Constating Documents: What are they and why you should care about them?

Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law
 
There is a lot of paperwork involved in getting a new business off the ground and it can be overwhelming to keep all the different documents straight. One set of documents that are essential to the formation and organization of any new corporation are the constating documents. This blog provides a brief overview of what constating documents are and why these documents are important to your start-up.
 
What are constating documents?
Constating documents, also referred to as organizational documents, are the documents that establish a corporation and set out how the internal affairs of the business are governed.[1] Under the Canada Business Corporations Act (CBCA), a corporation’s constating documents consist of articles of incorporation, bylaws, and unanimous shareholder agreement.[2]
 
Articles of Incorporation:
Every corporation incorporating under the CBCA or the Alberta Business Corporations Act (ABCA) is required to file an articles of incorporation document with the regulator appointed to administer the act.[3] The articles of incorporation are the charter or constitution that set out basic elements of the corporation and provides the framework for its formation.[4] Under the CBCA[5] and the ABCA[6], articles of incorporation must include the following information:

• the name of the corporation
• the classes and any maximum number of shares that the corporation is authorized to issue
• if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted
• the number of directors or, the minimum and maximum number of directors of the corporation
• any restrictions on the businesses that the corporation may carry on

 
The CBCA also requires the province in Canada where the registered office of the corporations is to be situated.[7] In addition to the required information above, articles of incorporation may also include additional provisions depending on the specific needs of the business. It is important to carefully consider your business and tailor the articles of incorporation to your business’s specific structure to help avoid shareholder disputes or taxation issues in the future.[8]
 
Bylaws:
Bylaws are the specific rules and procedures for the internal governance of the corporation.[9] In other words, the bylaws are like the internal operating manual for your business.[10] The bylaws often cover the procedures for board and shareholder meetings, the composition and election of the board of directors, and corporate record-keeping. These rules must be consistent with the articles of incorporation. [11] However, unlike the articles of incorporation, bylaws are not required by law under the CBCA or the ABCA. If a corporation chooses not to pass its own bylaws, the CBCA or the ABCA will act as the default for certain affairs of the corporation.[12] Although not legally required, bylaws are important to establish the effective governance of the corporation and may be required in the future by third parties such as potential investors or banks lending money to the corporation.[13]
 
Unanimous Shareholder Agreement:
A unanimous shareholder agreement is defined in the CBCA as a written agreement among all the shareholders of a corporation that restricts the powers of the directors to manage, or supervise the management of, the affairs of the corporation.[14] The purpose of a unanimous shareholder agreement is to transfer authority over some or all management decisions from the directors to the shareholders of the corporation.[15] It is important to note that under the ABCA, the removal of power from the directors is not required and instead represents one of several things that may be included in a unanimous shareholder agreement.[16] Furthermore, as is the case with bylaws, a unanimous shareholder agreement is not a legal requirement under the CBCA or the ABCA.[17]
 
In addition to binding current shareholders, all subsequent shareholders are also bound to the terms of the unanimous shareholder agreement. This can be problematic for growth companies as they add new shareholders as it becomes more difficult to efficiently make decisions among all shareholders.[18] Furthermore, the CBCA and ABCA provides no clear-cut procedures for governing shareholder decisions made under a unanimous shareholder agreement. Another issue is that the powers exercised by shareholders under a unanimous shareholder agreement attract the same kind of fiduciary duties that attach to the activities of directors.[19] New shareholders may not want to become bound to the fiduciary duties of the corporation, especially if they already have fiduciary duties to their own shareholders.[20] As these potential issues illustrate, it is very important to think through your business and growth plans to determine whether or not a unanimous shareholder agreement is appropriate for your specific business. If a unanimous shareholder agreement is not entered into, there are other types of shareholder agreements that do not fall within the meaning of CBCA or ABCA’s definition of unanimous shareholder agreement that can be drafted to set forth the various rights and obligations of the corporation’s shareholders.
 
If you have questions regarding the various constating documents discussed above or require assistance with the drafting of your start-up’s constating documents, please reach out to the BLG Business Venture Clinic.
 


[1] Ahlstrom Wright, Definition: Constating Documents (April 18, 2018), online: https://ahlstromwright.ca/definitions-constating-documents/

[2] Practical Law, Glossary: Constating Documents, online: https://ca.practicallaw.thomsonreuters.com/Document/I188aaba9f92311e498db8b09b4f043e0/View/FullText.html?listSource=Foldering&originationContext=MyResearchHistoryRecents&transitionType=MyResearchHistoryItem&contextData=%28oc.Default%29&VR=3.0&RS=WLCA1.0

[3] Practical Law, Glossary: Articles of Incorporation, online: https://ca.practicallaw.thomsonreuters.com/Glossary/CAPracticalLaw?docGuid=I75b15b03f95911e498db8b09b4f043e0&transitionType=DocumentItem&contextData=(oc.Default)&ppcid=66e3e985f4a0458c8fc2c0c02dbb4792

[4] Upcounsel, Bylaws vs. Articles of Incorporation, online: https://www.upcounsel.com/bylaws-vs-articles-of-incorporation

[5] CBCA R.S.C., 1985, c. C-44, s 6(1)

[6] ABCA RSA 2000, c B-9, s 6(1)

[7] CBCA, supra note 5

[8] Kahane Law Office, Understanding The Articles That Form Your Corporation, online: https://kahanelaw.com/articles-of-incorporation-corporate-lawyers-calgary/

[9] Supra note 4

[10] Lena Eisenstein, Articles of Incorporation and Bylaws: Same or Different? (September 29, 2021), online: https://www.boardeffect.com/blog/difference-between-articles-of-incorporation-and-bylaws/

[11] Ahlstrom Wright, What is A Corporate Bylaw And Why Do Corporations Need Them? (April 20, 2018), online: https://ahlstromwright.ca/what-is-a-corporate-bylaw-and-why-do-corporations-need-them/#:~:text=There%20is%20no%20legal%20requirement,although%20it%20is%20not%20recommended.

[12] Ibid

[13] Ibid

[14] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, p. 100-101

[15] Ibid at p. 101

[16] Ibid

[17] In 1998, the Supreme Court of Canada recognized unanimous shareholder agreements as being one of the three constating documents for a corporation under the Canada Business Corporations Act in Duha Printers (Western) Ltd. v. R. [1998] 1 S.C.R. 795

[18] Ibid at p. 102

[19] Ibid at p. 104

[20] Ibid at p. 104