BUSINESS ASSOCIATIONS FINAL EXAM OUTLINE

INTRODUCTION

Different Forms of Association

Describe each of the following forms of association for carrying on business noting the particular features of each of them that are set out in the “Notes on Business Associations”.

Agency - A person carrying on business may choose to have another person act on their behalf.

- Agent not a party to the K – K on behalf of principle

Sole Proprietorship

- Single investor with ultimate management authority Single equity investor Sole proprietor has legal title to the assets of the business Manages the business (or overseas the management)

- Agents and employees: may hire- Creditors

Will usually obtain funds on credit May put constraints on how you manage business

- Not a separate legal entity (contracting personally, if tort committed then your personal belongings may be taken)

- Comes to an end on the death of sole proprietor – except could continue through administrator of the estate until all assets distributed

Partnership - Can hire agents and employees- Partners themselves are treated as agents for each other- Partnership not a separate legal entity (partners are personally

liable)- ‘the partnership’ cannot enter into contract – it is the partners

themselves who enter into contracts.- Partners responsible for torts committed in the conduct of the

business directly or vicariously (personally liable)- Partnership comes to an end on the death or bankruptcy of any

one of the partners Limited Partnership

- Partners have a limit on their liability- Must have one general partner – one without limited liability

To get around that – make a corporation the general partner and ensure they have no assets

- If you’re a limited partner you’re not supposed to be involved in the management of the business

- Can have creditors- Not a legally recognized entity

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Limited Liability Partnership

- Not the same as limited partnership - In B.C. available on a broader basis, not just for professional

partnerships- Not recognized as a separate legal entity.- Partners are not liable for the acts of their fellow partners or

employees unless they were directly supervising the activity that caused the loss.

- Still personally liable – can go after personal assets

Corporations - Separate legal entity The corporation is liable when it enters into K – not

shareholders Corporation is liable for torts Corporation that owns the assets and not the equity

investors- Often has several equity investors - Equity investors are usually

referred to as shareholders- Interests are usually divided into shares – equity investors are

only liable for the amount of their investment (like limited partners)

- No constraint on the extent to which shareholders can become involved in the management of the business (unlike partners)

- Continued existence even upon death of shareholders- Can have creditors, can hire employees (through its agents) –

when directors act, it is the corporation acting – when anything below that acts, it is the directing mind

- Shareholders can be held personally liable

Business Trust - Allows you to flow income directly through to investor (only taxed once) – unlike in corporations where the corp income is taxed and the dividends are taxed

- Type of trust used in the business trust is an express trust.- One or more persons (settlors) put title to property in trust in the

hands of one or more persons (trustees) with instructions that the trustees hold that property for the benefit of other persons (beneficiaries)

- Settlors, trustees, and beneficiaries can all be different ppl, or settlors can be either trustees or beneficiaries or both

- Details of the operation of the trust set out in the trust instrument - Trust not recognized as a separate person although basically

taxed as one- 2 main sources of liability risk for investors/unitholders: (1)

implied right of trustees to be indemnified for their losses by beneficiaries in some situations (Default rule – rule unless you say otherwise); (2) possibility that the trustees will also be

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considered agents of the investors in some situations.

Co-operative Associations

- Much of what was noted about corporations applies to co-operative associations

- Unique feature – typically distributes is profits to its members in a form other than dividends

In the form of lower prices or reduced fees for services or in benefits of some sort

Societies or Non-profit corporations

- Common to have separate statutes for the incorporation of non-profit corp that will carry on their activities on a non-profit basis

- Members usually elect board of directors or executive committees- Member vote to:

Elect a board of directors or exec committee Amend the articles, bylaws or other constitutional docs of

non-profit corp Members may also be persons who receive the benefits of

the activities performed by the non-profit corp- Non-profit corporation is the term used in many jurisdictions in

Canada – society in B.C.

Unincorporated Association

- 1+ person, not for profit, activity carried on in common- Don’t need to do anything formal to form it – just have to carry on

activity in common - Not separate legal entity – some similarities to partnership

cannot enter in K with other persons – member enters not responsible for torts committed in the conduct of the

association’s activities member can be personally liable members considered agents for each other can engage other agents and employees and creditors

Joint Ventures - Not recognized as separate legal entity- describes a relationship among persons who agree to combine

skills, property, funds, time, resources, knowledge or experience to pursue some common objective

- typically each member of the joint venture has some control over the mgmt of the joint activity and agrees to share in the profits and losses of the activity

- could be set up as a partnership (members of the JV might be two separate corporations carrying on the JV though a partnership) or could be carrying on the joint venture through a corporation with the corporations that are the members of the joint venture being shareholders in the corporation (terms might be contained in a shareholders’ agreement among the members) or could simply be a contractual arrangement that does not amount to partnership

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Franchises - Arrangement in which a franchisor grants a franchisee one or more rights such as the right to sell the franshisor’s products, use its business name, adopt its methods, or copy its symbols, trade-marks or architecture over a specified period of time in a specified place

- Franchisor often also provides marketing support and training in the franchisor’s method of carrying on business

- Franchisee pays a royalty or licence fee to the franchisor- Arrangement has one or more of three basic elements:

The provision of know-how Image recognition Purchasing power

- key = license to use the name, trade mark etc.- franchise is not a separate legal entity- franchisor and franchisee nearly always a corporation- governed by provincial law since dealing with K’s that fall under

provincial powers with respect to prop and civil rights

Multiple Contracts

- Plastic pen example – every step could be done by separate persons acting independently subject to the terms of separate contractual arrangements

- Could involve high transaction costs- Forms of business association as means of reducing these costs

Show how a trust can be used to replicate features of a corporation such as shareholders, shares, directors of the board and officers. How does a trust replicate a corporation?The basic framework for the management of a corporation is that shareholders elect a board of directors who then appoint officers who either manage the day to day business of the corporation themselves or delegate various management responsibilities to other persons they hire.

A business trust replicates the corporate structure in that the equity investor (settlor) in a trust is equivalent to the shareholders in a corporation. The trustees are equivalent to the directors in that they are elected by the settlor and appointed to manage the trust. In a business trust, the trustees are liable (the beneficiaries/unitholders are not liable). As long as the investor-beneficiaries are not trustees they will have some protection against personal liability that may roughly approximate the limited liability of shareholders in a corporation.

Who are the stakeholders of a business? The stakeholders of a business are the persons who are affected by the conduct of the

business. These include equity investors, creditors, managers, employees, and can also include the businesses customers (or consumers), suppliers, competitors and the local community and the broader community (national or international).

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Note four commonly used financial statements.4 commonly used financial statements:- balance sheet- income statement- statement of retained earnings- statement of changes in financial position.

Explain what a balance sheet shows.Balance sheet – assets (shows what was done with funds) vs. liabilities and equity (where funds obtained from) -- if everything is properly accounted for the sides should balance

Explain what an income statement (or statement of profit and loss) shows.Income Statement – shows the revenues of the business (sales, royalties, license fees, rental income) less the expenses of the business –total expenses are deducted from total revenue (revenue – cost of goods sold = gross profit – other expenses = net income)

Explain the terms “assets,” “liabilities” (or “debt”), “equity,” “trade credit,” “accounts receivable,” and “accounts payable”.Assets, Liabilities and Equity Assets are acquired for the business that will have a continuing value Liabilities/debt represent fixed obligation (bank loan) Equity is the entitlement to residual amounts (amounts left over) - Persons who have

advanced funds as an “equity” investment share in the profits that are the residual amount of revenues left after payment of expenses including interest expense.

Trade Credit, Accounts Payable and Accounts Receivable Trade credit – goods or services acquired for a business on credit

Appears on balance sheet as accounts payable If business is one extending the credit it will appear on balance sheet as

accounts receivable (asset)

PART I: AGENCY

Relationships Between Principal and AgentAn agent is a person who affects the legal relations of another person, called the principal,

primarily through entering into K’s on behalf of the principal.

Quick Notes:- Principal can be vicariously liable for the torts committed by the agent when committed

within the scope of their employment- Distinguished from employment in that an employee does not necessarily have the right

to enter into K’s on behalf of the employer- Agency and trust similar in that agents and trustees both owe fiduciary duties

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An agent can possess two types of authority: (1) Actual authority; (2) ostensible authority. Actual authority can be: (A) Express or (B) implied.

STARTING POINT: If the agent has actual authority to enter into a particular contract with another person on behalf of the principal, and if it is clear that the agent is acting as agent in its dealings with that other person, then the K, if otherwise valid, will be a binding K between the principal and the third party.

Express actual authority – when principal has stated either orally or in writing what the agent’s authority is; includes authority that can be inferred from the written or oral words

Implied actual authority – refers to the authority that the principal and agent would have expected the agent to have in the circumstances; to determine the implied authority of an agent, courts look to the usual or customary authority of such agents:- Usual authority – determined by what the agent has been allowed to do in the past

(Freeman & Lockyer)- Customary Authority – determined by looking at the kind of authority agents of that

type normally have (Wiltshire v. Sims)

CAREFUL: Usual authority looks at this principal and this agent while Customary authority looks at what agents of this type are normally allowed to do.

POLICY: Protecting reliance interest of the agent – unjust enrichment (do something for the principle 5 times, on 6th time if it doesn’t turn out right, they could threaten not to pay the agent)

Freeman & Lockyer v. Buckhurst Park Properties – Kapoor acting as a managing director of Buckhurst although the board never appointed him. Actual authority was implied – scope of authority was based on what the directors has usually allowed Kapoor to do in the past.- No express actual authority – never appointed, but the board allowed him to act as the

president of the company. - Case really about 3rd parties – Kapoor acting for Buckhurst and hired architecture firm -

if 3rd party wants to say this agent had authority, they can claim actual (usual) or ostensible – both argued in case (resolved on ostensible authority)

- Buckhurst can then go after Kapoor – question of actual authority, not ostensible – customary? usual?

Wiltshire v. Sims – court held that while stockbrokers usually have authority to sell shares on behalf of their clients, they normally do not have the authority to sell shares on credit.

Duties of the agent to the principal

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1. Agent must perform the tasks that have been assigned by the terms of the agreement or according to instructions of the principal

2. Must perform with reasonable care – standard of care is the degree of skill and diligence which an agent in his or her position would normally possess or exercise.

3. Agent must act in the best interests of the principal: Agent owes certain fiduciary duties to the principal – implied, parties can vary

them or can be varied by implication from the circumstances Agent is not allowed to delegate responsibilities to anyone else – exception when

implied term of non-delegation is not considered to be a reasonable implied Remedies for delegation – damages for any loss and possible injunction Two old sailor cases

Agent is not to put himself in a position where his duties to the principal and his personal interests conflict

Remedies for conflict of interest – transaction is void and the agent is required to account for any profits made plus compensation for losses and a possible injunction

Agent is not allowed to make secret profits (can’t be told to sell for $10, sell for $12 and pocket the difference) – will have to account to the principal for the extra (Thompson v. Meade)

The agent has a duty to keep proper accounts (books of account of transactions)

Duties of the principal to the agent (default rules)1. Principal often required to pay remuneration

Does not require consideration – agent may act gratuitously (power of attorney – you don’t usually pay your POA)

Court might look at implied circumstances – if they had of written it out, would they normally have expected payment for services, or would it be gratuitously

Normally rule is that agent is expected to perform (effective cause) – make sale, get commission

o Can be overridden – exclusive agency – doesn’t matter who makes the sale, as long as it is made, agent gets commission

2. The principal is required to pay the expenses of the agent and indemnify the agent against losses

Events that terminate an agency agreement1. Act of the parties

Provided by agreement Unilaterally terminable on notice by either party immediately.

2. By operation of law When either becomes bankrupt – if agent goes bankrupt and continues to collect

payments for principle, creditors could swipe principles payments; if principle is bankrupt, agent gets no remuneration etc.

Frustration - where whole purpose no longer exists Death of either party

AGENCY II

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Relationships with Others (ostensible authority)

- STARTING POINT: If the agent has actual authority to enter into a particular contract with another person on behalf of the principal, and if it is clear that the agent is acting as agent in its dealings with that other person, then the K, if otherwise valid, will be a binding K between the principal and the third party.

- HOWEVER: if the agent did not have actual authority (or principal claiming no actual authority), the third party may still be able to enforce the K or recover damages by claiming the agent had ostensible authority, claim a breach of warranty of authority, or argue the K was ratified

Ostensible Authority (Apparent authority/agency by estoppel)- Unique to principal and 3rd party r/ship – non-existent b/w principal and agent- Can arise even where the agent does not have actual authority (express/implied)- The representation when acted upon by the third party by entering into a K with the

agent operates as an estoppel.

Elements of Ostensible Authority

1. The alleged principal must have made a representation, or permitted a representation, that the alleged agent had the authority to act on behalf of the alleged principal (rep can be express or implied); and

2. The third party reasonably relies on the representation to her or his detriment (Freeman & Lockyer v. Buckhurst Park Properties)

What are possible reasons for the law on apparent authority?POLICY Reasons behind the Ostensible/Apparent Authority:- Protects the reliance interest of third parties who are led to reasonably believe the

person acting as agent has authority to act o VS. the principal’s potential unfair surprise at being bound by a K when he

would not have reasonably expected to be bound- Least cost avoidance – puts the obligation to avoid the loss on the person who can avoid

it at least cost (probably principal in most cases)o Check agent’s trustworthiness beforehando Monitor agent’s behavioro Dismiss agent who acts beyond his authorityo Sometimes the third party is in the best position to avoid – when the alleged

agent is a complete fraud and the alleged principal has never had any contact with the person purporting to be an agent

o If P dismisses Agent – it is a good idea to notify any 3rd party who has engaged with P/agent in the past

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Breach of Warranty of AuthorityA claim by a third party against an agent where the agent warranted that she had authority

but in fact did not have either actual or ostensible authority.

Elements of a breach of warranty of authority:1. Agent represents that she has authority;2. Representation is false; and3. Third party acts reasonably to her detriment

- REMEMBER, the third party could have 2 claims: (1) against the alleged principal on basis that agent have authority (actual or ostensible); (2) against the alleged agent on basis of a breach of warranty of authority

- Expectation measure of damages used for a claim for breach of warranty of authority – intended to put third party in position he would have been in had the agent’s promise of authority been true.

Problem if the corporation the 3rd party entered into a K with later went bankrupt – if promise of authority had been true, would have entered into K with corp, they would go bankrupt and you would have nothing, so expectation damages = $0

RatificationWhen agent acts beyond his authority the principal can choose to accept what the agent did

and ratify the act of the agent.

1. Other person purported to act on behalf of person who seeks to ratify2. Person seeking to ratify was in existence and was ascertainable at time (Corporation

must have been incorporated already); and3. Person seeking to ratify must have had legal capacity to do the act both at the time of

the action and at the time of the ratification

Ratification can be:- Express – oral or writing- By conduct (principal provides some service/delivers goods) – any performance or part

performance of the terms of the K by the principal- By acquiescence – simply waiting to see what happens over a period of time

Ratification must be based on knowledge of all relevant facts – a principal trying to ratify a K would need to know the facts of the K – however, they would probably not be relived of obligations if they were not informed of just a minor aspect of the deal

Consequences of Ratification:- Ratification relates back to time of offer and acceptance b/w agent and party- Principal can sue 3rd party and be sued

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- Agent no longer liable for breach of warrant of authority- Agent no longer liable to principal for exceeding authority- Principal will be liable to agent for reasonable remuneration and to indemnify agent for

expenses reasonably incurred by agent in effecting the K

What are possible policy reasons for the principles of ratification?POLICY reasons for ratification:- Mutual benefit – at the time entered into, it appeared mutually beneficial to both

parties- Unjust enrichment due to speculation (waiting and seeing if it is better to go through

with the K or not): UE Principle at expense of Agent – principle would benefit by not

remunerating or indemnifying agent for expenses if they acted beyond their authority, potential gain of the K at little/no risk (could seek compensation from agent)

UE Principle at the expense of 3 rd Party – Several principles address the following concerns: The principal would have the potential upside gain if the prices went

down while having downside risk protection from ratification of the contract with the third party if prices went up (Ratification by Acquiescence)

If the principal could perform parts of a contract and still not be considered to be bound by the contract then the principal might perform as required until the contract turns out to no longer be to the benefit of the principal (Ratification by Conduct)

Promoters of the corporation could wait to see if the deal was a good one then incorporate the corporation and ratify the contract (Principal in Existence)

If the principal were not ascertainable then the principal could come forward and ratify the contract if it were beneficial but could remain unascertainable if the contract turned out to be unfavourable to the principal (Principal Ascertainable)

UE of third party – Suppose the ratification did not relate back to the time of offer and acceptance the third party could wait to see if the contract were favourable and then choose to enforce it against the principal. But if before the principal ratified the contract it turned out be unfavourable to the third party then the third party could revoke his offer (or acceptance).

- Cures minor defects in the grant of authority – Litigation over claiming losses from agent or claiming remuneration/indemnification from principle can be avoided where the principal has ratified the contract (upon ratification principal is bound to indemnify/remunerate agent and no longer entitled to compensation for losses) – avoids litigation between the principal and the third party over whether the agent acted within her actual or ostensible authority.

Undisclosed Principal

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General principle = an undisclosed principal can disclose the agency relationship and sue the third party on a K entered into by the agent with the third party – however, does not

apply if the 3rd party was looking to the agent alone to perform the K (Objective test).

The third party will be considered to be looking to the agent alone to perform if: (1) terms of K require only agent perform the terms of the K; or (2) circumstances indicate that the 3rd party clearly intended to K with the agent alone (personal aspect to K, would not have contracted with principal had they known, K is for agent’s services Said v. Butt)

Rights of the 3rd Party:- Can sue principal, agent, set off rights (paid $4000 to agent, principal suing for $10,000

– set off the $4000 and just owe principal the $6000)- When sued can use defences of duress, mistake, or misrepresentation.

What are possible policy reasons for the law concerning undisclosed principals?POLICY reasons for law concerning undisclosed principals- Mutual benefit – If the third party wasn’t looking particularly to the agent to perform

the contract then the third party is arguably still getting the expected benefit from the contract even if the principal performs the contract. Thus there would be a mutual benefit to the contract at the time the agent enters into the contract on behalf of the undisclosed principal. Enforcement of these contracts will facilitate such mutually beneficial transactions.

- Potential unjust enrichment of the third party – The principal may well believe that she has a binding contract with the third party and proceed to perform the contract. If the third party could avoid performance of his part of the contract on the basis that the agency relationship was undisclosed then third party would be enriched at the expense of the principal.

- Potential unjust enrichment of the principal - If the principal were able to say that he was not a party to the contract and thus is not liable on it, the principal would have the benefit of the goods at the expense of the third party.

Saide v. Butt Facts: Saide is play critic. Mr. Butt banned him from theatre due to unfavourable reviews. Mr. Saide got agent, Mr. Pollock, to purchase ticket for him – could not disclose and sue b/c they never would have contracted with Pollock had they known ticket was going to be given to Saide

Liability of Principals for torts committed by their agentsLegal test Principal liable for a tort committed by the principal’s agent if the agent committed the tort while acting within the scope of her authority (Lloyd v. Grace, Smith & Co.; Ernst & Young v. Falconi)

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What are the likely policy reasons for the law concerning the liability of the principal for the torts of the agent?POLICY reasons for the liability of the principal for the torts committed by the agent- Deterrence/ least cost avoidance – gives the principal an incentive to take

steps to avoid the loss.- Allocation of the loss to the activity causing the loss – loss allocated to the activity

resulting in an increase in the price reflecting the full cost to society and the demand for the goods/services should adjust in response to the increased price (supply/demand).

- Concern for compensation of the victim – (defrauding the old lady in law firm – Lloyd)- Other – accessibility of legal services (people reluctant to seek out legal services)

Lloyd v. Grace, Smith & Co. Facts: Clerk at law firm defrauded a client by convincing her to sell cottages when actually had her transfer them into his name.Held: as long as you are within scope of kinds of things you would do (drawing up deeds, having clients in to sign deeds) as clerk in a law firm, you are within scope of your authority

Ernst & Young v. Falconi Facts: Falconi was a lawyer in a firm and plead guilty to helping someone make fraudulent dispositions of their property – Partner in firm had no idea.Held: court need not find that action was within ordinary course of business of a law firm (conspiring to defeat creditors) but it is sufficient if partner used facilities of the law firm to perform the services (making use of support staff, trust account, letterhead and documents)

SOLE PROPRIETORSHIP

Explain how a sole proprietorship is formed.

A SP is the simplest form of business association. In a sole proprietorship, the SP is the only equity investor, owns all the assets of the business and is the ultimate decision-maker. It is possible for sole proprietorships to become very complex; however, one simply needs to start carrying on business to initially form a SP.

Note the legal status of the sole proprietorship.

Note the legal consequences of the legal status of a sole proprietorship in terms of:(i) who owns the assets of the business;(ii) who can be liable on contracts and in tort; and (iii) what assets can be obtained in the enforcement of judgments arising out of

the conduct of the business.SP Characteristics:- SP not a separate legal entity- Assets of business are owned directly by sole proprietor- When entering K’s, SP is contracting party – business is not a party

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- SP will be liable for torts committed in carrying on business b/c of direct involvement or through vicarious liability for acts of agents and employees

- Judgments against SP (from conduct of business/outside of business) can be satisfied out of assets of the business and also out of SP’s personal assets

Name- One can carry on business as SP in one’s own name without having to register- Must register name if using name other than one’s own or a name indicating a plurality

of persons- Rule 7 – could sue in business name - The Partnership Act

S.88 If one, (1) Is in the business of trading, manufacturing or mining; (2) is not in partnership; and (3) the business name is not the sole proprietor’s own name or the business name consists of a phrase indicating a plurality of persons, then the name must be filed with the registrar. (No definition of terms “trading, manufacturing or mining”)

S.89 the Registrar is not to register name if it resembles name of a corporation in B.C. or if it is likely to confuse or mislead unless (1) the corporation consents in writing; or (2) the business name was used before the corporation first used its name

S.90 requires Registrar to maintain register showing business names and names of persons associated

- **use of words “and company” does not necessarily mean it is incorporated or partnership – could still be a SP just using the phrase in name (still need to register)**

Discuss the various purposes that the business names registration requirement may serve.- Purposes served by the registry

Identifying the SP for credit check purposes – Identifying the SP for purpose of starting an action – Avoid deception of a name indicating a plurality of persons Avoid passing off – ability to check register to avoid using someone else’s

business nameFunding- Investment by SP- Funds borrowed from lenders (usually bank)- Trade credit – SP may buy goods to be used or sold, on credit (buy now, pay later) Management- SP has ultimate control over decisions- May delegate some authority to employees or agents - Lenders may put restrictions on business that attempt to control degree of risk to which

their loans will be exposed (SP has constrained ultimate control)Dissolution - SP simply stops carrying on the business

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Explain why one might choose to operate as a sole proprietor rather than through other forms of business association.Why this form?- Easy to form – no formal process- Very easy to dissolve – just stop- Tax consideration – profits in SP business are taxed directly in hands of SP- Tax advantage of SP over incorporation – Corporation is treated as separate taxpayer Downsides to this form:- Personal liability rather than limited liability

Maybe not so much of a downside because even if you incorporate you are often asked to be personally liable (waive limited liability) when leasing, getting loan, etc.

PARTNERSHIPAnswering a Question on Partnership:1. Is it a partnership? – go through s.2 and identify that 4 key elements are present2. Consider whether business is being carried on as a corporation (s.3)3. Discuss the legal status of a partnership4. Any indication that the name has not been registered (J&S liability implication)5. Address whether the partnership is governed by a partnership agreement formed by

the default rules of the PA or whether the terms have been expressly/implicitly altered (Rochwerg v. Truster; McKnight v. Hutchinson)

6. Address any funding issue ()7. Consider whether the partnership has been dissolved8. What is the partnership being used for – was it created by default?9. Are we dealing here with 3rd parties?

a. Consider liability in tort/contract due to acts of another partnerb. Consider s.4 and expanding on “carrying business on in common”c. Are lenders benefiting from profits and benefiting upon bankruptcy?

Consider s.5d. Are there issues with the retirement of a partner?

I. THE RELATIONSHIP BETWEEN THE PARTNERS

Formation of Partnership- No formal steps required to create a general partnership- Failure to register a general partnership may result in a fine but does not mean it does

not exist

Partnership = the relation which subsists b/w persons carrying on business in common with a view of profit (S. 2 Partnership Act )

Four Key Elements: Persons (more than one); Carrying on business; In common; and with a view of profit

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1. Personso “Person” defined in s.29 of IA as “a corporation, partnership or party, and the

personal or other legal representatives of a person to whom the context can apply according to law”

2. Carrying on Businesso “Business” presumably takes on its ordinary meaning – “a trade, profession, a

person’s usual occupation; buying and selling, trade; a commercial firm; a shop”3. In Common

o Suggests that the persons must be carrying on business together in some wayo S.4 provides some guidelines about what is “in common”

4. View of Profito Means that a non-profit association is not treated as a partnership under the Acto Business only needs to be carried on with a view of profit – no profits actually have

to be made (Backman)

Backman v. Canada (2001)Facts: Investors wanting to buy interest in an (unprofitable) apartment development and deduct the loss from their income taxes then sell the apartments to realize capital loss. This could only happen if the relationship was a partnershipIssue: was the r/ship a partnership?Held: only an attempt to appear as a partnership for tax purposes, no real expectation of profits- Not necessary to show that the parties held meetings, entered into transactions or

made decisions- Partnership does not need to be long term – can be for one single transaction- Carrying on Business = (i) occupation of time, attention and labour; (ii) the incurring of

liabilities to other persons; (iii) the purpose of a livelihood or profit (Gordon v. The Queen)

- In common – o Authority of any partner to bind the partnership is relevant however, fact that

mgmt of partnership rests in single partner does not mean it wasn’t “in common”.

o Relevant whether parties held themselves out to third parties as partnerso Consider other factors as well: contribution of skill, knowledge or assets to a

common undertaking, a joint property interest in subject matter, sharing of profits and losses, filing of income tax returns as a partnership, financial statements and joint bank accounts, correspondence w/ third parties

- View of profit – o Tax motivation will not derogate from validityo Profit doesn’t have to be overriding intention – sufficient if ancillary profit-

making purposeo Does not require net gain over a period of time

- Weigh factors in the context of the surrounding circumstances (Pooley v. Driver and Martin v. Peyton)

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What is the purpose of s. 3 of the B.C. Partnership Act?S. 3 of Partnership Act- Where the business is carried on through a corporation then the particular corporate

statute applies and the Partnership Act does not apply ** KNOW THIS**- Does not say a corporation cannot be a partner – a corporation is a person (s.29 IA) and

so can be in a partnership- Sets out various ways a corporation might be formed and then says that these

corporations are not partnerships- Does not say that corporations cannot be partners

Describe the legal nature of the partnership and note the consequences of that legal nature.

The Legal Status of PartnershipA partnership is not recognized as a separate legal entity (Thorne v. New Brunswick)

Each partner is liable to the full extent of his personal assets Partner cannot be an employee of the partnership business (shareholders of a

corporation can be employees) Partner cannot be a creditor of the partnership (because you cannot enter into a

contract with yourself) Rule 7: Can sue in the name of the partnership firm; can serve to place of business For income tax purposes – income is allocated b/w partners and partners are taxed

individually

Thorne v. New BrunswickFacts: Thorne and Robichaud partners in tree-felling and sawmilling operation – Thorne injured and sought workers’ comp but was denied on basis that he was not a worker.Board argued: he was not an employee b/c he was a partner (Thorne would have to have made a K with himself)Held: Partnership (not employment situation) because you cannot make a K with yourself Bottom Line: court held that a partnership is not a legally recognized entity

Name and Registration and Actions Against PartnershipsPersons associated in a partnership for trading, manufacturing or mining must file a

registration statement with Registrar (S.81)

- Failure to register may result in fine and partners become jointly and severally liable for debts – not just jointly liable

- If J&S – plaintiff can sue each one separately and individually – if just jointly, the plaintiff is barred from suing other partners if already sued one

- Registrar keeps an index (s.90) showing name of partnerships and persons who are partners

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- S.83 requires that when there is any change in membership of firm (partner retires, new partner taken on, etc.) new statement must be filed

o Failure to file Registration Statement or Statement for Changes Fine Failure to register a retiring partner will (s.84(2)) mean they continue to

be a partner and therefore liable for debts

Note and describe the default nature of the Partnership Act as between the partners.

The Partnership AgreementDefault rules contained in ss.21-34 of the PA govern the r/ship b/w partners if they have not either expressly or implicitly agreed otherwise (s.21 allows for variation to the default

rules by express or inferred consent)

- Default rules based on assumption of equal partners with respect to their capital contributions, rights to participate in mgmt of business and share of the profits

- If the default rules are not overridden by express written agreement there is a risk that the partners will be stuck with terms they don’t want

- Important to be familiar with default rules and to have express agreement that overrides them

- Also useful to write up comprehensive partnership agmt and put in provisions that may be consistent with default provisions (only have to look to written agmt to determine rights)

- Partnership interest can be assigned but this does not result in assignee becoming a partner – all it assigns is interest in share of profits and right to a share of partnership assets on dissolution

Default Position- S.6 provides that partnership property means property brought into partnership, prop

acquired on account of the firm or property acquired for purposes of and in the course of business

- S.23(1) says partnership property must be held and applied in accordance with partnership agmt

- S.23(2) – Land held by one or more partners is held in trust for the partnership - S.24 Prop bought with money belonging to firm is deemed to be partnership prop - S.27

(a) partners share equally in capital, profits and losses(b) firm must indemnify every partner(c) entitled to interest for additional contribution(d) just entitled to profits (e) all partners have equal right to participate in management (f) no remuneration for work(g) no new partners can be admitted to partnership without consent of all partners(h) ordinary business decisions will be governed by majority votes of partners – but if it is a decision regarding nature of partnership, everyone has to agree(i) must keep books and all partners must have access

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- S.28 – no majority of the partners can expel any partner unless power to do so has been conferred by express agreement b/w the partners and power is exercised in good faith

- S.29 – (1) If no set term has been agreed on, any partner may end the partnership at any time on giving notice to all the other partners of his or her intention to do so

Fiduciary Obligations- S.22 requires that “a partner must act with the utmost fairness and good faith towards

the other members of the firm in the business of the firm”(general fiduciary duty of partners)

o S.31-33 (specific fiduciary duties) (McKnight v. Hutchinson) S.31 – partners bound to render accounts and full info of all things

affecting partnership S.32 – partners must account for any benefits derived w/out consent of

other partners S.33 – requires partners account for profits mad from engaging in

competing business

Rochwerg v. TrusterFacts: Rochwerg became a director of a corporation (which entitled him to shares and stock options) that was the client of his partnership accounting firm Issue: whether the other partners were entitled to an accounting for the shares and stock options?Held: No written partnership agmt so governed by PA no obligation to account under s.30; must account under first branch of s.29(1) – “concerning the partnership” and under the second branch of s.29(2) – benefit derived from use of partnership business connection

McKnight v. Hutchinson (example of fiduciary duties of partners)Facts: Law partnership that ended when McKnight learned that Hutchinson had received earnings from part ownership in a private companyHeld: Relevant sections of PA are ss.22(1), 31, 32(1) and 33 and these obligations can be varied by consent of partners.

Funding

- The funding of a partnership is usually done by a portion of trade credit and typically a loan (bank or other lenders)

- Partners are the equity investors – could make cash contributions but invest could be in form of property or services (or combo)

- Typically partners will share profits in proportion to relative contributions, but not necessarily – if nothing is said, the default under s.27(a) is an equal share in capital, profits and losses

- Possible (although rare) that a partnership interest may be considered a security and if so would be subject to provincial securities legislation

o If partner does not take part in management of business (dormant partner)

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o Loans from persons other than bank

DissolutionA partnership can be dissolved by the act, death, bankruptcy or dissolution of a partner.

By Act of the Partners- S.35(a) – set a fixed term for the partnership – dissolved unless partners agree

otherwise- S.35(b) – dissolved at the end of a particular venture- S.29 & S.35(c) – If neither of the above, it may be dissolved by notice of intention to

dissolve and the dissolution will take effect from the date of the notice or the date specified in the notice

Dissolution on Death, Bankruptcy or Dissolution of a Partner- Partnership is dissolved automatically upon the death, bankruptcy or dissolution of a

partner o Why?

Upon a death it is not the same partnership anymore, don’t want to have administrator of estate stepping in

Upon bankruptcy the other partners do not want to have to cover the debt of the bankrupt partner

- Will need a whole new partnership agreement among the remaining partners to continue

- Often expressly altered by agreement between partners such that a death, bankruptcy, or dissolution of a partner does not result in the dissolution of the partnership between the remaining partners

Uses of Partnership

Note and discuss four situations in which partnerships are often used.- Professionals

o For many years prov leg prevented most licenced professionals (doctors, lawyers, dentists, engineers, accountants) from carrying on bus thru corp so they used partnerships

o Still common for professionals to form partnerships (also using the recent form of LLP)

- Joint Venture – (no legal definition/not really a recognized bus ass.)o 2 or more corporations can engage in a joint venture formally organized as a

partnershipo common choice partly due to flow through tax benefits

- Tax Reasonso Tax advantages for SP also apply to partnerships b/c partnership is not a

separate legal entity (or taxpayer) A partner can use their/its share of the losses against their/its other

sources of income

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- Defaulto Ppl might be in partnership w/out knowing it – no formalities to formation

II. RELATIONSHIPS BETWEEN THE PARTNERS AND OTHER PERSONS

Relationships Between the Partners and Third PartiesPartners can be liable to third parties through contract or tort because every partner is an

agent of the firm and other partners for purposes of a partnership business

- Liability of Partners in Contract : SS.7-11 of the PAo S.7 – apparent authority of partners

(2) where partner does act for “carrying on in the usual way business of the kind carried on by the firm” it binds the firm and partners, unless:

partner had no authority to act for firm in the particular matter; and

third party either knew the person had no authority or did not know or believe the person was a partner

parallels ostensible authority (agency law) reliance by the third party must be reasonable – third party should be

suspicious of unusual behaviour and make inquiries to confirm that the partner has authority

o S.8 – actual authority of agent or partneri. An act or instrument (document);ii. Relating to the business of the firm; iii. Done or executed in the firm name, or in any manner showing an intent to

bind the firm;iv. By any person authorized to do so (whether partner or not) Is binding on the firm and all partners Does not limit actual authority – appears to cover both actual and

ostensibleo S.9 – No Ostensible Authority then the Partners are not Bound Unless the

Particular Partner had Actual Authority Where partner pledges credit of firm for a purpose not connected with the

firm’s ordinary course of business, the firm is not bound unless person was specially authorized by other partners

Action not connected to firm’s ordinary course of business so third party has no reasonable reason to believe partner has authority (no ostensible authority)

o S.10 – Third Party Notice of Restriction on Authority of Partner If a third party has notice of restriction on power of partner, then actions

of partner do not bind the firm Overlap with S.7 – except here person has notice, doesn’t just possess

knowledge aloneo S.11 – Joint Liability for Debts of Partnership

Every partner is jointly liable for all debts and obligations

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After partners death his estate is also severally liable subject to prior payment of the partners separate debts – allows for action against estate of deceased partner while estate is being administered without barring actions against other partners

Joint and several liability = claimant can pursue obligation against either party and becomes responsibility of D’s to sort out their respective portions of liability. P may recover all damages from any of the D’s regardless of their share of the liability.

Jointly liable = parties are each liable up to the full amount. One or other or both can be sued for full amount (creditor’s can only sue for each debt once)

Severally liable = parties are liable for only their respective obligations

o S.19 – Liability of New Partners and Retired Partners 19(1) person who joins an existing partnership is not liable to creditors

for debts of partnership that arose before person joined 19(2) person does not cease to be a party to K’s just because he/she left

partnership 19(3) if creditor agrees to relieve retiring partner form further liability

then agreement will be binding

- Liability of Partners in Tort:o S.12 – firm is liable for wrongful acts or omissions where a partner:

i. Acted with the authority of co-partners; orii. Acted in the ordinary course of business of the firm It is not necessary for a partner to conspire with others for others to be

held liable for tort – sufficient if partner uses facilities of the law firm to perform services normally performed by the business (Ernst & Young v. Falconi)

o S.14 – liability under s.12 is joint and several (You can sue A, B, C, or/and D together/separate)

Ernst & Young v. Falconi (scope of s.12)- Facts: Falconi was lawyer and plead guilty to charge of assisting persons making

fraudulent dispositions of their propertyo Klien had no personal involvement with transactions – but each transaction

involved use of legal services of firm- Klien argued that acts of Falconi could not be considered within ordinary scope of

business- Held: not necessary for a partner to conspire with others to defeat creditors – sufficient

if partner uses facilities of the law firm to perform services normally performed by law firm (prep and completion of mortgage docs, pre and completion of docs for transfer of title and prep of corporate minutes and resolutions)

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Indemnification – liability of a partner is independent of any right of the partner to seek indemnification (seek contribution for loss) or contribution from the other partners

o Partner may seek contribution from fellow partners according to partnership agreement

o When supplier sues A, A is 100% liable for full amount – then up to that partner to seek indemnification from each other partner (B, C, D) – might be a good idea as A/supplier to join B, C, D/fellow partners

- S.53 of Law and Equity Act – serving any one of the partners involved in a joint liability suit, sufficiently serves all.

Outline policy reasons for the law on the existence of partnership as it relates to third parties.Underlying Values or Policyo Reliance on a Known Participant in the Business – persons dealing with the business

may reasonably assume that the person dealt with was acting not only for herself but also as agent for others involved in mgmt

o Reliance on a Person not Known to the Third Party – person may advance credit to business on reasonable assumption that there is someone who has the funds to pay the debt

o Unjust enrichment - If a person gets a share of profits (benefit) and does not bear the burden of the

expense of the supplies because they claim they are not a partner, they are receiving a benefit at the expense of a creditor who has supplied goods/services (and cannot come after them if debt not paid)

counterargument – if creditor priced goods or services and set terms of credit based on the persons in the business he was aware of, then being able to make a claim against a person he was not aware of is itself a windfall

o Least Cost Avoidance – who will bear the loss? Supplier-creditor or some other person who has some connection to the business- Position to assess the risk and control for it – persons who are involved in the

business b/c they have made invest/share in profits usually in better position to assess risk of failure and control for it

Third party creditors (especially who only advanced small amount) have much less inventive to spend substantial sums investigating the risk of failure

- Lowers overall cost of credit – putting risk of failure on person who is in better position to assess and control risk lowers the overall cost of credit (if you personally guarantee loan/credit – often the interest rate is lowered)

o Other Concerns – distributional concerns may be inconsistent with other policy concerns and override them (unique to each case)

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PA Section 4: in context of third party relationshipsS. 4 is a gloss on the definition of partnership in section 2 and provides guidance on when

persons will be considered to be carrying on business “in common”. S.4 provisions do not of themselves make the person a partner. The more facts that suggest the person is carrying

on business in common, the more likely she will be considered a partner.

- S.4(a) common ownership of property does not of itself make co-owners partners If some other aspects exist in addition to co-ownership, then might be

considered a partnership (ie. Share profits and have some involvement in mgmt of property)

Finding a co-ownership as opposed to a partnership has significant implications – under co-ownership:

Co-owners are not agents for each other (partners are)Co-owners can deal with their own interests in the property w/out the consent of the other co-owners (unless otherwise agreed, a partner cannot transfer interest without consent since their property is held by the partners jointly as an asset of the business itself)

A.E. Lepage v. Kamex Developments- S.4(b) sharing of gross returns (revenues before deduction of expenses) does not of

itself create a partnership (ex. Traveling play company performing in theatre operated by theatre owner)

not carrying on business in common just a presumption – something over and above the sharing of gross profits

(sharing expenses) may indicate they are carrying on a business in common (and is partnership)

- S.4(c) opening words = the sharing of profits is proof of partnership in the absence of evidence to the contrary (default assumption) – it then goes on to say that receipt of a share or payment contingent on or varying with the profits does not itself make a person a partner (Cox v. Hickman codified)

- S.4(c)(i) payment of a debt or liquidated amount by installments out of profits does not of itself make a partner (creditor temporarily taking a % of the profits)

- S.4(c)(ii) contract for remuneration of an employee or agent by a share of the profits does not of itself make the person a partner (articling student gets Christmas bonus set at a % of the yearly profits)

- S.4(c)(iii) spouse of child of a deceased partner who receives an annuity out of the profits is not a partner merely because of the receipt of profits

- S.4(c)(iv) An advance of money by way of a loan; To a person engaged in business or about to engage in a business; On a K between that person and the lender; Where the K is in writing; The K is signed by or on behalf of all parties to it; and Under the K the lender is to receive a rate of interest varying with the profits or a

share of the profits from the business

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Does not of itself make the lender a partner with the person carrying on business. Not part of CL of partnership – introduced in England in Bovill’s Act Controversial provision – possible for a person to invest in a business (get

a share of the profits) and yet not be considered a partnero Close to a ‘pure equity’ claim lender would be entitled to share

with the other creditors in the proceeds form the sale of assets ahead of claims by the partners

Justification = a struggling SP (motel) will have a hard time attracting new equity investors (their funds could be completely lost if business doesn’t pick up) or fixed rate investors (if it does turn around, all these investors get back is principle plus fixed rate, nothing more) S.4(c)(iv) allows investors to share in the upside gain through a share in the profits while allowing them a degree of downside risk protection in that they don’t become partners and liable for all other debts

Martin v. Peyton & Pooley v. Driver Canadian Commercial Bank has something to say about this – fixed

amount would fall under 4(c)(i) – open ended possibility to share in gains falls here

- S.4(c)(v) a person receiving payment for goodwill out of the profits of a business is not a partner merely because of the receipt of profits

“Goodwill” – value of a business that is not fully reflected in the market value of the assets

Ex. Business is sold and the purchaser pay value of business upfront and agrees to pay additional amount for goodwill out of the subsequent profits of the business (current owner and vendor will not be carrying on business in common)

- S.16 provides that a person who represents himself to be a partner (orally, written, conduct) or who knowingly allows himself to be represented as a partner, will be liable to anyone who had given credit on the faith of the representation

Ex. Person with good credit allowing user of his name by SP to help them obtain credit

Cases Dealing with Definition of Partnership Sharing of profits creates a rebuttable presumption of partnership (Cox v. Hickman)

An agreement between parties stating that they are not partners is NOT determinative (Pooley v. Driver) (Martin v. Peyton)

CASE FACTS CONSIDERATION/HELD

POLICY

A.E. Lepage v. KamexDevelopments

Group of persons formed syndicate to buy a property. One co-owner exclusively listed property for sale. Sold by another

Ownership in common, not partnership

Reliance – no indication that co-owner was held out as having authority and not clear Lepage relied on the other members as partners Unjust enrichment – Lepage would be paid commission and was not responsible

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company but Lepage still entitled to commission and trustee for syndicate refused to pay.

for sale of the property Least Cost avoidance – Syndicate members had very limited control over mgmt – Lepage could have simply checked with officers of Kamex before approaching co-owner

Cox v. Hickman (1860)

Codified in s.4(c)(i) Creditors were not partners (even though receiving cut of profits to pay off debt) and were not liable to pay other creditor’s debt. Sharing of profits creates a rebuttable presumption of partnership.

Reliance – Hickman does not appear to have relied on trustees (likely didn’t know who they were) Unjust Enrichment – creditors benefited from supply of goods at the expense of Hickman (might have been a factor, but not an overriding one) Least Cost Risk Avoidance – creditors likely not in any better a position to assess risk of business failure than Hickman was Other (Promoting Arrangements) – if case had gone against creditors it would have been foolish for any creditors in future to agree to arrangement such as this

Pooley v. Driver (1876)Deals with provisions similar to s.4(c)(iv)

All funds of grease, pitch and manure business provided by lenders – Pooley held several bills endorsed by partnership and sued the Drivers (a lender) arguing they were also partners.

Found to be a partnership

(Court mentioned that agreement between the parties stating that they were not partners was NOT determinative)

Reliance – no direct reliance since Pooley admitted he was not aware of connection of Drivers to business – maybe indirect reliance similar to Cox Unjust enrichment – Drivers would benefit from advance of goods on credit and a share in the profit Least Cost Avoidance – Drivers in good position to assess risk associated w/ business Can’t have this kind of arrangement w/out being partners (Would effectively give Drivers limited liability; Persons dealing with business would find it difficult/costly to determine whether there was significant equity in business)

Martin v. Peyton (U.S. Case 1927)

Partnership obtained loan of securities from D’s (D’s denied offer of partnership because of the poor

Provisions taken together do not constitute a partnership

Reliance – Peyton et al. were not part of operations of the business so their involvement was probably unknown to third parties (no reliance) However, reliance may have taken form of third

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financial state of the company); loan repayment provided on basis of a share of the profits

(Statements that no partnership is intended is not conclusive)

party expecting business to have substantial equity capital behind it Unjust Enrichment – maybe, if they got a share of profits while others provided goods to KNK and suffered loss Least Cost Avoidance – PPF had some ability to assess risk Other Concerns – No one would want to help out a firm in financial difficulty if the options are limited to the usual fixed return creditor investment or full partnership.

Subordination of Lenders for a Share of the ProfitsIt may lead to unfair results if “lenders” are able to enjoy the benefits of profits upon

success, but are also able to recover (even partially) their loan/investment as creditors upon bankruptcy if business fails (Especially unfair if “lenders” have equal priority claim to assets of business as other creditors who did not enjoy potential of benefiting from profits)

Section 5 IF:

(i) a person whom money is advanced by way of a loan on K as mentioned in s.4; or(ii) a buyer of good will in consideration of share of profits; EITHER(iii) becomes insolvent;(iv) enters into an arrangement to pay creditors < 100 cents on the dollar; or(v) dies in insolvent circumstances;

THEN the lender, or seller of goodwill, is not entitled to recover anything in respect of the loan or share of the profits until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money’s worth have been satisfied.

Policy behind s.5 = one who shares in the profits should share in the risks

RE Fort Schofield loaned Fort money at interest rate plus half of the profits of business net of

management salary – loan agreement was not in writing Held: s.5 applies whether or not K is in writing

Canadian Commercial Bank Bank in financial difficulties so loan arrangement was made whereby lenders got a right

to share of the profits (only until the principal of the loan was paid in full) Held:

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o s.4(c)(iv) does not apply in situations where payment out of profits was for just repayment of principal plus interest

o Instead, falls within s.4(c)(i) as the repayment of a liquidated amount out of a share of the profits

o S.5 did not apply to s.4(c)(i) since it refers to a “contract” of the type mentioned in s.4 and s.4(c)(i) does not refer to a “contract”

Suckloff v. Rushforth Facts: Loan was provided under agreement for repayment as a share of profits, but later

the lender obtained a security interest in part of the loan - Upon bankruptcy, other creditors argued that lender’s claim should be subordinated according to s.5

Held: s. 5 does NOT apply to security interests

Most provinces now have a common registration system for security interests under personal property security legislation.

o Allows a person considering advancing credit to check security interests granted by the potential debtor

o Reliance on availability of assets subject to registered security interests would arguably not be reasonable since the existence of these security interests can be checked in the registry at low cost.

Retirement of Partners

S.19(2) a partner who retires from a firm does not cease to be liable for partnership debts/obligations incurred before retirement

o A retiring partner can also be liable for debts of partnership arising after retirement due to third party reliance (unaware partner retired)

S.39 and 84(b)o S.39(1) – person dealing with firm after retirement of partner can treat all

“apparent” members of the pre-retirement firm as partners until they have notice of the change

“Apparent” partner = notoriety of the person as a partner in a particular town or region, use of a persons name on notepaper, letterhead, or on sign outside office, can be due to the particular third parties dealings with the firm (not what was apparent to whole world/community in general) (Tower Cabinet v. Ingram & Dominion Sugar v. Warrell)

o S.39(2) – for persons who have not had prior dealings with the firm the notice can be effected by way of a notice in the Gazette

Has been held that persons who have had prior dealings must be given “actual” notice (Tower Cabinet v. Ingram)

Notice in the registry is notice to persons who have not had prior dealings with firm (suggests something more is needed if persons with prior dealings)(Dominion Sugar v. Warrell)

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o S.39(3) – retired partner will not be liable to those who can be shown not to have known that the retired partner was a partner

o S.84(b) – if one fails to file a new registration statement on the retirement of a partner that person will continue to be considered to be a partner

POLICY Reasons for SS. 39 and 84(b) Reliance of third party:

o Reliance not reasonable if the persons who dealt with the firm could be shown not to have known the retiring partner to have been a partner

Least cost avoidance – cheaper for retiring partner to notify persons who have had prior dealings with the firm than to require those persons to check the Gazette and Registry every time they wish to deal

STEPS that can be taken when a partner retires: S.39 and s.84(b) allow partner to leave partnership without being liable for subsequent

liabilities, but the onus is one the retiring partner to take steps to protect against reliance

S.39 and s.84(b) set out means that retiring partner can satisfy onus:i. Provide actual notice to all those with whom firm has had prior dealings

Look to accounts payable Look to limitation periods to determine how far to go back

ii. Put notice or retirement in the Gazetteiii. File revised registration statement removing name of retired partner from list of

partners Providing actual notice to all persons who had prior dealings with firm may create

practical difficulties - may not be possible to identify them all Look through firms current creditors Check through accounts payable in previous years If it has been several years since person dealt with firm, it is arguably reasonable

that they should at least check the registry again to determine who is still a partner

S.19(3) allows for an agreement between a retiring partner, the remaining partners, and creditors relieving the retiring partner from liability

Have the partnership agreement provide right to a retiring partner to require that specific steps be taken to reduce risk of continuing liability of retiring partner

Why Use this Form of Association- Partnerships are not tax payers - flow through taxation

- Corporate form has often not been available for several professional businesses- Easy to form

- Flexible – very little that is mandatory- Corporate form has constraints

- Disadvantage: partners are personally liable for K’s entered into in respect of the partnership and for torts

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LIMITED PARTNERSHIP

A limited partnership (LP) consists of one or more LP’s and one or more general partners (s.50). Liability of limited partners is limited to amount the limited partner contributes or agreed contributions (that you have not actually invested) (ss.57&63). Liability of general partner is not limited (personally liable). A limited partner is not to contribute services to

the partnership (s.55) or take part in the management of the partnership (s.64).LP’s allow some of the partners (investors) to have limited liability but only if the

partnership does business under a name that adds the works “Limited Partnership” as a suffix to name. The “cautionary suffix” is intended to signal to third parties that some

partners have limited liability.

Describe a limited partnership in terms of the types of partners, the nature of the limitation on the liability of limited partners and the extent of the liability of the general partner(s).

Set out and discuss seven features of the limited partnership provisions that may serve to protect the interests of third party creditors.Characteristics of LP’s that may serve to protect 3 rd Parties Provisions of the Act (Part III)1. S.53 – calls for cautionary suffix by requiring name of LP must end with “Limited

Partnership”2. S.53 – requires, subject to certain exceptions, that name of a limited partner must not

appear in the name of the LP If it does, and does not fall within an exception, that limited partner will no

longer have limited liability3. S.55 – provides that a LP is not to contribute services to the partnership business 4. S.64 – a LP is not to take part in the management of the partnership – if they do, they

are treated as general partners5. S.59 – no return of capital to partners is permitted if after the return of capital the

partnership would be insolvent those funds may be the only recourse for 3rd party creditors – “No abandoning

ship” provisions6. S.51 – Certificate must state who partners are

Not a limited partnership unless registered – it will remain a general partnership allows 3rd parties to assess creditworthiness of general partners)

7. S.51 – Certificate must state the contribution provided, or to be provided, by LP’s

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might assist 3rd party creditors in determining the amount of capital in the firm (although capital at the onset of business may tell us nothing about the net capital of the business now)

Discuss the problem that may arise if a limited partner is also an officer of a corporate general partner noting relevant case law.

Cases on Taking Part in the Management of the BusinessA common structure for a LP is to have a corporation as the general partner. Promoters of the business can be made officers of the corporation and participate in management of the

business. These promoters also often want to be investors and want to have limited liability and invest as limited partners (who cannot have part in management).

The problem is whether the limited partners who are also officers in the general partner corporation (managers) are liable as general partners on basis they have taken part in

management.

Haughton Graphic Ltd. v. Zivot (1986)Held: if a limited partner takes part in the control of the business he is liable as a general partner even though the 3 rd party did not rely on him as being personally liable (statute says nothing about reliance)

Nordile Holdings Ltd. v. Breckenridge and Rebiffe (1992)Held: The corporate partner took part in the management in their capacities as officers and directors of the corporation, but not in their capacities as limited partners (therefore not liable under s.64)- Key Points:

o If you are limited partners and doing what Haughton did – there is a chance of being liable but can K out of it like Nordile

o Next time this is litigated, parties will not agree in facts that person was acting as officer of general corp. (likely what persuaded court)

**Be nervous relying on this case**

Relationships among the partners

The separation of ownership and control:- The limited partners are usually the major contributors of the capital and in that sense

are sometimes referred to as “owners” – but the limited partners do not “control” the business

- This puts the LP’s at the mercy of the managers of the business- Partnership acts tend not to have (mandatory) provisions that protect the limited

partners from being taken advantage of by managerso However they do provide a relatively flexible form of association in terms of

organizational structures that might be set up in partnership agmtso Partnership agreements can provide protections

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- S.56 – provides that general partners cannot do an act that makes it impossible to carry on the partnership business or consent to a judgment against the partnership (varying this requires consent of all LP’s)

o (d) provides that a general partner has no authority to admit a person as a general partner or a limited partner unless the right to do so had been given in the certificate

- S.58(1)(c) – limited partner can seek court order for dissolution and winding up if the partnership (general partners right is set out in s.38) – one situation in which court can order dissolution is “whenever circumstances have arisen that, in the opinion of the court, render it just and equitable that the partnership be dissolved” 

- Right to inspect books and right to disclosure (s.58(1)(a)(b)) General partner’s right to inspect books is provided in s.27(i) and is prefaced by

the words “subject to any agreement express or implied between the partners…”- IF LP interests sold to members of investing public, the general partner would be

subject to obligation under Securities Act to provide certain forms of disclosure on the sale of the LP interests and on an ongoing basis

- S.66 – a limited partner must not assign interest in LP unless: (a) all LP’s and general partners agree or partnership agmt permits it; and (b) assignment is made in accordance with terms of consent (default rule) If permitted by partnership agreement s.51(4)(b) provides that the certificate must

set out provisions concerning assignment rights- S.51(4)(c) – right to admit additional limited partners must be set out in the limited

partnership certificate- S.65 – additional limited partner is not to be admitted except in accordance with the

partnership agreement and register must be kept pursuant to s.54(2)- Share of Profits- S.61 – limited partners share in the profits and in any return of capital in proportion to

their contributions unless the limited partnership agreement provides otherwise

Reasons for using the limited partnership form of association- Taxation – any losses can be passed on to the limited partners and they can make use of

these losses against their other sources of income- Limited liability (although there are other ways of creating limited liability for investors

– incorporation)- Greater flexibility

LIMITED LIABILITY PARTNERSHIP

Explain the origins of and reasons for the creation of the limited liability partnership form of association.Background- Many professions do not have access to limited liability forms of business association

because the they are either expressly or impliedly restricted from carrying on through a

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corporation or professional partner needs to take part in the business (thus taking away their limited liability)

- Increasing scope of liability and increasingly large awards created an insurance crisis that made it difficult to obtain adequate insurance coverage

The Structure of LLP’s in Ontario and Alberta- Partial Liability Shield (only protects against negligent/wrongful acts)

o In Ontario, only available for professionalso Ontario LLP Act provides that partners are not liable for the malpractice of

fellow partners/employees unless they were directly supervising the activity; not liable to indemnify fellow partners; otherwise partners are personally liable for debts of the firm

- Business Name Registrationo Ontario LLP Act provides that LLP is not allowed to carry on business unless the

registered business name contains the words “Limited Liability Partnership”, “LLP”, or French equivalents

LLP’s in BC- January 2005 BC passed legislation allowing for LLP’s. the Partnership Amendment Act

added part 6 to the PA (sections 94-129)- Not limited to professional partnerships (subject to Act governing particular

professions – ie. Law Society of BC allows for LLP’s)- Full Shield Liability

o S.104(1) – provides that a partner in a LLP is not personally liable for a partnership obligation merely because the person is a partner

Gives partners limited liability on K debts such as bank loan or trade credit (subject to personal guarantee)

o S.104(2) (a) a partner is not relieved of liability in a LLP for his own negligent or

wrongful act or omission; or (b) negligent act or omission of a fellow partner

(i) when he knew of; or (ii) did not take reasonable actions to prevent it

- Full Shield Liability Protection Subject to Partnership Agreemento S.104 allows the partners to opt out of the full shield liability protection in the

partnership agreement (ex. for tax reasons - below) or by personally guaranteeing a loan

Amount of losses you can claim is limited to extent of investment – this is why the act allows for one to opt of full shield liability and become only partially shielded

- Limited Liability Partnership vs. Limited Partnershipo The full shield liability protection in a LLP give the partners the equivalent

protection from liability that limited partners have in a LP but with the advantage that the partners in a LLP can take part in the management of the partnership without becoming personally liable for debts

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- Registration Necessaryo LLP does not come into effect unless it is registeredo S.94 – LLP defined as “a partnership registered…”

- Cautionary Suffixo S.100 – provides that a LLP must have the words “limited liability partnership”

or “LLP” as part of its business name (or French equivalent)- Registration of Extra-Provincial or Foreign LLP’s

o S.114 – provides that the partners of an extra-provincial or foreign LLP that carries on business in BC and is not registered in BC will be liable as if they were partners in a general partnership

CORPORATIONS

I. THE NATURE OF THE CORPORATION: ESSENTIAL CHARACTERISTICS

Describe the general structure of a corporation noting the characteristics of the equity interests of the corporation and the basic management structure of the corporation.General Structure of a Corporation- General features regardless how big/small corporation is- Equity interests divided into shares and holders are referred to as shareholders- 3 basic rights must be provided somewhere in the various sets of share rights (do not

need to all be assigned to same set of shares): voting rights – right to elect directors who will manage, or supervise, the mgmt of

the corp. dividend rights – right to receive distributions out of the profits of the corporation

when the directors choose to provide such a distribution by declaring a dividend liquidation right – right to receive what remains when the assets of the corporation

are sold and the liabilities of the corp are paid off- Management Structure of corp includes:

Board of director(s)(could be just one director) (elected by shareholder(s) – could be just one) who appoint officers to manage the day-to-day operations of the corp

Officers (may be given titles such as president, CEO, vice-president, secretary, treasurer, etc.) may engage others to assist in carrying out managerial tasks

Directors are similar to agents – but not legally considered agents (they are the directing mind)

There are 3 key features which distinguish a corporation from partnership and SP:1. Limited liability – liability of the shareholders is limited to amount they invested **2. Separate personality – treated as separate legal entity so can own property, enter

into K’s and commit torts and crimes3. Perpetual existence – does not come to an end just b/c a shareholder has died or

has sold shares to another person

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II. THE BENEFITS OF LIMITED LIABILITYIdentify and explain the possible benefits of limited liability.The Benefits of LL

Unlimited Liability Limited Liability1. Valuation Costs What is cost to value investment in a partnership (usually look at cash flow & risk)?

Need to Check-earning capacity (future cash flows) and risk-wealth of fellow investors** Because partners are personally liable – if fellow partners have no wealth, you will be paying full amount

Need to check-earning capacity (future cash flows) and risk(but not wealth of fellow investors)

2. Monitoring Costs

Need to control against-managers putting wealth at risk-changes in wealth of fellow investors: -due to sales of their investment -due to changes in their personal assets

-less need to control managers since smaller potential loss-don't need to monitor wealth of others or control their exit from the firm-potential for control block of investment to monitor management

3.DiversificationDon’t put all your eggs in one basket

Each investment carries risk of loss of all personal wealth - therefore keep number of investments to a minimum

-increased number of investments doesn't increase risk since personal wealth is not exposed with each investment**reduces risk for investors, thereby reducing compensation they demand and reducing prices business must charge (benefit to society)

4.Liquidityrefers to the ease with which an investment can be shifted to another or withdrawn for some other use

lack of liquidity due to:-high costs of assessing value-controls on transfer of shares – restrictions on selling etc.

provides liquidity since:-lowers cost of valuation information-less need for control over other investors selling their investment**investors will demand compensation for a lack of liquidity and to provide this costs will have to be raised – increased liquidity reduces societies costs

5. Optimal Investment Decisions

managers may not make highest value investment since must take account of diversifiable risk to which investors exposed

investors can diversify risk and this allows managers to ignore diversifiable risk in investment decision and make highest value investment

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6. Market Price Impounding Information

no single price since each investment must be valued separately (see 1 above)

single price for units of investment - price reflects just estimate of future cash flow and risk (see 1 above)-thus price impounds important information on value of firm

Economies of Scale

- Less likely to have funds to increase size of production to achieve economies of scale

-per unit cost of providing goods, etc. may decrease as the size if the number of units produced increases. -Increasing the size of production requires capital – LL tends to favor greater infusions of capital than UL

Explain why the costs of an unlimited liability investment probably increase with an increase in the number of investorsValuation costs and monitoring costs depend on the number of unlimited liability investors: the greater the number of investors, the greater the costs. In a partnership with unlimited liability, partners must determine the wealth of fellow investors because partners are personally liable – if a fellow partner has no wealth, you will be paying full amount. Monitoring costs also increase with increased investors in a UL business association because there is a need to control against managers putting wealth at risk, changes in wealth of fellow investors due to sales of their investment or due to changes in their personal assets.

III. HISTORY OF THE CORPORATION IN ENGLAND AND CANADAProvide a summary of the various ways in which a corporation can be formed in Canada noting as well, by giving examples, the existence of several different general statutes of incorporation.Three ways in which corporations might be formed:1. Crown Charter –

Separate legal entity if created by Crown Charter Almost never happens anymore

2. Special Statutes of Incorporation – legislature would pass statute stating “an act to incorporate ABC company…” Has nothing to do with BCA or CBCA

3. General Statute of Incorporation – relatively recent (150 yrs) – like Canada Business Incorporation Act (don’t need to get parliament to pass specific statute for each corporation) Federal: CBCA, Canada Corporations Act, Bank Act, Insurance Companies Act, Trust

and Loan Companies Act BC: BCA, Society Act, Cooperative Association Act, Financial Insitutions Act

As a lawyer the first thing you should do when dealing with a corporation (or company) is to find out how it was incorporated – it determines what statute governs the internal affairs of the company

Three Types of General Statutes of Incorporation1. Memorandum of Association

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English company law statute approach Memorandum of association as a K among the members Incorp as of right by filing the required docs (the MOA and AOI) MOA a simple doc showing original subscribers of the shares, authorized capital

2. Letters Patent Early Canadian approach used in the early federal statutes, Ontario, Alberta, PEI Based on Crown Charter concept – grant of letters patent was an exercise of Crown

prerogative – therefore incorp (grant of letters patent) not as of right but by permission only

Tended to be a more detailed document with more mandatory terms3. Articles of Incorporation

Modern style used in most Canadian jurisdictions (Alta, Sask, Man, Que, NB, NFLD, NWT, Yukon, Nunavut, and in the federal CBCA)

Modeled on the US corporate statutes (primarily NY and Cal) Articles of incorp is relatively simple doc – contains elements of memorandum of

association plus Incorp as of right on filing of required documents

In BC it is the MOA style

What is the Dickerson Committee? In the early 1970s the federal government appointed a committee (the Dickerson

Committee) to examine corporate law. The Dickerson Committee produced a draft act that was largely followed in the

enactment of the Canada Business Corporations Act (the “CBCA”) by Parliament in 1975.

Federal government conducted another review of corporate legislation in the 1990s Concluded that the CBCA continued to be a fairly modern and effective corporate

statute – several amendments were made but the fundamental structure of the legislation remained the same.

IV. THE CONSTITUTIONAL POSITION

Describe the scope of the power to incorporate companies in each jurisdiction.Note the basis for federal and provincial powers to incorporate companies.

The Power to IncorporateBoth federal (POGG) and provincial (s.92(11)) governments have power to incorporate

companies.

BASIS FOR PROVINCIAL POWER s.92(11) - provinces can make laws "in relation to" ..."The Incorporation of Companies

with Provincial Objects" Prov. Gov. can only make laws for incorporation of companies with “provincial objects”

Scope of Provincial Power: Province can confer powers to carry on bus within province and outside province

(anywhere in the world)

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Cannot confer on a company the right to operate in another jurisdiction (that is up to the other jurisdiction)

BASIS FOR FEDERAL POWER s.91 - federal government can make laws "in relation to all Matters not coming within

the Classes of Subjects... assigned exclusively to the Legislatures of the Provinces" Residual power (POGG) to make laws for incorp of companies with objects other than

“provincial objects”

Scope of Federal Power: Since the province can not incorporate a company with the right to operate elsewhere

in the country besides the province the federal residual power must be the power to incorporate companies with the right to operate throughout Canada

Cases have put limits on provincial legislation that prevent federally incorporated companies from carrying on business in a province

HOWEVER, federal companies are subject to provincial laws as long as those laws are not designed to just prevent federal companies from operating in the province

CASE HELDCitizens Insurance Co v. Parsons (1881) Fed gov had a broader power (not just

banking) to incorporate companies in relation to all matters not coming within the classes of subjects assigned to the provinces.

John Deere Plow v. Wharton/Duck (1914) A federally incorporated company had the power and the right to operate throughout the country (a province cannot prevent a fed incorporated comp from carrying on business in the province)

Great West Saddlery v. The King (1921) Legislation prohibiting a company from maintaining an action in the province unless it had obtained a licence to carry on business in the province could not be applied to a federal company

Colonial Building and Investment Association (1883)

Not necessary for validity of a federal incorporation that the company carry on business in more than one province

AG Can v. AG Man (1929) Highlighted the potentially wide ranging consequences of the broad power of feds in John Deere – if a otherwise valid prov leg prohibited a type of bus, could leg be avoided by incorporating under fed leg?

RETRENCHMENT ON POTENTIAL SCOPE OF FEDERAL POWERPotential breadth of John Deere Plow reigned in by series of cases:

Lymburn v. Mayland (1932) Alberta statute could be applied to a fed incorporated company (statute would not prevent the fed company from carrying on bus in the prov)

Great West Saddlery (1921)

(followed in Canadian Indemnity Co.)

Suggested that a fed comp incorporated for purpose of holding land would be unable to successfully attack prov leg that prohibited corporation, wherever incorporated, from

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owning landCanadian Indemnity Co. (1977) The prov can enact leg to stop fed insurance

comps from operating in the prov as long as they don’t discriminate against them (blanket prohibition against all, other than ICBC)

Reconciling John Deere and Canadian Indemnity – might be said that the leg in Indemnity did not prevent federally incorp companies from carrying on bus in the province. It prevented

all companies from carrying on a particular type of business

Multiple Access v. McCutcheon (1982) Prov leg identical to leg in the Act under which fed company was incorporated could still be applied to the fed company (no conflict)

Re Constitution Act (1991) Provincial leg requiring a fed comp to register its corporate name has been held to be valid

Re Royaltie Oil Co. (1931) Prov leg imposing penalties for failure to comply with requirement to obtain extra-prov licence before commencing business in prov can validly be applied to a fed incorp company

An Ontario incorporated company can be refused from carrying on business in BC – but BC can not refuse a federally incorped company from carrying on business (although they can regulate – Indemnity)

Note the implications of the constitutional position.IMPLICATIONS OF THE CONSTITUTIONAL POSITION Both provinces and fed gov can pass valid leg for the incorp of companies

A corporation incorped under a prov statute can carry on bus throughout the rest of the

country as long as other provinces permit it

A fed incorped company can operate throughout the country or in one or a number of

provinces

One can choose to incorp under fed or prov statute and still practically carry on bus

anywhere (would this choice raise competition for incorporation (fees)?)

Fed incorped companies have to obtain at least one extra-prov registration in order to

carry on bus in Canada (adds to the cost of fed incorp)

Federally incorporated company has a quasi name protection in that it can not be

prevented from operating in another province just because there is already a company

incorporated there with the same or a confusingly similar name – however, the

federally incorporated company can still be liable for passing off if it carries on business

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in that province where the pre-existing provincial company has carried on business

under that name there before.

Bottom Line : You can incorporate anywhere! BC, Federal, Delaware

V. THE INCORPORATION PROCESS

Steps in the Incorporation Process (Under the CBCA)Who may incorporate a corporation under the CBCA? S. 5 (1) One or more individuals (or bodies corporate – an existing corporation) not one

of whom:(a) is less than eighteen years of age,(b) is of unsound mind and has been so found by a court in Canada or elsewhere, or(c) has the status of bankrupt,

may incorporate a corporation.

Summary One + individuals or bodies corporate may incorporate a corporation under the CBCA by:

o Filing articles of incorporation (ss.5 and 6 and Form 1);o Filing notice of the registered office (ss.7, 19, and Form 3);o Filing a notice of directors (ss.7, 106, Form 6);o Paying the prescribed fee (Reg. s. 97 and Schedule 5); and o If the corporation is to have a name other than a numbered name, filing a NUANS

Name Status Report ** NOTE: Capital “D” Director is the administrator of the CBCA – lower case “d” director

refers to directors of the corporation Corporation has to have a name that is not the same as or confusingly similar to the

name of another (If not a numbered company, corporation must file a NUANS name search report – contains list of names registered in Canada)

The Issuance of a Certificate of Incorporation Ss. 8 and 12(1) – on receipt of required docs and upon their assessment, Director shall

issue a certo “Shall” – once requirements satisfied, the incorporators have a right to cert of

incorp S.9 – corporation comes into existence on date shown in the certificate of incorp

Articles (This says what company cannot do – if any) S.6 – Articles of incorporation must follow the form set out in this section (i-viii) Articles are the primary constitutional doc of the corp – difficult to change provisions in

the articles, but it can normally be amended by the supermajority vote of shareholders

Post-Incorporation Steps Under the CBCA S.104 – after the issue of the certificate of incorp, a meeting of the directors shall be held

at which the director may (i-vii)

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o (i) make by-laws – normally at the first meeting the directors will pass a set of general by-laws that deal with matter such as:

procedure at directors’ meetings; Notice for and procedures with respect to shareholder meetings; Procedures for the allotment and issuance of shares; Procedures for the declaration and payment of dividends; and Procedures for the appointment of officers *By-laws are another important constitutional doc of the corp governing

internal procedureso (ii) adopting a form of share cert (Security certificates include certificates for

shares and debentures)o (iii) allotting shares to persons they intend to have become shareholders and

issue shares to themo (iv) appointing persons as designated officers and may delegate particular taskso (v) appoint an auditor to hold office until the first meeting of shareholderso (vi) as to the bank with which the corp will deal and to indicate who will have

signing authorityo (vii) transact any other business

Corporate Names and the Name Approval Process Names may be important b/c of value of consumer recognition (goodwill) Complex web of law dealing with commercial use of names (fed trade name and trade

mark law, prov business name laws, and fed and prov registration of corp names law…and CL dealing with appropriation (taking without permission for use) of names

S.12(1) – Director has power to refuse prohibited or deceptively misdescriptive names o S.12(2) or order a change of name of an existing corporation

Certain names are prohibited o Prohibited words: obscene, suggests corp carries on bus under gov approvalo Too general: just describes quality or characteristic of goods/services (running

shoe), primarily the name of an individual (Jim Smith), primarily a geographic name (Canada)

o Confusion with other names (reg.18) – prohibited if it is confusing in sense that it may creat confusion with other names

o Misdescriptive names (reg. 25) – protecting public from a deceptive corp name Essential Elements of Most Corporate names = descriptive part, distinctive part, and

suffix (Kwitfit Shoemaker Ltd.) You can reserve a name for up to 90 days ahead under CBCA s.11 – you can also use a

numbered name and then later apply for a name change DBA (doing business as) names – a corporation that uses a business name other than its

own corporate name must register that business name (s.88)

Why Incorporate?

Advantage of Incorporation Critical Evaluation of Advantage

1. A corp provides LL for its shareholders May not provide much benefit where SP

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as against the J&S liability of partners or partners have to provide a personal guarantee (to bank, lessor, major suppliers) Protection against tort claimants may be qualified by courts “piercing the corporate veil”; if the person acting on behalf of the corporation commits the tort, they are personally liable without the need to PCV

2. A corp provides the perpetual succession of a body corporate contrasting with indefinite tenure of partnerships

May not provide a significant advantage over SP or partnership – assets in SP would go to estate and business could be carried on

3. A corporation allows for ease of transfer of shares as against difficulty and inconvenience of terminating partnerships to permit changes in personnel

No significant difference in how freely one might transfer shares in a closely-held corporation and how freely one might transfer partnership interests in a partnership Closely held corporations will likely have restrictions on share transfers – this is often due to fact that shareholders will have substantial involvement in business and don’t want just anybody buying the shares; also due to securities regulations

4. Individual partners may bind the firm but a shareholder alone cannot obligate the body corporate

However, in a closely held corp the indiv shareholders are usually officers of the corp and authority is often delegated to them as agents to bind the corp Corp will be vicariously liable for torts committed by its officers, agents, and employees – in a closely-held corp where shareholders are officers, agents, or employees there will be very little difference with partnership liability

5. A shareholder can contract with or sue a body corporate; a partner cannot sue or K with his firm

Ways of achieving same/similar result in partnership – partner can K with other partners separate from partnership agreement

6. Facilities for a body corporate to secure additional capital are not possessed by a partnership

Corporation can sell shares or issue debenture – you don’t have to be a corp entity to issue debentures; partnership cannot sell shares but they can take on another partner to get additional capital

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which accomplishes same ends (more money) Side note: a debenture is a doc that provides evidence of indebtedness

7. Tax advantages may accrue to the sole proprietor or small partnership which converts to the corporate form

Forming corporation that operates as small business does come with a reduced tax rate on first $400,000. However, double taxation (corp is taxed on income and then same income is taxed again in hands of shareholders) and flow through losses (passing losses through investors to be applied against other sources of income) are not possible with a corp (just SP and Partnership)

PLUS – Costs of Incorporation do not arise with SP or partnership Fee for incorporation itself Legal fees Fees associated with filing annual reports

The Choice Between the CBCA and the BCBCA Reasons for preferring CBCA:

o Name protection unlike provincial registration John Deere Plow – it cannot refuse

registration just based on similar name Can still be sued for passing off

o No restriction on maintaining an action (which can be a concern re uncertainty with respect to “carrying on business”; and

o Lawyers and shareholders in other provinces are familiar with it Reasons for preferring BCBCA:

o Lawyers tend to be more familiar with it;o It is easier to deal with Victoria than with Ottawa (get to know ppl, time change);o It is cheaper (CBCA has one more extra-prov registration than incorporation)

ReincorporationDefine a “reincorporation” and give an example of how a reincorporation can be effected other than by way of continuance. A corp that has been incorporated in one jurisdiction may decide to become incorped

under a different statute in another jurisdiction – process of changing the statute of incorp referred to as “reincorporation”

Example of how a reincorporation can be effected other than by way of continuance:

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Incorporate a new corporation under the statute in the destination jurisdiction, then have the new corporation issue shares to the shareholders of the original jurisdiction corporation in exchange for their shares of the original jurisdiction corp.

Once done, the new jurisdiction corp will own all the shares of the original jurisdiction corp – the original jurisdiction corp can then be wound up with the assets of the original jurisdiction corp transferred to the new juris corp

ContinuanceNote the steps in the process of continuance and the reasons for them. “Continuance” is a more convenient way of reincorporating

Procedure for continuance out of CBCA (export continuance):i. obtain a resolution from the shareholders permitting the continuance (CBCA

s.188(1), (5));ii. obtain approval from the director (CBCA s.188(1));iii. register in the other jurisdiction making amendments to the incorporation docs

to make them conform to the requirements of the jurisdiction in which the company is being incorporated (note that one still have to satisfy the name requirements for registration)

Procedure for a continuance into CBCA (import continuance) usually involves similar procedure since statute under which it is incorporated will typically require a resolution from shareholders and approval from registrar who administers that statute

Continuance under statute other than CBCA may result in a significant change in the rights of shareholders (since rights might not be same under other statute)

Extra-Provincial RegistrationExplain the main purpose behind foreign corporation (or extra-provincial corporation) registration. Common for jurisdictions around the world to require corporations that are carrying on

business in the jurisdiction (but are not incorporated in that jurisdiction) to register referred to as “foreign corporation registration”

In Canada this is referred to as “extra-provincial registration”o Requirement includes a requirement to have a registered attorney in the province who

can receive service of legal docs in prov (one of the essential steps in beginning a civil law suit)

MAIN PURPOSE behind registration requirement is to provide a means through which a foreign corporation carrying on business in the jurisdiction can be served with legal documents within the jurisdiction – without this a foreign corporation might well be able to sue persons it dealt with in the jurisdiction while avoiding suits by persons within the jurisdiction

Registration requirement enforced through various means including fines ($100/day) against the foreign corporation and/or its agents, a prohibition against the foreign corp

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maintaining a suit in the jurisdiction and sometimes a prohibition against the foreign corp holding an interest in land in the jurisdiction

Extra provincial registration under the BC Business Corporations Act S.375 – foreign entities must register as an extra prov company within two months of

beginning to carry on business in BC Foreign entity = a foreign corporation or a LL company

Foreign Corporation: o Foreign corporation = s.1(1) a corporation that is not a “company”o Company = s.1(1) a company incorporated under the BC BCA or a

prior Companies Acto Bottom line: a corporation not incorporated in BC

Limited Liability Companies o Idea of a LL company is to allow investors to carry on business

through a corporate entity but still pass through any losses to the investors for tax purposes

o LL company = a business entity that was organized in a jurisdiction other than BC and that is recognized a s a legal entity in the jurisdiction in which it was organized and that is not a corp, partnership or a LP

Carry on Business = s.375(2) – a foreign entity is deemed to carry on business in BC if:

its name, or any name under which it carries on business is listed in a telephone directory for any part of BC together with an address or telephone number

announced in any advertisement (giving address or telephone number in BC)

if it has an agent resident in BC if it has a warehouse, office, or place of business in BC Or otherwise (for courts’ discretion)

o Said to be a question of the degree of presence of the foreign entity in the province

Registration Requirements Reserving of the name of the foreign entity Filing of a registration statement Appointment of one or more attorneys S.386 – extra-prov companies must have one or more attorneys who can

be either an individual or a company S.388 – each attorney is deemed to be authorized to accept service of

process on behalf of the extra prov company in each legal proceeding by or against it in BC and to recieve notices to the company

VI. LEGAL STATUS OF CORPORATIONS Examining the separate legal personality characteristic in more detail

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Legal Status of the Company/CorporationA company is a separate legal entity (Salomon v. Salomon)

Set out some implications of the legal nature of the corporation.Some Implications of the legal nature of companies/corporations A shareholder can be a (secured) creditor of the corporation (Salomon)

Shareholder who is also a creditor can rank equally with other creditors for the amount of the debt or even ahead of other creditors to the extent of any security held for the debt

A shareholder can be a director, and officer and/or an employee of the corporation (Lee v. Lee’s Air Farming Ltd) unlike in a partnership where a partner cannot be an employee of the partnership/K with themselves (re Thorne)

The corporation owns the assets not the shareholders, the shareholders just have shares which are “bundles of rights” (Macaura v. Northern Assurance) However, shareholders can have an insurable interest (Kosmopolous)

Furthermore, a corporation can go into debt, enter into contracts, be liable in tort, can sue of be sued, and can also be found guilty of committing a crime

Identify four potential problems the legal nature of the corporation creates.Potential Problems Notion of LL coupled with separate personality of the corporation creates a number of

potential problems:1. Shareholders becoming creditors when the corporation is insolvent

May be able to defeat interests of creditors and other 3rd party claims Shareholders may be able to put themselves ahead of other creditors by

taking a security interest2. Company may make payouts to shareholders when it is insolvent3. A company may enter into K’s with some shareholders that are very unfavorable

to other shareholders or creditors4. Person might set up a company with very little capital and defeat the interests of

creditors who act in reliance on the presence of some minimum adequate amount of capital

5. 3rd parties may be deceived into thinking they are dealing with an individual or partnership business when they are in fact contracting with a corporation that has a separate personality and in which shareholders have limited liability

6. persons may incorporate a company to avoid personal obligations or restrictions

Salomon v. Salomon & Company, Limited Facts: Mr. Salomon sold his SP boot manufacturing company to a company that he had

formed Holding

Trial – company was Mr. Salomon’s agent CA – company was a trustee House of Lords – company was a separate legal entity

Policy Concerns:

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Potential fraud of creditors – House thought likelihood of fraud was small in this case given apparent value of the business at the time it was sold and fact that Salomon’s loaned money to business in attempt to keep it going – accepted that motive was to bring other family members into business

Could creditors have been deceived? – may not have been aware that business was now a limited company; may have been deceived by book value of bus if they looked at books since excessive value was paid for business

Lee v. Lee’s Air Farming Ltd. (New Zealand) Remember: in re Thorne Thorne could not be a worker under Worker’s Comp

legislation since he was a partner and thus could not hire himself as a worker on principle that one cannot K with oneself

Facts: Lee was the sole shareholder, sole director, president, and only employee of Lee’s Air Farming Ltd. – died and his wife made a claim for compensation under the worker’s compensation legislation Claim resisted on basis that Lee would not be an employee or worker within

meaning of legislation because he was employing himself Held: Lee was not employing himself – company employed him (not same person)

Implication: company is a separate person that acts through its shareholders or directors to the extent they have powers to authorize certain acts by company

Macaura v. Northern Assurance Facts: Macaura transferred all assets into a corporation and incorporated and took

shares – signs insurance K’s on timber Holding: Macaura could not claim on insurance because he did not have an insurable

interest (he did not own timber, only owner can insure) – only company had insurable interest (even though he owned all the shares in the corporation) Shares are “bundles of rights” Implication: The company is the person that has an interest in the assets not the

shareholders

VII. PRE-INCORPORATION CONTRACTS

Pre-Incorporation ContractsOften promoters of companies enter into K’s on behalf of proposed corporations in order to

secure the K before the time of incorporation. Normally, the promoter does not have any intention of being personally liable and sometimes the promoter is not even aware the

corporation has not been incorporated (3rd parties often do not know). The promoter who purports to act on behalf of the corporation for a pre-incorporation K has no authority to

act as an agent for the corporation because the corporation does not exist (not incorporated).

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Explain why, under the common law of agency, a corporation cannot ratify a pre-incorporation contract.GENERALLY – a person can ratify a K entered into by another person on his/her behalf if:

a) The other person purported to act on behalf of the person who seeks to ratify;b) The person who seeks to ratify must have been in existence and ascertainable at

the time the other person purported to act on his/her behalf; andc) The person who seeks to ratify must have the capacity to do the act both at the

time the other person acted and at the time of ratificationHOWEVER – b) and c) make it impossible for a corporation to ratify a pre-incorporation K – a corporation that was not in existence when the pre-incorporation K was entered into does not meet either of these conditions.

THE CL POSITION Kelner confirmed that a company cannot ratify a K (or purported K) entered into on its

behalf if company not in existence at time person purported to enter into K on its behalfExplain and distinguish the “rule of law” and the “rule of construction” approaches to the liability of promoters for pre-incorporation contracts.o After Kelner uncertainty existed on whether promoters were automatically liable

(“rule of law” approach – clearly an intended K) or whether the promoter’s liability depended on whether it was intended that the promoter be a party to the K (“rule of construction” approach)

A promoter can be liable on a pre-incorp K but only if it can be said that it was intended in the circumstances that the promoter be a party to the K (Kelner as interpreted in Newborne, Black, Wickberg)Where a claim is made against a promoter on the basis of a breach of warranty of authority to act for a corporation that subsequently went bankrupt what are the damages likely to be? Explain why.

The damages are likely to be nil. If the warranty of the promoter had been true then the third party would have had a contract with the corporation. Since the corporation is now bankrupt the third party would have had an action against a bankrupt corporation and would have gotten nothing even if the third party succeeded in an action against the corporation.

PROBLEMS WITH THE CL Created risk for both promoter and third party that there would be no enforceable K –

risk that reliance on K will be defeated along with potential for an unjust enrichment of promoters at the expense of third parties or vise versa

Creates unnecessary costs – to deal with risk of potentially unenforceable K, both parties will have to take precautions to ensure that the corporation is in fact incorporated

How does the CBCA modify the common law position on pre-incorporation contracts?CBCA S.14 MODIFICATION OF THE CL

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S.14(1) provides that unless K expressly provides otherwise (see.14(4)), a person who enters into, or purports to enter into a written K in the name of or on behalf of a corporation before the corp comes into existence, is personally bound by K Codification of “rule of construction” approach Only applies to written, CL will likely still apply to oral K’s etc. “purports to enter into” -

S.14(2) provides that a corp can adopt a K after it comes into existence – If adopted the corp is bound and the person who purported to act on behalf of the corp is not longer liable (must be adopted within a “reasonable time”) Anything they do to indicate they intend to be bound

S.14(3) allows the court to apportion liability b/w the corp and a person purporting to act on behalf of the corp

S.14(4) provides that parties can expressly agree in written K that the person who enters into the K on behalf of the corp before it came into existence is not bound by the K or entitled to the benefits of the K

POTENTIAL PROBLEMS WITH S.14 Constitutional Problem

Property and civil rights falls to provinces with a federal ancillary power associated with incorporating companies – does this power allow it to regulate K’s that were entered into before a CBCA corporation came into existence? Court would probably uphold s.14 under federal gov’s ancillary power to incorporate companies with objects broader than prov objects

“Written Contract” – referred to in s.14 CL will likely still apply because s.14 only applies to “written contracts” **EXAM**

Jurisdictional or “Conflict of Law” Problem – was it intended to be governed by BCBCA or CBCA?

BCBCA (S.20(2)) In BC it could be written or oral and the section would apply The promoter is deemed to warrant that the company will come into existence or adopt

the purported K within a reasonable time – if not, promoter liable Lays out damages Over rules CL s.20(3) – company can adopt K

OTHER WAYS TO ENFORCE PRE-INCORP K’S/HOLD PROMOTERS LIABLE UNDER THE CL: Promoter as trustee of a chose in action – promoter would be under a fiduciary

obligation to enforce the K Company as assignee – court may be able to treat K as having been assigned to the

company (as opposed to ratification) Restitutionary Principles – although there was now valid K, there was a “quasi-

contract” Infer a second K from a course of dealing – court may look at part performance and

infer another K b/w the 3rd party and corporation Offer to promoter as agent for the third party to make an offer to the company –

promoter might be viewed as agent of third party with authority to make offer to

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corporation on same terms as those involved in the dealing b/w promoter and third party

Provisional K to become binding on a future event (incorp of the company)

Practical Notes IF you are asked to incorp company – warn client that if they go out an act on behalf of

the company and enter in K’s on behalf of company they are personally liable (under CBCA)

Not so strong in BC but they could be liable under breach of warranty of authority Solution: Incorp immediately under a numbered name and change name later –

however, potential problem that client will still go out and K under the name of the company they hope to incorp/change name to later

Cases Applying Provisions Equivalent to CBCA s.14

Landmark Inns v. HoreakHeld: Company could not ratify/adopt K, because there wasn’t one – as soon as they decided to rent space elsewhere, the K was repudiated (didn’t apply s.14(3))

Bank of NS v. WilliamsHeld: As long as 3rd party knew they were dealing with company, you should not succeed in apportionment

VIII. LIABILITY FOR CORPORATE ACTS: PIERCING THE CORPORATE VEIL

Piercing the Corporate VeilSalomon is often cited for the proposition that a corporation is a separate legal entity.

However, courts have often disregarded the concept to assign liability to individual shareholders, directors or officers of a corporation, known as piercing the corporate veil.

Where it would be too “flagrantly opposed to justice” to apply Salomon principle (Kosmopolous), courts are likely to PCV. The situations in which courts will PCV follow no

consistent principle (Kosmopolous). Courts seem most likely to PCV in cases of: Gap filling and implied contractual terms (Gilford Motor Company Ltd. v. Horne; Saskatchewan Economic Development Corp v. Patterson-Boyd Mfg. Corp) When a corporation was formed to avoid statutory requirements (ie. Taxes) (British Merchandise Transport Co. Ltd. v. British Transport Commission) Affiliated corporations (Magen v. Terminal Cabs Ltd. and Walkovsky v. Carlton) Misrepresentation to avoid LL premiums (Gelhorn Motors Ltd. v. Yee;Chiang v. Heppner; Tato Enterprises Ltd. v. Rode; Roydent Dental; Wolfe v. Moir) Non-consensual claimants and incentive costs

Caution: courts rarely pierce the corporate veil and asking the court to do so will probably be an uphill battle

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The basis of POSSIBLE EXCEPTIONS to the Salomon Principle (PCV) The corporation is just an agent of the shareholders and the debts incurred by the

corporation are really debts of shareholders as principles (TJ in Salomon)o This concept has been picked up in subsequent cases, referring to the

corporation as the agent, Alter Ego, Puppet, or Instrumentality of the shareholder (same person/entity), as a “conduit”, Sham or Cloak for the shareholder

Courts may refer to the failure of the shareholder(s) to maintain the separate identity of the corporation (don’t make annual filings, don’t keep minute books, no separate accounting records) (Salomon)

Courts may say that they are PCV on the basis that the promoters of the corp used the corp to engage in “conduct akin to fraud” (Gilford Motors v. Horne)

Courts appear to be more willing to disregard the corporate entity where the effect of doing so is to link a parent company with its subsidiary or to link a subsidiary with one or more other subsidiaries through a parent corp.

o TESTS (Smith, Stone and Knight Ltd.) for determining whether the subsidiary is an agent of the parent corporation:

Were the profits treated as profits of the parent company? Were the persons conducting the business appointed by the parent? Was the parent the head and brain of the trading venture? Did the parent govern the trading venture, decide what should be done

and what capital should be embarked on the venture? Did the parent make profits by its skill and direction? Was the parent in effectual and constant control?

o PROBLEM: All the answers seem to be “Yes” in every parent-subsidiary r/ship, but the corporate entity of subsidiaries is not disregarded in every case –may be more going on in these cases.

o Not sufficient to consider the 6 criteria in Smith, Stone and Knight Ltd. (and ignore the separate legal existence of the subsidiary company – must have something more (Alberta Gas Ethylene Co. v. MNR)

o Generally, a subsidiary will not be found to be the alter-ego of its parent (even if 6 tests are satisfied) unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability – Need 6 tests satisfied plus something (conduct akin to fraud)(Gregorio v. Intrans-corp)

Court seems to be more willing to pierce in situations of affiliated companies where you would be considering the entities as one (PCV) to get at assets of parent company, not necessarily the assets of shareholders (in essence negating benefits of LL)

What you are looking for is something appears that they are not treating company as separate, conduct akin to fraud, affiliated enterprises

Articulate possible policy reasons for disregarding the corporate entity in each of the situations in which courts appear to be more willing to disregard the corporate entity.Situations in which Courts Appear to be more Inclined to PCV and the Possible Associated Policy explanations

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Gap Filling and Implied Contractual Terms Courts may disregard the corporate entity in a way that amounts to filling in the gaps in K’s Court is essentially saying that although parties did not include a provision in their agreement, such a provision would have been put in had the parties directed their minds to it

Problems could be avoided by a more carefully drafted non-competition clause (Gilford Motor Company Ltd. v. Horne) If the court did not PCV, lawyers would have to write extensive clauses to cover all possible means to avoid the K – filling the gaps avoids unnecessary transactions costs in the drafting of K’s (Saskatchewan Economic Development Corp v. Patterson-Boyd Mfg. Corp)

Corporations Formed to Avoid Statutory Requirements Corporations may be used as a means of avoiding a statutory requirement or restriction If court PCV in these cases it is arguably engaged in a form of gap filling Court is effectively saying that if the legislature had turned its mind tot the situation, it would surely have dealt with the matter by putting in a provision that prevented the use of a corporation to avoid the statutory obligation/restriction Tax Avoidance Cases are the most frequent case that would fit into statutory gap filling category

Addressing all possible ways ppl might avoid restrictions in the legislation is costly and will delayed the legislation (British Merchandise Transport Co. Ltd. v. British Transport Commission) Trying to anticipate every way in which a corp might be used to avoid all the taxing provisions of the Act may be impossible and make the Act more complex

Affiliated CorporationsCourts may be more willing to PCV between affiliated corporations

Policy: the benefits of LL are not lost when the veil is pierced and a parent comp is held liable (Terminal Cabs) as opposed to the personal liability that is incurred when the veil is pierced and an indiv is held liable (Walkovsky)

Misrepresentations If the business enterprise is conducted through a form of association that provides LL for equity investors and if the persons who choose to deal with the business (voluntary/consensual claimants) are aware of this they can either refuse to deal

POLICY: if this was allowed to succeed, it would make it more difficult for persons dealing with bus enterprises to determine LL (would have to incur additional screening costs, incur cost of obtaining personal guarantees, charge premium without bothering to assess)

If evidence indicates that P had not been made aware of the incorporation, the D’s may be held personally liable (Gelhorn Motors Ltd. v. Yee)

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with the bus enterprise or charge a premium that reflects any added risk Often the case when a bus carried on by a SP or partners is transferred to a corp unbeknownst to persons who dealt with SP or partnership

Persons operating bus might be inclined to misrepresent or mislead persons into believing equity investors will not have LL to avoid premiums PCV allows court to compensate persons who are misled and creates an incentive for those transferring bus assets to corp entities to inform persons who previously dealt with them

If the D made himself out to be a SP and name gives no indication of LL then D may be held personally liable (Chiang v. Heppner)Even if it is unlikely that P’s decision to do business with D was influenced by type of business association, P might still have had a reasonable expectation that the business would have insurance to cover losses due to fire (Chiang v. Heppner)Even though third party P contracted with “corporation” not in existent (wrong corporate name used on K), contracting D could be held personally liable (could have arguably avoided mistake at least cost (Tato Enterprises Ltd. v. Rode)Even if P appears not to have relied or type of business being incorporated, shareholder(s) of company may still be personally liable as it would have been difficult for P to make inquiries since they had failed to register the bus name (not complying with legislatio) (Roydent Dental Products Inc. v. Inter-dent Int’l Dental Supply Co. of Canada)D may be held personally liable where (even when P didn’t rely on LL) the corporate name was not used and by not following statutory requirements, took the risk of being held personally liable (Wolfe v. Moir)

o Nothing in the statute says that the consequence of not using the cautionary suffix is the disregarding of the corporate entity.

o If the corporate name had been displayed it is unlikely Wolfe have made a different decision about roller-skating.

Non-Consensual Claimants and Incentive CostsGreater willingness to PCV in situation were there is a tort claimant, were person had no intention to deal with corporation (non-consensual claimant) (Wolfe but not in Walkovsky)

Perfect example of an involuntary claimant would be the victim of a tort committed in the carrying on of the business enterprise Compensation – the corp entity may be disregarded in order to compensate a tort victim (the assets of a corp may not be sufficient to fully compensate the victim) Imposing liability on a deliver bus, for example, for reckless drivers with incentive to deliver quickly injuring claimants, could create an incentive for manager to take this risk into account when devising a method for compensating drivers

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A Tort action against director or officer directly, is another way of disregarding the corporate entity (shareholders are often directors/officers). It will not just be the

corporation that is vicariously liable, the employees/directors/officers will also be directly liable (Berger v. Willowdale A.M.C.)

POLICY: Could overcome the “deterrence trap” problem and restore the incentive to take sufficient care – however, this could lead to managers over protecting themselves at expense of investors – could be controlled by indemnifying directors/officers through insurance

SAID V. BUTT is cited for the proposition (obiter) that as long as an officer is acting in good faith within scope of authority, they are not liable for any tort. HOWEVER, this is not what court said, they emphasized that it was just for tort of inducing breach of K. The court in MCFADDEN clarified the principle and held that as long as you’re acting bona fide, w/in scope of employment, in best interests of company, an officer is protected from tort of inducing breach of K only (not all torts).

SO – basically, you can sue a manger/director/officer/employee directly for all torts except inducing breach of K. The RATIONALE being that two sets of damages could be recovered otherwise.

HOWEVER, ADGA limits Said v. Butt exception to cases involving the tort of inducing breach of K holding that if you want to sue directors/managers/etc. personally, you have to show some independent tort , that they have done something that wasn’t really w/in scope of authority but was serving personal interests. This is an Ontario case, and not followed everywhere, however it is good to refer to.

IN Rafiki Properties, ADGA was cited. It was a negligent misrepresentation claim, extending the principle beyond breach of K. However, the court followed a much narrower principle (like the old principle) and exonerated the employee.

Use of corporate Oppression ActionS.241 CBCA allows court to make an order for relief on the basis that the conduct of the affairs for the corp has been oppressive or unfairly prejudicial to a “complainant” in the

complainant’s capacity as a security holder, creditor, director, or officer.S.241(3) – wide powers for providing relief

Ex. PCM Construction – employee dismissed by corp with no assets – employee was also a shareholder and was able to make oppression action and court ordered directors to

personally pay damages

STATUTORY PROVISIONS UNDER WHICH SEPARATE CORPORATE PERSONALITY AVOIDED

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CBCA s. 118 S.118 sets out a number of circumstances in which directors may be found personally

liableo (1) liable for issuing shares without receiving full payment for themo (2) liable for purchasing, redeeming or otherwise acquiring shares, paying

commissions for the sale of share, paying dividends, providing financial assistance to shareholders, etc. or for paying indemnity to a director/officer if certain tests of insolvency are not satisfied.

Unpaid Wages s.119 CBCA overrides any argument that the directors are not liable on the basis that

the employee K’s are with the separate corporate legal entity – directors are J&S liable to employees for up to 6 months of unpaid wages Side note: is this not property and civil rights (provincial concern)? – never

challenged – perhaps an ancillary power of fed gov Gillen would take these provisions out

GENERAL THEORY FOR THE DISREGARD OF THE CORPORATE ENTITY

Avoid costs of transacting around avoidance of obligation – gap filling in K’s by courts may avoid transactions costs if the parties do not have to anticipate every means of using a corporation

Avoid costs of gathering information – in cases of misrepresentation, if promoters were not made liable then the outsiders would have to be much more careful to make sure they knew exactly who they were dealing with

More likely to PCV in one-person or few shareholder companies More likely to PCV where it leads to Claim Against LL Parent Co. Rather than

Shareholders (affiliated corporations) – no individual investor will be made personally liable (benefits of LL would not be lost)

IX. FINANCING

FINANCINGTo finance a corporation both equity finance and debt finance (and instruments that

have features of both debt and equity) can be used. Equity interests in for-profit corps are referred to as shares

1. SHARESDescribe the nature of a share, the three main rights attached to shares, and the share certificate requirement and share register requirement.

Shares typically described as being “bundles of rights” (McCaura v. Northern Assurance) or “bundles interrelated of rights and liabilities” (Sparling) A share is not a property right in the assets of the corp

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Separate bundles of rights are referred to as classes – the CBCA allows for different classes of shares with different rights and restrictions (s.6(1)(c)(i); s.24(4)) Where there is more than one class of shares, the rights and restrictions must be set

out in the articles (s.6(1)(c)(i); s.24(4))

Where there is one class of shares that class will have each of the three rights: voting, dividend, and rights to proceeds on dissolution (s.24(3))

Shares are presumed to be equal in all respects unless otherwise indicated (s.24(3)) (Jacobsen v. United Canso) and not much is required to make a sufficient distinction b/w classes (R v. McClurg)

Frequently used types of shares are common shares and preferred sharesShare Certificate Requirement Each shareholder is entitled to a share certificate upon request. The certificate must

show on its face the rights, restrictions, privileges and conditions on the shares or a statement of the right of the shareholder to have a copy of the rights, privileges, restrictions and conditions of the share provided to them on request.

Share Register Requirement The corporation is required to maintain a register in which it records the names and

addresses of its shareholders, the number of shares held by each shareholders and the date and particulars of the issue and transfer of each share. The register must be kept at the registered office of the corporation or at a separate records office of the corporation.

Describe: The main types of equity securities (common/preferred) The rights attached, or that can be attached, to those securities.

COMMON SHARES (ordinary shares) have 3 main rights attached to them: right to vote right to receive dividends right to proceeds on dissolution of corporation

PREFERRED SHARES are “preferred” because they typically have a preference with respect to some/all right(s): Features:

Typically do not carry a voting right Preferred shares will get specified amount in liquidation before any proceeds can be

distributed to common shareholders If you don’t say anything more, upon dissolution, after preferred is paid, they

share the remainder with the common shares (McMaster University) Cumulative vs. non-cumulative – a preferred share is cumulative if any dividend that

is unpaid in any given year accumulates and is to be paid in a subsequent year Non-cumulative preferred shares are not common – only when some

controlling shareholder controls preferred shares

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Presumption in favor of cumulative (Webb v. Earl) Participating vs. non-participating – participation right allows preferred

shareholder to participate in the distribution of dividends beyond the preferred dividend right – anything left over after distribution of preferred dividends, they get a share

Presumption in favor of non-participating – must be written into articles (International Power)

Convertible/Non-convertible – conversions rights allows shares to be converted into common shares at a predetermined conversion rate

Retractable/Non-retractable – retraction rights allow the shareholder to sell the shares back to the company at a predetermined price

Redeemable/Non-redeemable – a companies reserved right to buy back the preferred shares at a predetermined price (this is b/c the company may want to refinance)

DIVIDENDS S. 43 CBCA allows for 3 forms of dividends:

Cash – dividends are usually paid in cash Dividends in specie – Property (ie. Shares in another company/turkey ) Stock Dividend – more shares in the same company

The power to issue payment of dividends falls to directors under the residual power to manage under s.102 CBCA. The power is not explicitly given to directors anywhere in the act, but is given implicitly, if not given to anyone else, as s.115(3)(d) states that directors cannot delegate power to declare dividends. Dodge v. Ford Motor – not paying a dividend was found to be a breach of the duty to

act in the best interests of the corporation Fergusson v. Imax – power to declare dividends must not be oppressive to one or

more shareholders

Once directors have declared a dividend, it becomes a debt of the corporation (shareholders can sue to be paid the amount of the dividend)

Dividends can only be paid out of profits (ie. Retained earnings of the corporation) Dividends cannot be declared/paid if the corporation is insolvent at the time or if

payment would make the corp insolvent (CBCA s. 42) – directors can be held personally liable (s.118(2)(c)) (no abandoning ship)

Shareholder receiving such dividends can be ordered to repay the amount to the directors (s.118(5))

Company will prepare a list of shareholders of record on that date and the dividend will be paid to “shareholders of record” on that date (CBCA s. 134) – shares traded after the ex dividend date will not receive the dividend

VOTING Directors are elected by a majority of votes cast by shareholders (“Ordinary

resolution”) (s.2(1) CBCA)

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Holders of voting shares have to approve changes to the articles of incorporation (“special resolution”)

Typically preferred shares do not carry a voting right – BUT classes of shares that do not carry a voting right may be given the right in particular circumstances

Unless articles otherwise provide, each share entitles the holder to one vote s.140(1)

Voting restrictions and equal treatment (**EXAM**): Bushell v. Faith – upheld article that allowed director to have 3 votes per share on

any resolution to remove that director (s.109 does not say that the resolution must be based on one voter per share)

Jacobsen v. United Canso Oil & Gas – by-law that provided a shareholder could only vote a max of 1000 shares (no matter how many shares were owned) was not valid (per. S.24 CBCA) – one could not make a distinction in the number of voters per share on the basis of characteristics of the particular shareholder who held the shares

Bushell and Jacobsen can likely be reconciled on policy reasons – in Bushell the 3 siblings likely all consented to the provision – in Jacobsen it is less likely shareholders consented to the transaction

o Not a good idea to use Bushell because of Jacobsen and Bowater (Canadian cases)

Bowater Canadian Ltd. v. RL Crain Inc. – within a given class the shares must have equal rights (subject to separate series rights) or all shareholders of a class must be treated equally

Poison pill plan – involve the issuance of rights to buy further shares of the issuer to existing shareholders – allows existing shareholders to acquire shares below market price (upheld)

ISSUING AND PAYING FOR SHARES The directors decide on when to issue shares, who to issue them to, and for what

consideration – subject to articles, by-laws, or unanimous shareholder agreement (S.25(1)) (s.115(3) – director cannot delegate this power)

Authorized limit on power of directors to issue shares was common approach in the past (common now to have a high limit that is for practical purposes, an authorization for directors to issue as many shares as they want – CBCA also allows for no authorized limit to be set

Describe the issuance of shares in series and note the purpose for it.

SERIES OF SHARE If it is decided that existing shares should be issued to raise funds, this can normally be

done by the directors (subject to authorized limit) without delay (except for securities regulation requirements)

HOWERVER, if different share rights are going to be offered then the directors will have to go to the shareholders to approve the creation of a new class of shares AND the rights for such a class are not set out in the articles so the articles will need

amendment

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TO AVOID the delay of amending articles, directors can be allowed to issue the shares of a class of shares in “series” (s.27) Authority to issue shares of a particular class in series has to be given to directors

when class created – right would have to appear in articles Risk that subsequent shareholders of a class will be better treated than the holders

of earlier series of shares of the class – CBCA tries to protect against this by providing that no series in a class can be given any priority over any other series in the class with respect to dividends or proceeds on liquidation.

2. CORPORATE DEBT FINANCE Corporate debt finance may take form of trade credit or loans

COMMON TYPES BANK LOANS: Two general types:

o Line of Credit – to finance short term fluctuations in a firm’s cash requirementso Term Loan – provided for longer periods of time and normally involve a fixed

sum to be paid at a later time with interest payments to be made on a regular basis

Bank concerned that the borrower not engage in business that are very risky since could lead to inability of borrow to pay – so bank may restrict businesses borrow can carry on

Bank may require that the ratio of liability to total assets be limited to some percentage (risk management)

Bank may take security interest (ie. Collateral) over certain assets of the borrower – borrower doesn’t pay bank can seize the assets

COMMERCIAL PAPER, BONDS, AND DEBENTURES: Notes/Commercial Paper – promissory notes which a corporation may sell that

constitutes promises to pay a specified amount of money at a specified time in the future (usually short time)

o May just be fixed amount, or fixed amount plus interest Bonds/Debentures – sold to the public (separate individuals) to produce a large

amount of $o Usually long periods until maturityo Do not generally carry the right to vote – subject to numerous contractual terms,

which are typically set out in an indenture (agreement K).o

ENFORCEMENT There can be problems with enforcement of terms of indenture where there are a large

number of bondholders Common for issuers of bonds/debentures to appoint a trustee to enforce the terms of

the indenture on behalf of the bond/debenture holders – otherwise might be hard to sell b/c investors would know that it was unlikely that the terms of the indenture would be enforced

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CBCA and other corporate statutes in Canada have rules governing trustees:o Qualification – trustee must be incorporated under and subject to controls under

statutes governing the incorp of trust companies (s.84)o Conflict of interest – trustees cannot have COI with issuer (s.83)o Access to list of debenture holders – trustees must be permitted access to list of

debenture holders for the purpose of communicating with them for the purpose of voting or other matters relating to enforcement (s.85)

o Trustees have power to demand evidence of compliance (s.86-66)o Trustees must give the debenture holders notice of a default by the corp (s.90)o Trustees must act honestly and in good faith for the interests of debt holders and

with the care, skill, and diligence of a reasonably prudent trustee (s.91)

3. SECURITIES REGULATION

If you are setting up any business: are you getting money from somewhere other than your own pocket? Yes – then you have a securities law issue (even if you issue shares to

yourself)

In Canada, securities regulation is a matter of provincial jurisdiction and is typically dealt with in separate securities statutes

Most provincial securities acts provide that a prospectus is required when there is a “distribution” of a “security” “security” = not just shares and debentures but also warrants, options, rights and other

instruments or transactions that have a similar investment character “Distribution” = includes, among other things, “a trade in a security of an issuer that has

not been previously issued Distribution of securities to anyone (including yourself) – exempted if only to

yourself Trade = broadly defined to include any sale of disposition of a security for

valuable considerationYou can be exempted form the Prospectus Requirement if you are a “private issuer” (small business) that has fewer than 50 shareholders and has only distributed securities in reliance on the private issuer exemptions.

Provincial securities act disclosure requirements include annual info forms, financial disclosure, proxy circular disclosure, insider trading reports and timely disclosure

Takeover Bid Regulation A takeover bid is a bid to acquire sufficient shares of a corp in order to control the

management (20% or more of the equity securities of any class of the issuer) Where an offeror makes a takeover bid the bid must comply with certain rules: must be

made to all holders of the target shares of the class sought; bud must be kept open for a minimum of 35 days; shares tendered by offerees can be withdrawn within bid period; bidder must provide a takeover bid circular.

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Poison pill plan – involve the issuance of rights to buy further shares of the issuer to existing shareholders – allows existing shareholders to acquire shares below market price

o Rights only come into effect when a person acquires more than a specified amount (usually 20%)

X. GOVERNANCE

POWERS OF THE CORPORATION AND AUTHORITY OF DIRECTORS AND OFFICERS

The division of powers in a corporation is like the constitutional division of powers (directors/officers vs. shareholders). The court’s developed doctrines: ultra vires,

constructive notice (indoor management rule) relating to restrictions on the business that corporations could carry on and relating to the ostensible authority of agents acting on

behalf of the corporation. Due to continued problems with the doctrines, the ultra vires and constructive notice doctrines are no longer in our CBCA; however, the doctrines might still arise if a company is not incorporated under the CBCA or a special statute (that does away

with them).

FIRST – the objects and powers of the corporation are set out in the memorandum of association/articles to help investors assess the risk to which they would be exposed

o Objects of a corporation – the kinds of businesses that the corporation would engage in

o Powers of a corporation – the kinds of things the corporation could do in carrying on the business of the corporation

SECOND – the scope of an agent’s authority (actual or ostensible) is limited to the capacity of the corporation because an agent cannot enter in a K that the principal (corporation) could not enter into himself.

UNDER THE ULTRA VIRES DOCTRINE (abolished under the CBCA) if an agent entered into a contract that was contrary to the powers or objects of the corporation, the K would be held ultra vires (beyond the power of) the corporation and the K would be void (never legally valid and impossible to sue on) (Asbury Railway Carriage & Iron Co. v. Riche) K cannot be ratified by unanimous shareholder agreement b/c there was no K to ratify Principle could not ratify b/c the principle had no power (capacity) to enter into the K

JUSTIFICATIONS for the ultra vires doctrine: Investor and creditor protection against changes in the risk – if a company could start

carrying on businesses other than those listed in its objects then investors/creditors might be exposed to much riskier types of businesses than they anticipated

Constraining Quasi-public corporations to their quasi-public purposes – protects against misuse of corporate funds since uses outside the objects would simply not be valid use of funds

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Controlling against the risk of bankruptcy for some types of corporations (particularly banks and insurance companies)

Articulate the problems with the ultra vires doctrine, the practical response to it and the subsequent legislative response to it in corporate statutes such as the CBCA.

PROBLEMS with the ultra vires doctrine: Could create hardship on 3rd parties who had to bear the risk that contracts they had

entered into could not be enforced – could lead to unjust enrichment where 3rd party has (begun to) perform

Corp’s might find K’s are not enforceable and 3rd parties might be unjustly enriched Solution: either charge a premium to cover risk or check objects of corporation

RESPONSE to the ultra vires doctrine Corporations had lawyers draft broad objects clauses with catchall ancillary power

(give corp capacity to do just about anything) to avoid risk Courts tended to read objects clauses very broadly and give wide scope to incidental

powers

PROBLEMS CONTINUE with the Ultra vires doctrine: Responses helped keep problems at bay, but there were still residual costs and risks

o Cost of having lawyer review extensive objects clauseso Still risk that K’s may go beyond the objects of a particular corporationo Courts might still find K entered into is ultra vires

Re Introductions Ltd. – objects clause (providing services for visitors to the Festival of Britain) held not to include the business of breeding pigs

LEGISLATIVE RESPONSE to the continuing problems with the Ultra Vires doctrine: Most general statutes of incorporation in Canada gave corporations the powers of a

natural person (s.15(1) CBCA) but allowed restrictions that are not constraints on capacity, but constraints on the powers/authority of persons acting on behalf of corp

16(2) – prohibited from carrying on business that articles restrict (saying what corporation cannot do – articles do not need to contain objects/what company can do)

16(3) – no act of a corp is invalid only by reason of a restriction of that action by articles (must be some other reason) – avoiding unjust enrichment (of 3rd parties/corporation)

s.247 – remedy for doing something that is restricted: court order for compliance

Describe the constructive notice doctrine, the indoor management rule and the legislative modifications to these doctrines in the CBCA.

CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT RULE

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Before legislative modifications that gave corporations the capacity of natural persons, memorandum of association set out powers of the corp to give effect to its objects. Because memo and articles are publicly filed, third parties are deemed to have knowledge of constraints on exercise of power (Constructive Notice). This created an additional risk for 3rd parties.

THE INDOOR MANAGEMENT RULE limits the application of constructive notice rule. 3rd parties are not deemed to know (no constructive notice) of any indoor/in-house restrictions on the authority of directors or officers (if documents are not publicly available).

LEGISLATIVE MODIFICATIONS have abolished the constructive notice rule with respect to a corporation that is incorporated under the CBCA (s.17). Once the constructive notice doctrine is removed, there is no need for the indoor management rule (although it is still codified in s.18 CBCA).

CONSTITUTIONAL ISSUE? The constructive notice rule was developed by courts in the context of actions predominantly brought to enforce a K, which is part of property an civil rights, a provincial area. Can the federal CBCA abolish it?

To what extent do the Ultra Vires doctrine and the constructive notice doctrine still apply?

The statutes that do away with Ultra Vires doctrine and the constructive notice doctrine do so only for corporations incorporated under those particular statutes

If a company has not been incorporated under the CBCA or a special statute that explicitly does away with them, the doctrines may still apply.

The ultra vires doctrine does not apply/never applied to Crown Charter or letters patent companies (b/c always had powers of a natural person)

DIRECTORS AND OFFICERS

DIRECTORS:

THE ROLE OF DIRECTORS is to manage (or at least supervise the management of) the corporation (subject to any unanimous shareholder agreement)(s.102 CBCA). The directors normally have the power to appoint the officers of the corporation (s.121), who generally conduct the day-to-day mgmt duties.

Comment upon the effectiveness of residency requirements for directors.The CBCA contains a residence requirement for directors. At least 25% of the directors must “resident Canadians” (and where the corporation has less than four directors at least one of the directors must be a resident Canadian).

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The idea is presumably that the corporation will be more responsive to Canadian national interests. However, there is no duty imposed on the directors (or on Canadian resident directors) that they take Canadian national interests into account).

A common practice has been to appoint nominee Canadian directors but to strip away their powers using a unanimous shareholder agreement. The consequence may be that the directors then have no powers and therefore no ability to influence the decisions of the corporation taking account of Canadian national interests.

CBCA s.105 sets out THE QUALIFICATION REQUIREMENTS FOR DIRECTORS: S.105(1) – directors must be:

o (i) natural persons (individuals, not corporations);o (ii) over 18 years of age; ando (iii) not adjudicated mental incompetents or bankrupts

s.105(2) – a director need not own shares of the corporation (although it does allow for share qualification in articles)

Minimum number of directors for corporations that does not publicly distribute shares = 1; corp that makes a public distribution = 3 (s.102(2)) – no max number of directors

S.105(3) – at least 25% of directors must be “resident Canadians” (where < 4 at least one must be)

AUTHORITY AND POWERS OF DIRECTORS

Note each of the powers that directors typically have.Management power (s.102) Several powers that implicitly fall within s.102 (broad residual power) are highlighted

in s.115(3) (cannot delegate these, can only be taken away in a unanimous shareholder agreement):

a. Submission to the shareholders of any question or matter requiring approval of shareholders

b. Fill a vacancy among directors or auditors or add additional directorsc. Issue securities/shares (also ss.25 and 27)d. Declaration of dividendse. Purchase, redemption or other acquisition of shares issued by the corporationf. Pay a commission under s.41g. Approval of a management proxy circularh. Approval of a takeover bid by the corporation or directors’ circular (prepared in

connection with a bid to takeover the corp.)i. Approval of any financial statement put before the shareholdersj. Adopt, amend or repeal by-laws (also s.103)

Directors may not delegate the powers listed in s.115(3) Subject to articles, the bylaws, or a unanimous shareholder agreement: Directors have the power to adopt, amend or repeal the by-laws (s.103)

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o Only a default allocation in favour of directors – any change the directors make in the bylaws must be put before the shareholders and is not effective until approved

Power to borrow (s.189(1)) and power to delegate borrowing power (s.189(2)) Power to issue shares (s.25) and power to issue shares in a series (s.27) Appointment of additional directors (s.106(8)) if the articles so provide Filling a vacancy on the board of directors that arises due to death or resignation of a

director (s.111) or due to shareholders not replacing director (s.109(3)) Filling a vacancy in the position of auditor (s.166(1)) unless articles stipulate position

of auditor can only be filled by a vote of the shareholders (s.166(3)) Calling of meetings of shareholders (s.133) Appointment and compensation of officers and the delegation of powers (s.121) Power to determine remuneration for the directors, officers, and employees of the corp

(s.125)

Cases dealing with delegation: Prior to enactment of s.115(3) – court still held that directors could not delegate all

their powers (Hayes v. Canada-Atlantic & Plant SS Co.) A corporation can delegate certain managerial duties to strangers for a limited period

(not indefinitely) – Longer the period of time they delegate, the greater likelihood delegation is improper (Sherman & Ellis v. Indiana Mutual Casualty)

How far one goes in delegating their powers is a matter of degree – if the K attempts to delegate substantially all corporate powers to an agent, it has gone too far (Kennerson v. Burbank Amusements Co.)

The cases are still relevant in jurisdictions where the corporate statue does not address the scope of delegation – still might also be relevant for a CBCA company (complying w/ restrictions in s.115(3) and delegating all other powers for 50 years might still be considered improper delegation)

ELECTION OF DIRECTORS One document that must be sent to the “D”irector to form the corporation is a notice of

the first directors of the corporation (s.106(1)) – these first directors hold office until the first annual meeting (s.106(2)) which must be held w/in 18 months of the incorporation (s.133(1))

At every subsequent annual meeting, directors are elected by an “ordinary resolution” of the shareholders (majority vote)(s.106(3)) cannot be altered or waived in articles

Term of director begins from time of election and ends at the subsequent annual meeting – however articles may provide for term up to 3 years (s.106(3)(5))

No limit on the number of times a director can be re-elected – if no one new re-elected, current directors remain

S.106(4) – articles may provide for staggering boards (not all directors need be elected at the same meeting) (have 9 directors but only elect 3 each year)

S.145 – a corp, shareholder, or a director may apply to court to resolve any controversy concerning the election or appointment of a director

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CEASING TO HOLD OFFICE S.108 – a director ceases to hold office when he dies, resigns, becomes disqualified or is

removed upon a resolution of the shareholdersREMOVAL OF DIRECTORS S.109(1) allows for the removal of a director by ordinary shareholder resolution

(Bushell v. Faith – suggests that in some circumstances the requirement for a majority might be avoided)

S.209 – shareholder can remove a director by ordinary resolution and can be filled at the same meeting

REMOVAL OF OFFICERSWhat is the justification for the position on the effect of constraints on the removal of officers? Directors may remove officers. The power to remover officers is key to the effectiveness of the election and removal of

directors as a shareholder control device. Trade off between replacement of management and job security

o Cases indicate a tendency to uphold long-term employment K’s – may be motivated by the reliance of the employee

o May give employee incentive to build firm specific human capitalo Long run effect of allowing dismissal without consequence would be that

companies would not be able to enter into these kinds of K’s and might well end up having to pay higher compensation to compensate for the lack of security in the job

Parachute Provisions (Policy considerations):o Golden Parachute – lucrative compensation for corporate executives should they

be dismissed from their jobo Tin Parachute – extravagant parachutes struck down (by the US courts) and

replaced with less lucrative K’so Reduce incentive of management to resist takeovers – b/c managers would not

get compensation as good as severance package – allows management to be replaced when performing poorly

Re Paramount Publix Corp. Court suggested that a person could be removed from office without consequence – it

would only be if person was dismissed entirely from their employment that the usual consequences of breach of an employment K would arise

Montreal Public Service Co v. Champagne – constructive dismissal Hired as general manager subject only to “such direction and control as it is the duty of

the directors to exercise”. However, president was later appointed and Champagne was placed under the direct supervision court held Champagne was entitled to damages for breach of K

Shindler v. Northern Raincoat Co. Ltd.

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Principle: where a party enters into an arrangement whose effectiveness requires continuance of an existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances

DIRECTORS’ MEETINGS The details of directors’ meetings are left to the bylaws of the corp S.114 – subject to bylaws/articles directors may meet at any place S.114(2) – subject to articles/bylaws the quorum is a majority of the board or a

majority of the minimum number of directors in articles S.114(5) – if meeting will deal with any matters set out in s.115(3), notice of the

meeting must specifically indicate that – otherwise no requirement to specify the purpose

Meetings by conference call or other electronic means (s.114(9)) S.114(8) permits a corporation to have one director and in that case, that director may

constitute a meeting It is not necessary to hold a meeting where all of the directors sign a written resolution

in lieu of the meeting (s.117) CBCA does not prescribe how frequent directors’ meeting should be – although, at some

point failure to hold meeting might give rise to liability for breach of the duty of care under s.122(1)(b)

HOW BOARDS OF PUBLIC CORPORATIONS OPERATE Board Structure Requirements under CBCA:

o S.102(2) requires that at least two directors of a public corp not be employees or officers of the corporation or any of its affiliates (mandatory) – however, it does not require that the majority of the directors be “outside directors” (may not be entirely independent)

Securities Regulatory Corporate Governance Requirements for Public Corporations o When a corp goes public in Canada it is common to list on the TSX or Toronto

Venture Exchangeo To list on the Exchange, the issue of securities must enter into a listing

agreement under which the issuer agrees to comply with the rules, bylaws, and policies of the Exchange

o National Instrument 58-101 – requires that when a corp that had distributed securities to the public it must include certain specified disclosure on its corporate governance in its management info circular

o National Policy Instrument 58-201 – guidelines given on what good corporate governance is (composition of the board, board mandate, orientation and continuing education, code of business conduct and ethics, nominating committee, compensation committee, regular board assessments, and enforcement)

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Comment on the use of “outside” (or “independent”) directors and on the effectiveness of having outside directors.

Compare the legal notion of the function of directors with the reality and be able to suggest alternative functions that the directors of the board may fulfill.

Shareholder Power (Voting Rights)Shareholder powers are set out specifically in the CBCA and include the power to: elect directors, approve amendments to by-laws, approve fundamental changes to articles, an amalgamation, continuance, sale, lease, or exchange of all or substantially all of the corp’s

assets, and dissolution

Set out a list of and describe the particular voting powers of shareholders.SHAREHOLDER CONTROL OVER DIRECTOR: SHAREHOLDER RESIDUAL POWERS? Directors have the power to manage (s.102) and normally do so by delegating the day-

to-day management to officers whom they appoint Shareholders do not manage the company Shareholders do not have the overriding residual power to dictate to directors how to

manage the company (Automatic Self-Cleansing Filter Syndicate v. Cunninghame) o All depends whether it is a power of the director – if it is, shareholders cannot

dictate Shareholders have power in cases of a deadlock on the board of directors to appoint

new directors (Barron v. Potter)

ELECTION OF DIRECTORS Shareholders have the power to elect directors at annual shareholder meetings – allows

them a means to exert some control over who manages the corporation

AMENDMENT OF BYLAWS Default rule that directors have the right to initiate bylaw changes in CBCA corporations

BUT shareholders must ratify these changes and the next annual meeting of shareholders

o Default and can be altered by articles, bylaws, or an unanimous shareholder agreement (s.103)

Shareholders can make proposals for by-law changes (s.137)

FUNDAMENTAL CHANGES The CBCA provides shareholders with some control over significant changes to the

business or the capital structure – could be provided through the share rights or by promoters of the corp

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o Our statutes make right mandatory – have these rights regardless of what articles say

o Control is provided by way of a voting righto May have mandatory class voting rightso Partial minority shareholder protection through supermajority voting

requirement S.173 – amendment of the articles – “special resolution” is required to amend the

articles (only for shares with voting rights): o change the corporate nameo change the registered officeo change in a restriction on the business of the corpo create a new class of shareso increase or decrease the number or the minimum or maximum number of

directorso change restrictions on share transfers

Other fundamental changes requiring “special resolutions” (ie. Shareholder approval): o to improve an amalgamation of the corp with another corp (s.183) o the sale or lease of all or substantially all of the corps assets (s.189(3)) o a continuance of the corp under the laws of another jurisdiction (s.188)o a liquidation and dissolution of the corp (s.211)

A “special resolution” = two-thirds of the votes cast in respect of the particular resolution (s.2(1))

CLASS VOTING RIGHTS Shareholders are given protection against changes in their share rights without their

approval and against the creation of rights for other classes of shares that would prejudice their share rights

o This is done by giving classes of shares class voting rights – that is, the class must approve a change that alters or prejudices the rights of that class

o Under CBCA the class voting right is mandatory and cannot be taken away CBCA s.176(1) sets out situations in which a class vote is required (p.330)

o Increase or decrease authorized limit on a class of shareso Where there is an exchange, reclassification or cancellation of shareso To add, change or remove rights, privileges or restrictions on a class of shareso To increase rights or privileges of any class of shares having rights equal to or

superior to the shares of such classo To create a new class of shares equal to or superior to a particular classo To make an inferior class of shares equal or superior to a particular class

If a series of shares is affected by a resolution in a manner different from other series of the class then the series of the class will also have the right to vote separately as a series (s.176(4))

S.176(5) – the shares of a class having a right to vote carry the right to vote whether or not the class otherwise carries the right to vote (s.176(1) things)

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S.176(6) – a separate resolution of the class is required and the resolution must be a “special resolution”

Class voting rights often arise in other fundamental changes: o on an amalgamation (s.183(4))o a sale, lease or exchange (s.189(7))o a liquidation and dissolution (s.211(3))

class vote might also arise on a continuance to the extent any change were to occur in the relative rights of the classes of shares on the continuance

Closely Held Corporations

Note the typical characteristics of closely-held corporations and the reasons for treating them differently than widely-held corporations. Characteristics:

o Relatively few shareholders;o Shareholders are generally active in the management of the business;o No established market for the shares of the corporation; ando Usually a restriction on the transfer of shares.

B/c of characteristics, they are treated differently Reasons for Different Treatment:o Large stake –

shareholders in a closely-held corp tend to have substantial investments in the corp

they have a much greater incentive to be involved in monitoring the management of the corporation (usually through being involved in the management themselves).

With fewer shareholders wanting to be involved in management it may make sense to have more of the day-to-day decisions in the closely held corporation in hands of shareholders

o Separation of ownership and control problem not as severe – the problem of shareholder rational apathy (they don’t care to vote b/c

they believe their vote wont make any difference and the potential loss is not worth the effort to understand the corporation) due to having a small stake and being inclined to free-ride on monitoring efforts of others is not nearly as significant a problem in a closely held corporation.

Shareholders will be inclined to take steps to inform themselves and to exercise their voting rights.

o Desire to control who one is in business with – without an established market the shareholders investment will be

difficult to liquidate. Shareholders will not want to be in business with others they don’t trust

so they tend to want control over who they are in business with and tend to want to put in share transfer restrictions

Statutory Definition of Closely-Held Corporation

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Drafters of the CBCA took a functional approacho Overall question being whether the particular mandatory provisions outweigh

the benefits Recent amendments to the CBCA moved away from functional towards a global

definitiono Whether the corporation is a “distributing corporation” = a corp that has made a

distribution of its shares under a prospectus or similar disclosure doc pursuant to provincial securities laws

Note at least three modifications to the CBCA with respect to closely-held corporations. Waiver of notice to meetings – corp does not have to provide notice to a shareholder for

a meeting if the shareholder has waived her right to notice (s.136) One shareholder meeting – s.139(4) expressly recognizes one shareholder meetings

(one person can incorporate a company – possible to have a one shareholder company) Unanimous consent in writing to resolutions in lieu of meeting – s. 142 – most likely to

be feasible in corporations with relatively few shareholders Dispensing with an auditor – s.163 allows a corp to dispense with requirement of

appointing an auditor where the corp is not a distributing corp No requirement for an audit committee where the corp is not a distributing corp

(s.171) Avoidance of management proxy solicitation requirement – mandatory solicitation of

proxies by mgmt is not required where the corp is not a distributing corp and has 50 or fewer shareholders (s.149)

Note the reasons for the use of shareholder agreements under the CBCA. Shareholders can enter into agreements as to how they will vote their shares (s.145.1) Can allow shareholders to increase their collective voting power and potentially

exercise control over the corp Used to make sure certain persons continue to be elected director in the corp or otherwise have involvement in the management of the corp

Shareholders in a closely held corp can agree to vote their shares to make each other directors of the corp – however, cannot agree on how they would vote as directors (Ringuet v. Bergeron) (s.145.1)

o It is contrary to public policy for directors to constrain how they would vote as directors (b/c they have a duty to act in the best interests of the corp) – no fettering

o Consequence of not voting your shares the way you agreed to may result in you forfeiting your shares

Unanimous shareholder agreement can provide certain management decisions normally made by directors allocated to shareholders (CBCA s.146 and s.102)

o S.102 – the directors shall manage the corporation “subject to any unanimous shareholder agmt”

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o S.146 – allows for a unanimous shareholder agmt that restricts, in whole or in part, the powers of the directors to manage or supervise the mgmt of the business of the corp

o Thus, for a shareholder to reallocate powers of directors it must be unanimous – thus such an agmt is only likely to be practical in the context of closely-held corps.

Powers can be reallocated from the directors to the shareholders – the general approach is to:1. Identify the power that is to be reallocated to the shareholders2. Determine the provision under which such a power is provided in the Act3. What methods can be used to reallocate the power (articles, by-laws, unanimous

shareholder agreement)4. Assess which of these documents would be the most appropriate (in closely held it will

normally be unanimous shareholder agreement)5. Once allocated, question of determining how shareholders agree to vote on the matter

and put the terms of that agreement in the shareholders’ agreement

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