreement the sole document whereby election or displacement of
provisions of the chapter can occur would help to reduce costs arising from
errors. 98
This does not, however, strengthen the case in favor of close corporation
legislation since, as illustrated by the A.B.CA., general corporate legislation can
be developed to allow such cost savings. Under the C.B.C.A., a significant
number of matters are required in the articles, thus raising the possibility of an
agreed upon term being rendered unenforceable by an inadvertent failure to
include it in the articles. This problem is much less likely to arise under the
A.B.CA. because it provides that most of the matters which are required to be
dealt with in the articles can also be dealt with in a unanimous shareholders’
agreement.99
Another possible change which could be made to close corporation chap-
ters would be to improve their signalling effect. This could be done by high-
lighting areas where planning can take place, thus reducing, though perhaps
marginally, the costs associated with planning in close corporations.’ This is
an explicit objective of Ohio’s close corporation legislation, which is based on
the North Carolina model and thus is restricted to validating the use of share-
96See supra, note 94. The utility of detailed contractual formulations is noted on a more general
level by C.J. Goetz & R.E. Scott, “The Limits of Expanded Choice: An Analysis of the Interactions
Between Express and Implied Contract Terms” (1985) 73 Calif. L. Rev. 261 at 265.
97See supra, notes 42, 43, 48, 49, 51, 53 , 55.
98See Kessler, supra, note 26 at 669-75 and O’Neal and Thompson, supra, note 21, para. 1.19.
99For a comprehensive list, see Goldenberg, supra, note 73 at 10-78 – 10-79.
10The utility of legislative signalling in the context of close corporation planning is noted by
Kessler, supra, note 26 at 698 and Bradley, supra, note 89 at 846. Both suggest that this might be
a better approach than the use of detailed terms.
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[Vol. 35
holders’ agreements by close corporations.’ Again, however, the A.B.C.A.
illustrates that general corporation legislation can achieve the same objective.
For instance, the A.B.CA., in addition to expressly authorizing a shift of man-
agerial powers to the shareholders, lists a number of topics which can be dealt
with by shareholders’ agreements.” This has the dual advantage of reducing
uncertainty and performing a signalling function by highlighting matters which
should be considered for potential inclusion in a unanimous shareholders’
agreement.
In sum, while it is not difficult to conceive of changes which could be
made to the Delaware or M.B.CA. chapters, such changes would do little to
improve the case in favor of introducing such chapters into Canadian corporate
legislation. Ambitious alterations, such as adding more detailed terms, would do
little to reduce planning costs in close corporations. On the other hand, more
cautious changes, which might actually reduce the costs to close corporation
participants, could be satisfactorily accommodated by general incorporation
legislation, as is illustrated by the A.B.C.A.
C. Presumptive or Mandatory Close Corporation Legislation
Given that tinkering with the provisions of the Delaware and M.B.C.A.
chapters does not displace the arguments against introduction of a special close
corporation chapter in Canadian corporate legislation, it is necessary to consider
more radical variations on the Delaware and M.B.CA. models. The essential
thrust of these variations is to displace the passive, elective format. The stronger
version would be to have a chapter of mandatory rules for close corporations.
The weaker version would be to make the rules presumptive. 3
Regardless of how a mandatory chapter was drafted, such a proposal suf-
fers from serious problems. Mandatory legislation would force close corpora-
tions into a legal straitjacket by imposing provisions on them which might well
be unsuitable. For example, a close corporation would lose the option of
electing to be govemed entirely under the general incorporation law even if this
better suited the needs of the participants. Further, even if the provisions of the
chapter were basically suitable to a close corporation upon incorporation, this
“‘Weinberg, supra, note 27 at 178-79, 185.
102See supra, note 2, s. 140(1) and statutory provisions listed in Goldenberg, supra, note 73 at
10-78 – 10-79.
103See generally Empirical Research Project, supra, note 5 at 886-88. Supporters of more radical
variations of close corporation legislation tend to advocate a mix of presumptive and mandatory
rules. See Secretary of State for Trade, A New Form of Incorporation for Small Firms (Annex A:
A Code for Incorporated Firms) by L.C.B. Gower (London: H.M.S.O., 1981); Miller, supra, note
20 at 621-22; Chittur, supra, note 26 at 145-51, 167-72; and Bradley, supra, note 28 at 898-904.
Bradley now recommends a less ambitious approach, restricting his recommendation of a manda-
tory provision to a broad dissolution/remedy. See supra, note 89 at 847.
1989]
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might change as the nature of the business evolved. Because of the mandatory
nature of the provisions, the corporation would be restricted in its ability to
respond to these changes.'”
Making the chapter presumptive rather than mandatory is the logical way
of displacing the rigidity criticism while maintaining advantages over the pas-
sive, elective approach. For example, a presumptive chapter would operate
more simply than its elective counterpart because the rules would apply without
any election and without affirmative statements in the corporate constitution or
a shareholders’ agreement. This could provide a cost saving for corporations
which would have elected anyway.
A further possible advantage of a presumptive chapter would be its appli-
cation to close corporations where little or no planning took place. In a regime
with an elective chapter, such corporations will probably be governed entirely
by the general corporate statute as it is unlikely that serious consideration will
be given to electing. Nevertheless, it is possible that participants in such corpo-
rations would have departed significantly from traditional corporate law rules if
bargaining had occurred. For example, it is frequently asserted that absent the
costs involved with detailed legal planning, minority shareholders would bar-
gain for improved protection from the potential impact of the principle of major-
ity rule and the lack of a liquid market for minority interests. 5
If, as compared with general corporate law principles, the set of presump-
tive rules in the close corportion chapter more closely matched the bargain
which would be reached absent transaction costs in close corporations where
planning did not take place, then a strong case can be made for the introduction
of these rules. The reason for this is that in resolving intracorporate disputes, a
great deal of weight should be placed on what the parties would have bargained
for absent transaction costs.’ 6 Because no consideration will be given to con-
tracting out in close corporations where planning has not occurred, whatever
regulations are imposed by the relevant corporate legislation will govern dis-
putes between the participants. Hence, if the presumptive rules in a close cor-
poration chapter more closely match the bargain which would have been made
absent transaction costs in close corporations where no planning has taken
‘4See Commentary by Committee on Corporate Laws, supra, note 3 at 272 and Empirical
Research Project, supra, note 5 at 887-88. Ironically, the basic thrust of these criticisms is much
the same as those made by the U.S. commentators who attacked the manner in which general cor-
poration law applied to close corporations. These commentators accurately pointed out that “the
corporation” does not exist. Consequently, they recommended that allowances be made so that cer-
tain corporations could depart from general corporation law principles. With mandatory close cor-
poration legislation, however, the problem would come full circle.
05See, for example, O’Neal & Thompson, supra, note 7, paras. 2.17, 7.20; Weinberg, supra,
note 27 at 196-97; Chittur, supra, note 26 at 130-31; and Olson, supra, note 28 at 633, 658.
16Easterbrook & Fischel, supra, note 5 at 291-96.
McGILL LAW JOURNAL
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place, it would be appropriate to have intracorporate disputes governed by these
rules rather than by traditional corporate law principles.
The case for a presumptive chapter, however, is not a strong one. Most of
the proposals of this nature focus upon establishing rules along the lines of part-
nership law.” The underlying assumption here is that partnership rules more
closely match the bargain which the participants would have reached than
would general corporate law provisions. As has been suggested, however, the
proposition that partnership law more closely parallels the bargain which would
have been reached by close corporation participants absent transaction costs is
highly dubious.
An alternative method which could be used to develop detailed presump-
tive rules would be to rely on the provisions which are adopted by close corpo-
rations which have the financial resources to engage in detailed planning.”‘3
Utilizing such a procedure would recognize that the business organizations
involved were corporations rather than partnerships and, intuitively, would be
more closely related to the objective of providing participants with terms they
would have bargained for if bargaining had been costless. There is reason to
doubt, however, whether such a procedure could develop suitable provisions on
a wide scale. The drafting of some presumptive rules, such as whether a close
corporation would have a board of directors, would be fairly straightforward
once it was determined what close corporation participants would bargain for
absent transaction costs. However, as has been suggested before, for most mat-
ters of importance in close corporations, such as buy-sell rights, transfer restric-
tions, preservation of employment and income flow, well-drafted provisions
will tend to be complex. Because of this, the use and drafting of such provisions
will generally differ in well-planned close corporations even if there are basic
similarities in format. Consequently, developing one precise, well-balanced pre-
sumptive rule from all of these sources will be difficult. Further, it is unlikely
that whatever rule is developed will precisely match the terms which the partic-
ipants would have bargained for since close corporations are all different.
The implications of this would differ for particular close corporations,
depending on the extent of planning. In terms of close corporations where par-
ticipants engaged in careful planning, it might be thought that the presence of
inappropriate presumptive rules would cause no difficulty. This is because the
participants could bargain out of the presumptive rule at little if any cost.
Indeed, this is a common assumption which is made about elective or presump-
tive terms created by the legislature in the context of commercial law generally.
‘TSee supra, note 103.
10 See Easterbrook & Fischel, supra, note 5 at 299-300 and Buckley & Connelly, supra, note
2 at 766. This is basically the approach that the drafters of the M.B.C.A. Supplement took in pre-
paring the transfer restriction and buy-out on death provisions. See supra, note 52.
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Under what is referred to as the Expanded Choice postulate, state-supplied
implied contractual terms are justified on the basis that they provide widely suit-
able preformulations for participants, thus eliminating the cost of negotiating
every detail of the proposed arrangement. Part of this thesis is that atypical par-
ties lose nothing as they are unrestrained from designing customized provi-
sions.”
Such an assumption may well be erroneous. As Goetz and Scott have
observed, there likely are costs involved with departing from state-supplied
terms, thus discouraging the use of terms which would maximize the wealth of
the participants. For example, the risks of misinterpretation by the courts will
be greater with terms generated by the parties because the intent of such terms
likely will not be as clear as state-supplied terms. Further, the possibility of mis-
interpretation by the courts will be increased in situations where it is necessary
to integrate the terms generated by the parties with state-supplied terms.”0 On
a broader level, the existence of state-supplied terms might well discourage
innovation in the development of contractual terms, thus reducing the range of
choice available to participants.”‘ All of this suggests that in most close corpo-
rations where extensive planning takes place, the existence of detailed presump-
tive rules could impose significant costs without providing much in the way of
benefits.
In relation to close corporations where planning does not take place to any
significant extent, the case against presumptive rules cannot be dismissed so
readily. As with close corporations where planning takes place, the precise
terms of any detailed set of presumptive rules will probably only match the pre-
cise bargain which would have been reached in a small number of such corpo-
rations. However, as mentioned, if the presumptive rules, as compared with gen-
eral corporate law doctrines, more closely match the bargain which would have
been reached in such corporations if detailed planning had taken place, a strong
argument can be made that the presumptive rules should apply, as they would
establish more appropriate guidelines for resolving intracorporate disputes.
If Canadian corporate legislation was based upon strict principles of major-
ity rule and non-intervention by the courts, a complex set of presumptive rules
might better match the bargain that would have been reached in close corpora-
tions where little or no planning takes place.”2 Corporate law rules, applied con-
sistently with these guidelines, could often expose minority shareholders to
risks of exploitation by virtue of the lack of the market for shares. Given that
’09See Goetz & Scott, supra, note 96 at 262, 265-66.
‘”‘Ibid. at 283-86, 290-91, 301-03, 321.
“‘ibid. at 291-98, 303-05, 321.
120n the status of majority rule in Canadian corporate law, see, for example, P. Anisman,
“Majority-Minority Relations in Canadian Corporation Law: An Overview” (1986-87) 12 Can.
Bus. L.J. 473.
REVUE DE DROIT DE McGILL
[Vol. 35
rational persons would not consent to an exploitation of their investment, pre-
sumptive rules incorporating some form of protection for the minority might
indeed match more closely the bargain which would have been reached absent
transaction costs.” 3
However, Canadian corporate law is not based on strict majoritarian and
non-interventionist principles, and a strong case can be made that the law, as set
out in the C.B.C.A. statutes, provides a more appropriate set of guidelines for
resolving disputes in close corporations than would detailed presumptive rules.
To start, most people in business probably understand that a majority share-
holder has some general power to control the business and thus exercise of this
power will rarely cause great surprise, even if the minority would have preferred
a different course.”4 Consequently, the principle of majority rule which perme-
ates Canadian corporate law is likely an appropriate one. This does not mean,
however, that the C.B.C.A. statutes permit exploitation of the minority’s invest-
ment since they contain a number of statutory remedies for minority
shareholders.
The most important of these is the oppression remedy. The existence of this
remedy can be justified in terms of imposing a term the participants would have
agreed on absent transaction costs since participants in corporations would not
agree upon investing to be subjected to unfair prejudice or oppression.” 5
Further, because of the open-ended and flexible nature of the oppression rem-
edy, a court can be cognizant of the contractual nature of the corporation and
can consider the case within a framework of what the parties would have agreed
to if they had bargained in relation to the matter in dispute.” 6 Detailed presump-
tive rules, on the other hand, would not lend themselves as easily to adaptation
by the courts. Instead, a court would be strongly inclined to apply the presump-
tive rule, even if its terms did not accord with that to which the participants
would have agreed absent transaction costs.
” 3See Prentice, supra, note 8 at 60-61 and Bradley, supra, note 89 at 840.
” 4Karjala, supra, note 20 at 1250-51.
1151t might be thought more appropriate to characterize the oppression remedy, like tort law doc-
trines, in liability rule terms. However, it is increasingly being recognized that corporate law doc-
trines which impose constraints on managers are more satisfactorily analyzed as state generated
terms which lower the cost of contracting. This analysis also seems to be the most helpful in rela-
tion to the oppression remedy. See generally Buckley & Connelly, supra, note 2 at 754; Fischel
& Bradley, supra, note 91 at 264-66; and C.J. Goetz, “A Verdict on Corporate Liability Rules and
the Derivative Suit: Not Proven” (1986) 71 Cornell L. Rev. 344 at 344-45. These issues are con-
sidered in greater detail in B.R. Cheffins, “Economic Analysis of the Oppression Remedy:
Towards a More Coherent Picture of Corporate Law”, U.T.L.J. (forthcoming).
“This approach has been advocated in relation to the oppression remedy by Prentice, supra,
note 8 at 81, 91. The reasonable expectations analysis which is being applied with increasing fre-
quency in interpreting U.S. dissolution/oppression provisions could also be quite easily adapted to
a bargaining analysis. See Hillman, supra, note 56 at 83-88; O’Neal & Thompson, supra, note 7,
para. 7.20; and Hetherington, supra, note 81 at 21-29.
1989]
CLOSE CORPORATIONS LEGISLATION
It is possible to argue that the existence of an open-ended oppression rem-
edy could be counterproductive in terms of bargaining because the participants’
knowledge of the courts’ open-ended jurisdiction to deal with corporate prob-
lems will dull the incentive to negotiate.” 7 There should not be a great deal of
concern about this possibility since applying to a court is not a costless option.
The parties will have to pay legal expenses and the losing party will have to pay
a portion of the winner’s costs.” s Further, costs arise for the participants because
of the uncertainty and delay involved with a court application.”9 Avoidance of
these costs will provide a strong incentive for the parties to bargain and estab-
lish terms in the corporate constitution or a shareholders’ agreement which will
resolve potential disputes in a less costly manner.2
IV. Conclusion
Important differences exist between close corporations and other corpora-
tions, one being the nature of the relationship between the participants. General
corporate legislation in the United States traditionally did not give sufficient
expression to this fact. Consequently, participants in close corporations found it
costly to depart from traditional corporate law structures when this was desired
117See Easterbrook & Fischel, supra, note 5, at 286-89, 291 and J.W. Welch, “Shareholder
Individual and Derivative Actions: Underlying Rationales and the Closely Held Corporation”
(1984) 9 J. Corp. L. 147 at 177-78. Even abandoning planning in favor of litigation would not be
a problem if the parties internalize the costs of litigation. They could then decide which was the
most cost effective way for them to proceed. However, if the costs of litigation are not fully inter-
nalized, then a decision to rely on the judicial process will be partly borne by the public. See Goetz
& Scott, supra, note 96 at 310.
“sThis arises by virtue of the jurisdiction of Canadian courts to award costs. See, for example,
British Columbia, Rules of Court, r. 57, appendixes B and C. The courts generally do not have this
jurisdiction in the U.S. However, Weinberg, who supports the introduction of a broadly based
oppression remedy in his home state of Ohio, recommends that judges should be given the discre-
tion to award attorney’s fees on oppression applications. He says this jurisdiction could be used
to encourage voluntary observance of high standards of conduct and to discourage nuisance liti-
gation. See supra, note 27 at 205-06.
“9Haynsworth, supra, note 70 at 294, 299-300 and H.J. Haynsworth, “The Effectiveness of
Involuntary Dissolution Suits as a Remedy for Close Corporation Dissension” (1987) 35 Clev. St.
L. Rev. 25 at 91-92.
120The courts should facilitate this process’by giving significant weight to terms which have
explicitly been negotiated by the parties. See Hillman, supra, note 56 at 84. English courts have
indeed been prepared to give substantial weight to the corporate constitution in oppression appli-
cations and commentators have recognized that this provides an incentive for the parties to bargain.
See Re Postgate & Denby (Agencies) Ltd. (1986), [1987] 1 W.W.R. 102, [1987] B.C.L.C. 8 (Ch.
D.); Re A Company (No. 004377 of 1986) (1986), [1987] B.C.L.C. 94 (Ch. D.); Re A Company
[1986] B.C.L.C. 362 (Ch. D.); Prentice, supra, note 8 at 76; and B. Hannigan, “Section 459 of the
Companies Act 1985 – A Code of Conduct for the Quasi-partnership” [1988] Lloyds. Mar. and
Comm. L.Q. 60 at 81. Canadian courts have been inconsistent in terms of placing weight on what
the parties have agreed upon. Contrast, for example, Re Bury (1984), 48 O.R. (2d) 57, 12 D.L.R.
(4th) 451 (H.C.) with Bernard v. Montgomery (1987), 60 Sask. R. 20, 36 B.L.R. 257 (Q.B.).
McGILL LAW JOURNAL
[Vol. 35
and minority shareholders in particular were vulnerable because of the illiquid-
ity of their investment.
A number of states in the U.S. have responded to these problems through
the introduction of elective close corporation chapters. The case for following
this approach in Canada is weak. This is indicated by the lack of use of these
chapters in the U.S which suggests that the provisions do not achieve cost sav-
ings for the parties because they do not reflect the bargain which would have
been reached absent transaction costs. Further, it is unlikely that elective close
corporation chapters will be made more attractive by the inclusion of provisions
relating to a wider variety of issues which are relevant to close corporations.
Most of the issues which would be dealt with are too complex to allow the
development of a single rule which will be suitable for most close corporations.
The difficulty with formulating detailed terms which will accurately match the
bargains which will be reached in close corporations is also an important argu-
ment against taking the more ambitious approach of introducing presumptive
rules for close corporations. Participants in most close corporations would have
to absorb the costs involved with contracting out of the presumptive rules or
would have disputes governed by rules which did not accord with the bargain
the parties would have reached absent transaction costs.
The foregoing suggests that corporate law should take a less ambitious role
with respect to close corporations. This does not mean that allowances cannot
be made for the differences between close corporations. In certain instances, it
may be appropriate to allow close corporations to waive the use of certain mon-
itoring devices. In addition, corporate law should encourage participants in
close corporations to reach the bargain respecting governance of the corporation
which most closely meets their intentions. Finally, corporate law can impose
safeguards to prevent minority shareholders from having their investment
expropriated. The C.B.C.A. statutes achieve these objectives to a significant
extent. Some differences are recognized to reflect the fact that monitoring is less
difficult, as distinctions are made on the basis of the type of corporation
involved in relation to some corporate formalities. Also, departures from tradi-
tional corporate law rules are expressly authorized through use of unanimous
shareholders’ agreements. Finally, the oppression remedy is a response to the
problem of exploitation of the minority.
The treatment of close corporations under Canadian corporate law could be
improved. For example, some savings in transaction costs could probably be
gained if the C.B.C.A. statutes stated more clearly that shareholders’ agreements
can be used to reallocate managerial control in corporations and explicitly sig-
nalled more areas where advance planning can take place. The A.B.C.A. illus-
trates that both of these types of reform can take place in a C.B.C.A. type statute.
Thus, consideration should be given to amending the C.B.C.A. statutes along the
lines of the A.B.C.A. Nevertheless, unless new evidence emerges which indi-
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195
cates clearly that U.S. close corporation legislation meets the expectations and
needs of participants in close corporations, the present approach of having the
internal affairs of corporations regulated under a single statute should be
retained.
